Retail Food Group has been slammed in a report following the Senate inquiry into franchising.

A far reaching review of the business is included as a case study in the report. It included issues of non-compliance with the Franchising Code of Conduct and Australian Consumer Law.  The case study discussed the comments and feedback given to the committee by current and former directors and management.

While acknowledging issues across other brands and franchise groups, the committee reserved its harshest criticism for the troubled franchisor.

Retail Food Group failure

It cast doubts on the performance of former management, particularly in relation to the issues of burning and churning franchises.

The committee viewed the refusal of RFG to provide relevant data as evidence of a failure of management.

“One possibility is that RFG is seeking to avoid providing data that would in fact substantiate the allegation that RFG churned sites across its networks. If this is the case, then RFG may not only have engaged in unethical business practices, but may also have misled Parliament. The other possibility is that RFG, its board and management were incompetent.”

The report continued: “The committee is firmly of the view that the management and board of every franchisor should be acutely aware of any outlets in their networks that are failing and churning through multiple franchisees.”

It highlighted the opening, closure and transfer of about 200 franchised stores annually in a three year period.

The committee found it “incomprehensible that nobody in an organisation the size of RFG undertook sufficient due diligence to ascertain whether certain outlets were being churned”.

If the committee’s assumptions proved correct, it points to negligence on the part of the board and senior executives, the report continued.  It suggested any such behaviour should be investigated by the ACCC and ASIC.

However it also admitted the franchisor’s behaviours may have been entirely legal and within the bounds of the Franchising Code of Conduct.

Shareholders over franchisees

The committee believes the rapid expansion of RFG’s network of brands indicated more concern for shareholder value than for franchisee profitability.

“The evidence on RFG indicates that a franchisor may prioritise the expectations of shareholders to the detriment of franchisees,” the report said.

Submissions suggested serious problems existed with the sustainability of the franchise model at RFG, the committee pointed out.

These are the two recommendations from the committee, regarding RFG:

• Regulatory powers to prevent the sale of franchises by franchisors found to be burning and churning their franchise outlets
• Further investigation in to the operations and dealings of RFG.

Retail Food Group supports change

In response to the report, the franchisor issued a statement: “RFG has an established history of cooperation with regulators and takes its compliance with all of its legal obligations extremely seriously,” it said.

The troubled franchisor is keen to shake off the shadow of a failing business model.

Late last year it brought in turnaround expert executive chairman Peter George.

It introduced change in its network through a policy and practices review and by implementing a board renewal strategy.

George added in the statement:“The current management team and board completely understand that RFG’s future success is directly linked to the profitability of its franchisees.

“We have instituted a comprehensive program of investment and improvement to materially help existing and new franchisees grow and prosper.”

On a broader front, RFG confirmed it will support any changes which will benefit the franchising industry.

Franchising report recommendations

The report balanced its view of franchising with comments that successful franchising works for both franchisors and franchisees. It drew attention to the lack of franchisee representation within the Franchise Council of Australia due to its franchisor membership base.

“Many of the problems considered in this report, including the unbalanced regulatory framework, are at least partially a result of a lack of effective representation of franchisee views” the report said.

The report suggests plenty of changes to improve the imbalance of power between franchisees and franchisors across the sector but what happens next is unclear. A cross-body Franchising Taskforce to review and implement these recommendations has been proposed.

What the committee wants:

• A national franchisee association
• A national register of franchise companies
• Greater franchisee protections
• More responsibilities and powers for the ACCC
• Severe penalties for misconduct
• Greater disclosure of information for franchise buyers

You can read the chapter on Retail Food Group, and the report in full here.