Retail chain cops a caning
THE company behind the Gloria Jeans and Donut King chains has been savaged by a parliamentary committee over its treatment of franchisees.
Management of the company, Retail Food Group, may either have been “unethical” or “incompetent”, MPS said in a report yesterday.
Following an inquiry into the franchising sector, the parliamentary committee said Retail Food Group should be investigated by the competition regulator, the corporate regulator and the Australian Taxation Office over a raft of possible breaches of the law.
Shares in the company have plunged 98 per cent over the past three years amid allegations it mistreated franchisees.
In the report, the parliamentary committee said Retail Food Group, or RFG, “has damaged the reputation of franchising more broadly within Australia”.
It recommended regulators look into the company and its former and current executives in relation to possible insider trading, short selling and tax avoidance along with other potential legal breaches, including possible breaches of market disclosure obligations.
The inquiry found Retail Food Group opened, closed and transferred about 200 outlets a year across three years, suggesting it knowingly engaged in “churning and burning” franchisees.
Churning refers to the repeated sale at a site of a failed franchise to a new franchisee, while burning is continually opening new outlets irrespec- tive of their viability or impact on existing sites in order to profit from upfront fees.
Retail Food Group repeatedly refused requests from the parliamentary committee for documents.
“One possibility is that RFG is seeking to avoid providing data that would in fact substantiate the allegation that RFG churned sites … (and) if this is the case, then RFG may not only have engaged in unethical business practices, but may also have misled parliament,” the report said.
“The other possibility is that RFG, its board and management were incompetent.”
The committee was troubled by the effect a stock market listing could have on a franchise-based business, noting that maximising shareholder value could conflict with franchisees’ best interests.
The report said RFG acquired 10 franchise brands over seven years after listing on the Australian Securities Exchange in June 2006 and that evidence suggested rapid growth came at the expense of existing franchisees.
“Franchisors have spoken of the harsh realities of the current retail environment, and the particular difficulties involved in operating in shopping centres,” the report said.
“Nevertheless, it appears that RFG has operated a particularly unjust business model.”
Retail Food Group, which will close 250 stores by the end of this financial year, said it supported any changes that would benefit franchised businesses and that it took its legal obligations seriously.