Disgraced franchising giant Retail Food Group is facing legal action for allegedly misleading its franchisees when selling them loss-making stores.
On Tuesday, the Australian Competition and Consumer Commission (ACCC) commenced proceedings in the Federal Court against Retail Food Group (RFG), which manages and operates Michel’s Patisserie, Brumby’s Bakery, Donut King and Gloria Jean’s.
The competition and consumer watchdog alleges RFG acted “unconscionably” and engaged in “false, misleading and deceptive conduct” when it sold or licensed 42 unprofitable stores to franchisees between 2015 and 2019.
During these sales, the ACCC alleges the group withheld crucial financial information from incoming franchisees and made false or misleading claims about the profitability of the stores.
In documents issued to the franchisees, RFG claimed it could not estimate earnings for a particular franchise. However, the ACCC alleges the franchisor knew whether the stores were profitable in both the current and the previous financial years.
“The prospective franchisees simply had no way of knowing the true financial performance of the stores, and we allege that Retail Food Group took advantage of this when selling or licensing the stores,” ACCC Chair Rod Sims said.
In a statement, RFG acknowledged the legal action against 42 of its corporate-owned stores and the management of its marketing funds, which it said relates to historical allegations which occurred under former senior executives.
According to the company, the ACCC has not pursued several of the more serious allegations raised during its three-year investigation and that under the current leadership of executive chairman Peter George, RFG is committed to improving its franchise systems for the benefit of its partners.
How did it start?
In 2017, a number of franchisees spoke out about the financial hardship they faced after purchasing stores from RFG and the difficulty they had when exiting franchise agreements.
In 2019, a Queensland court ruled RFG breached Australian Consumer Law by misleading two Michel’s Patisserie franchisees about a Townsville store in 2012. The former franchisees claimed they were left hundreds of thousands of dollars out of pocket by unsatisfactory supply arrangements and poor-quality products.
In March 2019, a Senate inquiry into the franchising sector recommended an interagency investigation into RFG and its directors over allegations of insider trading, tax avoidance, breaches of consumer law and other market disclosure and valuation failings.
The investigation ramped up in mid-2019 when the Australian Securities and Investment Commission began scrutinising whether the company had failed to be transparent with investors. However, by mid-2020, the franchisor had escaped enforcement action after ASIC closed the investigation.
Meanwhile, the ACCC’s probe resulted in the commission’s decision to launch legal action in the Federal Court against five of the group’s entities.
The legal action concerns four of RFG’s franchise brands, including Michel’s Patisserie, Brumby’s Bakery, Donut King and Gloria Jean’s as well as RFGA Management Pty Ltd.
Other brands owned by RFG such as Crust Pizza, Pizza Capers and The Coffee Guy are not involved in the proceedings.