It said the ACCC had reviewed thousands of documents, interviewed numerous people as part of an in-depth investigation. It apologised for taking so long to update them. “So we’re really sorry it’s taken us so long to update you. Unfortunately there may be further long periods of radio silence.”
In a statement the ACCC said it was close to finalising the investigation. It declined to comment on the letter or the legal action. RFG declined to comment on the potential legal action but said it had cooperated with the investigation and would continue to do so.
The purpose of the ACCC’s letter sent to potential RFG witnesses was to check how they were doing, update them on the case and provide some resources that might be able to help during the coronavirus pandemic.
It was a hell hole. For the entire year I didn’t earn a cent.
ex Donut King franchisee and witness for ACCC
One of the franchisees who received a letter was a NSW Donut King operator who bought into the franchise network in late 2016 and borrowed $200,000. The franchisee asked to keep her name private. She said a year after signing a franchise agreement she sold it for $30,000, a fraction of the purchase price. “It was a hell hole,” she said. “For the entire year I didn’t earn a cent,” she said. “It was affecting my mental health and I decided I had to get out.”
She said she did everything by the book and the only advice she received from RFG was to put up the prices, which she said wasn’t feasible given the problem was a lack of customers. She told her story to the ACCC in October last year, including giving them invoices relating to food supplies such as the cost of jars of Nutella which were negotiated by RFG but cost the franchisees far more than how much they were sold for in Woolworths.
The franchisee said the ACCC also took a copy of a recruitment booklet which outlined how much a Donut King store would make. She said her store never earned anything like those outlined in the booklet. “Buried in tiny writing was a disclaimer that RFG wasn’t responsible for anything, which I didn’t see until it was too late.”
RFG has been struggling for the past few years after a media investigation in December 2017 exposed a brutal business model that was squeezing franchisees and pushing some of them to the wall.
It triggered a parliamentary inquiry which came to a similar conclusion and recommended an investigation by the ACCC, the corporate regulator and the ATO. The parliamentary report said RFG relied on buying new brands, stripping out costs, exploitative fee-gouging of franchisees and cutting services.
Since the December 2017 expose, the company’s shares have been decimated, falling from $4.40 to close on Friday at 5¢ a share. Over that period there has been a revolving door of senior management and directors, a significant closure of stores and a series of profit downgrades.
It has also had to battle debt troubles which culminated in October 2019 with a highly dilutive capital raising of $193 million to pay down $118.5 million of its $260 million debt.
In the past few months social distancing and the closure of non-essential services due to the global pandemic, foot traffic has dried up. On March 24 it withdrew its full-year guidance and a few days later, on April 2, RFG’s executive chairman Peter George issued another market update that it had recorded a 50 per cent reduction in customer count across its Donut King, Michel’s and Gloria Jeans brands, most of which are located in shopping centres.
He said 90 local franchisees had elected to temporarily close stores and internationally 481 stores had been temporarily closed, with a further 141 outlets limited to take-away and 51 remaining outlets continuing to operate. “Whilst some outlets have reopened, there has been no material change at this stage and we will provide the market an update when appropriate to do so,” RFG said in response to a series of questions on Friday.
It said it had implemented a number of measures to support franchisees. “The steps we have taken differ by brand and are directed at those franchisees most in need, and include the waiver or reduction of certain fixed and percentage-based fees, waiver of fixed royalty and or marketing levy ‘floors’ so that these are calculated solely by reference to a percentage of sales, and the deferment of outstanding debt and RFG provided finance. Interest will not be charged on these deferred amounts,” it said.
Rent and leasing arrangements remained a priority.
It follows the introduction of the government’s mandatory blueprint for landlords and tenants to find common ground on rent. The underlying principal of the new code is “proportionality”. For instance, if a tenant’s sales fell 60 per cent in March, the landlord will take a 30 per cent reduction in rent during the pandemic and defer 30 per cent of rental payments over the remaining lease. The tenant is asked to pay some rent during the pandemic.
“We have secured some positive outcomes for franchisees at this time, but continue to negotiate with landlords regarding this important matter,” RFG said.
Given rent is a key component of running a franchise, it doesn’t bode well for many of the group’s franchisees, which were struggling to make ends meet well before COVID 19 hit.
Adele Ferguson is a Gold Walkley Award winning investigative journalist. She reports and comments on companies, markets and the economy.