RFG troubles: assets or liabilities?

gloria-jeansCoffee can provide a kickstart each morning for many people but it remains to be seen if it can provide the same lift for the struggling Retail Food Group (RFG).

While a class action by aggrieved franchisees might not proceed and it has obtained some short-term respite from its lenders, the multi-brand retailer may need to divest some assets to stabilise its financial position.

RFG’s share price on the Australian Stock Exchange has slid from a robust $5.14 in August 2017 to just 43 cents this week.

Since a media firestorm encircled the company in December 2017, RFG has seen its share price fall by around 90 percent, testing the nerve of lenders.

Directors of the embattled retailer have hired investment bankers, UBS, to advise on possible asset sales that could cut debt levels.

The retailer is also implementing a strategy unveiled late in 2017 to close up to 200 stores in Australia by 2019, due to what it claims are unsustainable rents and declining shopping centre performance.

Directors indicated they were assessing a range of options to reduce the stress on its balance sheet, including potential asset sales when they advised shareholders on June 29 that lenders had agreed not to test adherence to financial covenants up to the end of the 2018 financial year.

The agreement required RFG to meet additional reporting obligations to lenders, which would include trading updates, advice on any legal matters still brewing and progress on both restructuring plans and potential asset sales.

There is speculation that bankers might also seek private equity participation, new capital investment or even the involvement of distressed debt management firms to accelerate a restructure of RFG.

Directors have pointed out to lenders that the company remains profitable on an underlying basis despite writedowns on the FY2018 accounts that will result in a net loss estimated at $87.6 million.

RFG claims its underlying trading profit is expected to be around $34.5m for FY2018.

Lenders are concerned, however, that a class action could be resurrected and that the costs of exiting stores along with franchisee walking away from their businesses, all of which could lead to the need for further writedowns on accounts.

Investors, financiers and analysts are also increasingly concerned about the impact on weakened retail franchise systems, generally from higher wage bills if Labor wins the next federal election and rolls back penalty rate reductions while pushing for additional wage increases.

Richard Hinson, who was appointed as RFG group CEO at the end of May, will provide a comprehensive update on the retailer’s trading position next month, but has indicated difficult market conditions are still dragging on results.

Hilson said the audited profit to be released next month will also detail the cumulative impact of planned domestic outlet closures and ongoing negative sentiment regarding both retail franchising and RFG in particular.

He said the forecast loss will include termination payments to former MD, Andre Nell, and other additional one-off turnaround expenses.

Hinson has more than 30 years experience in the retail food industry, including executive positions with Wrigley and Metcash.

He joined RFG in January of this year as CEO for the Australian operations, two months after directors advised the annual general meeting of restructuring plans and a month after media reports surfaced of franchisee disputes.

His mandate was to lead implementation of the retailer’s strategic business review, to simplify the group’s operating model and to improve the sustainability and performance of the franchise network.

In that role, Hinson was responsible for the group’s domestic franchising network, working with franchisees to strengthen and improve their businesses.

Directors claim RFG has made significant progress in addressing issues within the business despite its share price continuing to decline and the reputational damage of media scrutiny and the Senate Inquiry hearings on the Franchising Code of Conduct.

The retailer claims that since February 2018, it has delivered franchisees reductions in cost of goods, renewal and new store fees, and worked with franchisees to pilot innovative new store concepts.

“The senior executive team has been committed to working closely with franchisees on a range of performance improvement initiatives, including new product range and quality, supply chain improvements, a group customer loyalty program, and other promotional activities,” Hinson said in May.

“Our core business is fundamentally sound and we are working hard to improve franchisee relationships and profitability.

“We are revitalising the network to focus on our customers first; improving performance, driving innovation and improving communication and transparency with our franchisees.

“This is a 12 to 18 month turnaround of the Retail Food Group business.

“Trading conditions in food retailing continue to be tough. The actions we are taking in collaboration with franchisees are starting to see a positive response,” Hinson said.

Discontent in the ranks

It is not known to what extent Hinson and his management team have quelled the grievances of franchisees across its retail brands, which include Gloria Jeans, Donut King, Brumby’s Bakery, Crust Gourmet Pizza, Pizza Capers and Michel’s Patisserie.

The class action proposed last December by Bannister Law has apparently not proceeded because there was difficulty in funding the legal action but the consultancy firm, Franchise Redress, is understood to be examining other options.

Legal action by disgruntled franchisees may therefore yet proceed albeit perhaps not until after the Senate Committee reports on its inquiry into the industry code of conduct.

Hinson and his re-shaped executive team are certainly working to address franchisee concerns and, despite the adverse publicity, have attracted close to 1,000 applicants for 30 new field-based retail support roles, increasing the total number of staff in those roles to 88.

Hinson said the $1.5 million investment, expanding retail support for franchisees, followed the business review in late 2017 that also highlighted training needs within the group.

RFG’s management structure has also been tweaked to include regional managers, area managers, business improvement managers and merchandise specialists.

Fixing the problems in the Australian franchise networks is critical to a return to profitability and lifting the share price and enterprise value, but is also important in terms of brand and system credibility for further expansion of overseas licences.

RFG has successfully expanded into overseas markets with its key brands under licence agreements.

The retailer has negotiations at an advanced stage in several overseas markets and has recently concluded a master franchise agreement with British businessman, Naweed Nasir, for the establishment of 13 Gloria Jean’s ooutlets in the United Kingdom over the next 12 months, and 190 outlets within 10 years.

RFG is also pinning its hopes for future growth on its coffee wholesaling operation under the Di Bella business, which is the second largest roast and ground coffee enterprise in Australia after restructuring in recent months.

Started in 1980 as the owner and manager of 50 Donut King and BB’s Cafe stores, RFG has been regarded as one of the more successful franchising companies.

It has been aggressive in its expansion over more than 30 years but Hinson is banking on more strategic growth plan to restore the company’s finances and reputation.



1 comment

  1. Jim posted on July 19, 2018

    Extraordinary the coverage RFG is getting. What you need to do is provide objective criticism regarding the ludicrous rentals that franchisees of organisations like RFG have to contend with. And Myer for that matter. Things like rental increases well above inflation each year, spending hundreds of thousands of dollars to do up their shops every few years, contributions for advertising and promotions, levies for increased Centre electricity and gas increases etc etc etc.

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