The company that owns Gloria Jean’s, Donut King and Brumby’s Bakeries is facing legal action for allegedly deliberately selling unprofitable franchises.
The competition watchdog has accused Retail Food Group, one of Australia’s largest multibrand franchise operations, of acting unconscionably and engaging in false, misleading and deceptive conduct when it sold or licensed 42 loss-making stores to new franchisees between 2015 and 2019.
The Australian Competition and Consumer Commission alleges RFG withheld important financial information from them and falsely claimed stores were viable or profitable, breaching Australian consumer law.
ACCC chair Rod Sims told NCA NewsWire more than one-third of the 42 stores had since closed.
The company claimed in documents issued to the incoming franchisees that it could not estimate earnings for a particular store but actually knew the figures for each, the ACCC said, and was “well aware” they had not turned a profit in the current or previous financial year.
“The prospective franchisees simply had no way of knowing the true financial performance of the stores and we allege that Retail Food Group took advantage of this when selling or licensing the stores,” Mr Sims said on Tuesday.
The Federal Court action also involves allegations RFG breached the franchising code by using marketing fees paid by all franchisees for other activities – in some cases using it for personnel costs for executives and employees who were not in marketing roles and not disclosing the payments.
“In the case of the Michel’s Patisserie marketing fund, it is also alleged Retail Food Group paid around $22 million from the marketing fund to cover a range of operational and other non-marketing expenses, which included the cost of implementing a business model changing from fresh cakes to frozen,” the ACCC said.
The ACCC has not levelled accusations at RFG’s other brands Crust Pizza, Pizza Capers and The Coffee Guy.
“The proceedings concern allegations that are historical and which occurred under various senior executives who are no longer with the company,” RFG said in a statement to the ASX.
It said the issues the case was considering were “relatively narrow”.
“The ACCC has not pursued several of the broad and serious allegations that were raised during the course of its extensive investigation of the company over almost three years,” it said.
These included the level of training and support provided to franchisees, and the competitiveness of the price of goods sourced on behalf of franchisees, RFG said.
The company said, under its chairman Peter George, it had “taken a forward-looking approach to improve and enhance its franchise systems for the benefit of its franchisee partners”.
“RFG will maintain its focus on improving franchisees’ current turnover,” Mr George said.
Mr Sims said RFG’s alleged conduct highlighted a lack of robust laws in Australia.
Under the franchising code, companies could only be hit with a maximum penalty of $133,000.
“We probably need to have a look at the franchising laws. At the moment they are in a code with very low penalties if you breach them,” Mr Sims said.
“There are problems in the franchise sector and we may need much stronger rules to stop a whole range of behaviours.”
The Australian Consumer Law breaches attract penalties of up to $1.1 million or 10 per cent of turnover.
Shares in RFG plunged 6.59 per cent to 8.5 cents.