Trail of misery for hard-working small business owners

DEBT: Michel’s Patisserie, Charlestown Square, owner, Devi Trimuryani. Picture: Marina NeilHundreds of small business owners running outlets under famous brands such as Gloria Jeans, Donut King, Michel’s Patisserie and Brumby’s are being pushed to the wall byAustralia’s biggest food franchisor, Retail Food Group.

A Fairfax Media investigation has uncovered a trail ofmiseryacross the country with numerous franchisees claiming the Gold-Coast-based RFG spieson its store owners, chargescrippling fees and is driving its stable of iconic brands into the ground in order to boost its profits.

As part of the investigation, Fairfax spoke to many current and former franchisees as well asobtainingconfidential franchise agreements and financial accounts, disclosure documents, marketing fund reports and internal correspondence between RFG and franchisees.

Read more:‘I don’t want to cry, but I don’t know what to do’:Michel’s Patisseriefranchisee

RFG franchisees claim the situation is so bad they are cutting corners includingunderpayingworkers and under-reporting sales to avoid the hefty royalties and marketing fees RFG reaps on every sale. At the same time franchisees report being forced to sell poor quality goods at inflated prices.

Fairfax can also reveal hundreds of stores are for sale,or about to go on sale,on websites including Gumtree andSeek南京夜网419论坛, as well as in local Chinese-language newspapers. Fairfax Media estimates 17 per cent of Gloria Jeans stores are for sale;at least 25 per cent of Pizza Capers are for sale.

The allegations againstASX-listed RFG, which has a market capitalisation of more than $800 million, arethe latest in a series against big franchisors that have been caught squeezing franchisees, including Domino’s, 7-Eleven, Caltex and United Petroleum.

Former Brumby’s founder and former managing director Michael Sherlock, who sold the Brumby’s franchise network to RFG in 2007 for $46 million, said RFG had trashed the brand and sent many franchisees broke.

Mr Sherlockstayedon as a franchisee of seven stores after selling the company to RFG. But he has now sold out after finding a buyer for his last store 18 months ago. He received $10,000 after it wasdebadged.

Mr Sherlock said one of his stores went from generating an annual profitof $100,000 to being a loss maker under the RFG business model.

“It is run for shareholders not franchisees,” he said. “Their model is to cut out all the overheads, get rebates and keep shareholders happy.”

When asked if he would ever buy a Brumby’s store or recommend one to a potential buyer, he said: “No. Are you silly?”

Franchise Redress, a business which assist franchisees in disputes,visited 100 stores over the past month and found most of the franchisees blamed RFG for the poor performance of their stores.

“In our investigations into other franchise models, we have never seen such desperation and hopelessness in large numbers,” Financial Redress said in a report.

Fairfax sent a series of questions to RFG which it refused to answer. Instead the company issued a statement saying it was aware that franchisees were operating in a “challenging and evolving” retail market, particularly in shopping centres.

“The livelihood and profitability of franchisees is of the utmost importance to RFG, and consequently, it is focused on driving enhanced outcomes for franchisees,” RFGsaid in a statement.

Thecompany hasappointed accountancy firm Deloitte to review the franchise operations. In a statement released on Thursday that was partly aimed at pre-empting the Fairfax investigation,RFG said the Deloitte review would take two years.

“A key aspect of the review is a focus on domestic franchise operations to ensure RFG’s strategic business model, and those of its franchisees, are appropriate for a retail market which remains challenging,” the statement said.

Documents obtained as part of the investigation show RFG has used a surveillance company Quantum Corp to monitorfranchisees it suspects are breaking the rules.

The document said RFG hadalso used mystery shoppers to ensure franchisees aren’t under-reporting sales and thereforeunderpayingroyalties.

Since listing in 2006, RFG has generated strong profits and currently boastsa market value of more than $800 million. Its largest shareholder in recent years has been former chief executive Tony Alford,although a change to his ownership in September means it is now not possible to track his holding.

RFG has become a major acquirer of franchise brands and currently has a network of 2500 stores with a target to grow to 3500 in 2018.

But critics claim the gains have come at the expense of store owners who are being squeezed for every dollar and there are signs of financial stress at RFG.

Earlier this year it re-stated its accounts, sparking a massive share price decline from a $7.15 peak earlier this year to about $4.40 this week. Concern about its financial position has led RFG to become a target of hedge funds.

Part of the concern is that the business model could be unsustainable and unless it makes the franchise system fairerit will struggle to attract new store owners.

Donna Kilpatrick a Brumby’s franchisee left the network in 2015 after failing to find a buyer. She claimsthe financial stress was so great her marriage broke down. After a few years of working 12-hour shifts seven days a week she walked away with $35,000 for the plant and equipment. She had paid $270,000 for the franchised store.

“The impact on my life has been incalculable,” Ms Kilpatrick said.

Another RFG franchisee, Julia Banks, a Michel’s Patisserie franchisee in Queensland walked away from her store in late November without selling after her and her husband lost their home and their life savings after only two years as an RFG franchisee.

Pizza Capers is another ofRFG’sbrands that is shrinking. There are now fewer than 80 stores operating, despite the company having nearly 120 stores when it was purchased in 2012.

A NSW Pizza Capers franchisee, who asked not to be named, said that after RFG purchased the brand from its original owners in 2012, his store started losing money.

“It was sending me broke. We were literally bleeding money. I felt like the GrimReaper was stalking us,” he said.

When RFG bought Brumby’s it had 321 stores with plans to grow. Now there are fewer than 246 stores, according to RFG’s annual report. Gloria Jeans had 500 stores at its peak and now has 300 stores, according to an internal video to franchisees.

Mr Sherlock said franchisees are either walking away or becoming “dinosaur franchisees”.

“These poor people are what they call dinosaur franchisees. They’ve got old, they still own it and they can’t sell it, so they’ve just got to keep working,” he said.

“It was their nest eggs, their retirement, that they were going to sell or give to their children.”

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