Retail Food Group: Owner of Donut King, Brumby’s, Gloria Jeans and Michel’s Patisserie faces new challenge to rebuild reputation

As cities across the country emerge from lockdown – and baristas serve tasty treats again – one business is still feeling the pain.

If you’ve ever had a cup of coffee, cake, or cinnamon donut in stores, there’s a good chance you’ve visited a Retail Food Group stable cafe.

For years, the franchisor has been a staple of food courts across the country, owning some of Australia’s best-known chains including Donut King, Gloria Jean’s, Brumby’s Bakery and Michel’s Patisserie.

But as the country’s largest cities emerge from lockdown – and baristas serve shoppers again with hot drinks and tasty treats – Retail Food struggles to erase the bitter taste of past controversies.

This week, the Gold Coast-based company was hit with a class action lawsuit by former and current franchisees dissatisfied with the way they should run their businesses under the previous management.

At the heart of the dispute are the infamous ‘fresh to frozen’ changes made by Retail Food to its supply chain model in 2015 and 2016, when franchisees Michel’s Patisserie were supplied with frozen goods instead of fresh produce, which resulted in what many franchisees described as a significant drop. the quality of the food they were trying to sell.

Retail Food intends to defend itself in Federal Court, but the class action lawsuit is just the latest in a string of scandals it has been forced to deal with over the past four years as it tried to rebuild its reputation – and the course of its action.

Empire in ruins

Retail Food, which also owns Crust Pizza, Pizza Capers, bb’s Café, and Di Bella coffee, was booming before it began to fall from grace in late 2017.

A series of successful media reports accused him of abusing and exploiting his franchisees, with several store owners claiming they had been financially devastated by the no-compromise business model and lack of support from the parent company.

Questions about the quality of the food provided – especially to Michel’s franchisees – only added to the perception that the company had relentlessly narrowed its network and put its shareholders first.

The allegations aired in the Sydney Morning Herald and The Age came at a time when Retail Food was arguably at the height of its powers, with its global network of 2,500 stores achieving $ 350 million in sales over the course of the year. he 2016-17 financial year and its investors are enjoying big dividends.

It would be the last of the cream, however, as the $ 800 million ASX company quickly plunged in value.

The company’s stock price plunged and it was forced to close hundreds of outlets and issue a series of downgrades to its earnings as bad press swirled.

Senior management has been a revolving door for some time, with chief executive Andre Nell, his successor Richard Hinson, and chairman Colin Archer among those headed for exit in less than 12 months.

Then there was the finances.

Retail Food went from a profit of $ 62 million to a staggering loss of $ 306.7 million in the space of a year as it tried to restore and fix bridges with disgruntled franchisees.

Executive Chairman Peter George, who has headed the company since November 2018, embarked on a “listening tour” as Retail Food announced a major turnaround plan to return to profitability.

While much of the company’s problems date back to a period prior to Mr. George’s tenure, it has certainly not been smooth.

In 2019, the company suffered more financial losses, more store closings and inflated debt while receiving offers to sell from Donut King and being forced to deny reports that it was using directors.

A damning report on fairness in franchising by the Federal Joint Parliamentary Committee on Business and Financial Services put the company on the sidelines, saying Retail Food appeared to have “exploited a particularly unfair business model in which shareholders and senior executives (had) profited at the expense of franchisees ”.

The company also admitted to asking Michel’s franchisees to ignore the expiration dates of certain products and to implement new shelf-life dates before reversing the decision and removing the products from the shelves.

Meanwhile, in mid-2019, law firm Corrs Chambers Westgarth announced a possible class action lawsuit against Retail Food on behalf of franchisees Michel’s Patisserie.

This is the trial that was finally launched this week.

At the end of 2019, the company had received a last-minute funding reprieve, while a new debt restructuring deal made onlookers question whether it had ultimately succeeded in righting the ship.

This notion, of course, has been completely blown out of the water by the coronavirus.

Pandemic chaos

It was a familiar story for many retailers in 2020 and 2021, as door-to-door orders and sporadic blockages resulted in shopping malls being closed and incomes drying up.

In July of this year, Retail Food announced that it had a leasing backlog of $ 9 million.

All states and territories – except Tasmania – have continued to be affected by closures in the new fiscal year to date, with the company’s largest store networks in NSW and Victoria particularly affected.

“This has contributed to the temporary closures of many outlets, as well as a decline in the number of network customers and same-store sales,” said Mr. George.

On the positive side, the company said Brumby’s Bakery, Crust and Pizza Capers and Gloria Jean’s Coffees Drive Thru outlets saw positive growth during Covid “as customers returned to their local bakery or sought home delivery and low contact service models ”.

But more pain can await us – and not from Covid – as Australia’s competition watchdog begins legal action in Federal Court for alleged unreasonable conduct.

In case still in court, ACCC claims Retail Food violated Australian consumer law through false, deceptive and deceptive behavior when it sold or licensed 42 loss-making corporate stores to entering franchisees over the four years between 2015 and 2019.

Retail Food says it intends to defend itself and hopes for an early resolution, although hefty fines and other penalties remain a real possibility.

“Given the historical nature of the allegations, as well as the issues described in our defense, we believe that an early resolution of the proceeding should be achieved in the interests of all franchise partners,” said Mr. George.

“Above all, this would serve to recognize the reality that under our new leadership, several positive initiatives have been and will continue to be developed, which together offer real benefits to our franchise partners who continue to face significant challenges arising from the COVID-19. pandemic.

“If such a resolution cannot be reached, we pledge to defend our position. “

“Cautious trust”

As Retail Food prepares to enter its fifth year of ‘payback mode’, it’s a very different beast than the one that dominated the Australian franchise landscape in 2017.

There are now around 1,500 stores in the global network, with around 940 located in Australia, including non-commercial locations.

Its total value is now around $ 170 million, down $ 630 million from its peak, with shares currently worth 8 cents each, up from a high of over $ 7 four years ago.

Morningstar’s most recent quantitative equity research report – released just before the class action lawsuit – showed Retail Food’s uncertainty levels remain very high, with no economic gaps or competitive advantages to speak of.

But he also noted that Retail Food was in “moderate” and possibly undervalued financial health.

Remarkably, the company’s latest bottom line shows a small profit of $ 1.5 million – his first since 2017 – while Mr. George says he is focused on streamlining the business, supporting franchisees and taking a customer-centric approach as Australians come out of bottlenecks.

“The economy will open up completely again, and we are positioning our brand systems and our network so that they are in the right place to respond when they are,” said Mr. George.

“In the meantime, the lingering uncertainty associated with Covid-19 and ACCC procedures continues to make it difficult to predict future financial results.”

Meanwhile, Collins Street Value Fund portfolio manager Michael Goldberg wrote on Livewire in July that while Retail Food management had a big job ahead of them, the future looked brighter.

“We also see a clear path to restarting dividends and a refreshed and rebranded entity judged objectively for what it really is, not what it once was,” Goldberg said.

About Glenda Wait

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