Shares in Retail Food Group (RFG), the stricken listed franchising group lost more value yesterday after it emerged as the prime target in the final report of a lengthy Federal parliamentary inquiry into franchising.
The report found RFG to have “damaged the reputation of franchising more broadly in Australia”.
RFG shares eased 7.7% to 18 cents – where it is worth just over $33 million and effectively in the hands of its bankers are its covenants on bank loans were not tested at the end of December (the company would have failed and probably be in administration by now).
Three days ago RFG denied a Courier Mail story that claimed the company was looking at appointing administrators. It said that was wrong and the media had not approached it for comment.
The monstering in the report from the Joint Parliamentary Committee could change that view.
The report recommended that the ACCC, the Australian Taxation Office and ASIC launch investigations into RFG, its current and former directors and officers for potential insider trading, tax evasion, quality of audit, director duties and continuous disclosure.
The report said it considered the RFG business model “high risk”, relying on buying new brands, stripping out costs, “exploitative fee gouging” of franchisees and slashing services.
“This is a strategic system-wide approach to business whereby RFG’s success relied on extracting profits from its franchise systems with hugely deleterious results for franchisees,” the report said.
“The committee is surprised that none of the relevant regulators appear to have undertaken any investigation that has led to court action, or, at the very least, public acknowledgment of misconduct,” the report said.
RFG’s troubles were first exposed in a lengthy investigation by Fairfax Media in late 2017 which outlined a business model that was pushing franchisees to the wall.
The report described former RFG chief executive Tony Alford as “evasive, inconsistent and generally uncooperative” in his testimony to the committee. “The committee did not find Mr. Alford to be a reliable or credible witness,” the report said.
It claimed that RFG and its current and former executive had done nothing “to instill any confidence … that all their actions are above board and would withstand thorough scrutiny by the regulators”, the committee said.
The committee said the refusal to supply data by RFG in the churning of franchises was either due to board and management incompetence or because the data substantiated the allegations.
“If this is the case, then RFG may not only have engaged in unethical business practices but may also have misled parliament,” it warned.”It appears that RFG has operated a particularly unjust business model in which shareholders and senior executives have profited at the expense of franchisees,” the report said.
While RFG was the most prominent of the franchise groups to earn the ire of the inquiry, the present franchising system came in for criticism.
The report found the exploitation of small business owners by their master franchise operators was “systemic” and that the system gave rise to wage theft.
“Many of the public and confidential submissions received by the committee outlined the significant, and often life-changing, detriment that many franchisees endured as a direct result of being exploited by franchisors,” the report said.
“On the balance of evidence given to the committee in public and in confidence, far too many franchisors are abusing the power imbalance between themselves and their franchisees.”
