Ex-RFG head ‘showed up, got paid’, no insights into franchise failure

By Nick Hall | 27 Nov 2018 View comments

Former Retail Food Group (RFG) executives Tony Alford, Alicia Atkinson and Andre Nell were grilled overnight at a special hearing of the parliamentary inquiry into franchising, after the high court shot down their proposed challenge of the committee’s powers late last week.

In a revealing three-hour hearing, Alford and Atkinson denied any knowledge of the circumstances that led to RFG’s $427m impairment and subsequent closure of 250 stores, equating to roughly 17 per cent of its domestic network.

“My evidence is that I had departed RFG in June 2017, what occurred after that date I have no knowledge or insight of,” Alford told the committee.

The former managing director and CEO provided little insight for much of the first half of the hearing, prompting Senator Deborah O’Neill to question his role at the helm of the franchise giant.

“Sounds like you showed up, got the pay, but you don’t know anything about it. What did you actually do?” Senator O’Neill asked.

Alford, who was revealed to have been director for 674 companies over his lifetime, was questioned by Senator John Williams on the rapid growth of RFG under his tenure.

“Growth was programmed, it was steady, and it was as required,” Alford said.

Since the beginning of 2017, RFG shares have fallen from $7.00 to just $0.40, which Alford, who described himself as a shareholder, indicated was troubling.

“The appetite for those shares and the perceived value of the company by the market have dramatically decreased, as has profits. In 2017, for example, you have company with a run rate EBITDA of $130m, and then in 2018, there was a significant write down of assets and a significant reduction in EBITDA or earnings,” Alford told the committee.

It was later revealed that Alford was in fact not a shareholder, but rather that his family held shares in the company, leading to a heated line of questioning that prompted Alford to at one point accuse the committee of acting impudently, remarking “it’s not helpful to be snide”.

“We had to fight you through the high courts to get you here to answer the questions Mr. Alford, you are the last person that should be calling people snide,” Senator Deborah O’Neill responded.

Throughout the hearing, the former managing director and CEO reiterated that the primary factor in store closure was lease expiration, indicating that while stores closed regularly and throughout the financial year, it wasn’t necessarily due to franchisee failure.

“The stores by and large close as a consequence of the expiration of the lease. The majority of leases were for a five-year period, sometimes with the option for a further five years,” Alford said.

“Franchisees would operate their business, for example, on a three-year period, if they were minded to vend their business, they would vend their business. The incoming franchisee would then take on the remaining lease term, however, RFG would insist on an elongated lease term so that the incoming franchisee wasn’t buying a business that was only going to operate for 12 or 18 months.”

When asked if franchisee failure did play a role in the closure of outlets, Alford insisted that franchisees were responsible for their own lifestyle undertakings.

“There are very, very few franchises that make a loss, but what I can say is the profitability of the franchise does not support the lifestyle of the franchisee. You can have a franchise with an EBITDA of $200,000 and it can still fail, it’s to do with the lifestyle of the franchisee,” Alford told the committee.

Senator Matt Keogh disagreed however, questioning whether RFG’s model of charging franchise service fees, in addition to franchise network fees constituted as double dipping.

“If there’s a commission on goods coming into the business, and then a franchisee fee on sales, for selling the products that they’ve effectively just paid a fee to purchase, isn’t that double dipping? Do you see that as a wholly sustainable model?” Keough asked.

Alford responded by arguing that the only model that would be more transparent would be one where there were no franchise network fees at all and where franchise services fees were increased to compensate.

“What I’m getting at is continuous transparency. One of the main issues that has arisen in the submissions the committee has received is that certain things that are disclosed in the agreement are otherwise not disclosed throughout the course of the arrangement,” Keogh said.

One aspect that must be outlined in the disclosure document is market fund spend, which Alford insists was not used to operate the RFG branded racing cars that he and his son have driven since 2006.

Alford replied that while the Donut King emblazoned supercars were indeed marketing exercises, all operating costs were paid through a personal salary-sacrifice.

Alford and Atkinson then faced a series of questions relating to personal joint finance and an association with company, Exit 57.

The company, revealed to be under the direction of Atkinson, was engaged in the management of a number of RFG corporately-owned cluster stores, in an arrangement akin to that outlined by former Brumby’s Bakery franchisee Baden Burke.

But while Exit 57’s management of between 20 and 30 corporately owned RFG outlets enabled the franchisor to sell them on to incoming franchisees, Burke was less successful.

In a previous written submission to the committee, Burke had accused Alford of ‘grooming’ him to oversee the management of 15 to 20 underperforming corporate stores, in what he called a “calculated plan engineered to shift loss-making stores off book”.

Questioned on this, Alford fiercely denied the accusation.

In last night’s special hearing Senator O’Neill then asked whether Alford was suggesting Burke had lied in his submission.

“I am saying Mr Burke’s submission to the committee was contrived, fabricated and designed to mislead the committee,” Alford said.

Senator O’Neill questioned how the two circumstances, while remarkably similar in nature, could return such varying results, causing Atkinson to reveal that Exit 57 was currently in liquidation.

Atkinson indicated that she is currently considering  commencing litigation proceedings against RFG relating to payment concerns during that period.

The former executive’s roles within RFG have been varied, with the committee hearing Atkinson, along with Gloria Jeans’ Nabi Saleh and former RFG COO, Gary Best purchased the drive-through rights to Gloria Jeans in 2015.

After 12 months, RFG resumed the rights to the drive-through at a loss for G.J.D.T. Holdings.

Towards the end of the hearing, Senator O’Neill reiterated that while Alford, Atkinson and Nell’s appearance at the hearing was forced, it would have a significant impact on the inquiry’s findings come December, and urged the trio to read the many hundreds of submissions regarding RFG.

“Take the time to actually read the evidence that we’ve received; the devastation and the wreckage in the lives of people who bought a franchise, while you were highly engaged at RFG in a leadership role,” Senator O’Neill told the former RFG executives.

“They bought franchises and they consistently tell us that what they were sold did not match what they received, support they were offered was not given, goods that they expected to purchase at a wholesale rate were overcharged to them at higher than a retail rate. This is consistent evidence we’ve received.”

The Senate is expected to hand down its findings on the parliamentary inquiry into the Franchising Code of Conduct on December 6.