The ACCC has slammed the operator of a number of popular franchises, the Retail Food Group saying it lied to franchisees about store profits in an ‘unconscionable’ move, stating that the operator withheld financial information from new franchisees about the profitability of their stores.
The consumer watchdog group has also levelled accusations that the Retail Food Group misappropriated funds from these franchisees intended for marketing and advertising campaigns that were reportedly used for “personnel costs” for executives.
The Retail Food Group (RFG) operates popular food and beverage outlets like Gloria Jean’s Coffee, Brumby’s Bakery, Donut King and Michel’s Patisserie, and is now under fire for reportedly lying to franchisees about the viability of some outlets.
The Australian Consumer and Competition Commission has released a statement saying that RFG “engaged in unconscionable and misleading conduct” after telling potential buyers of its franchises that they were more profitable than they really were.
The ACCC says that this is a violation of Australian Consumer Law, and that the “Retail Food Group acted unconscionably and engaged in false, misleading and deceptive conduct when it sold or licensed 42 loss-making corporate stores to incoming franchisees between 2015 and 2019.”
The ACCC has taken the case to the Federal Court, where it will allege that the Retail Food Group broke Australian Consumer Law on 42 stores that were reporting steep losses between 2015 and 2019.
Share prices for the Retail Food Group have dropped as much as 14% upon the market hearing news of the case being taken to the Federal Court.
Shares Dive as ACCC says Retail Food Group Lied to Franchisees About Store Profits
The consumer watchdog says that the Retail Food Group withheld important financial information about the profitability of some of its stores, misleading the potential new owner of the outlet. The purchasers were unable to gather accurate and relevant information on the loss-making stores they were about to finalise, according to the ACCC.
“We allege that Retail Food Group withheld critical profit and loss information about these corporate stores from incoming franchisees, and falsely represented that these loss making stores were viable or profitable,” Chair of the ACCC, Rod Sims said.
“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,” Sims continued to explain.
The Retail Food Group has said that it was not able to estimate the earnings of any specific franchise, according to ACCC documents being submitted to the Federal Court. “The ACCC alleges Retail Food Group knew the earnings of each loss making store, and was well aware that the stores being sold or licensed had been loss-making in the current or previous financial year,” the consumer watchdog says.
The ACCC’s case also includes a number of claims over the Retail Food Group’s use of funds from franchisees for ‘marketing funds.’ These funds were collected from the owners or licensees of certain outlets, and were administered by the Retail Food Group for marketing and advertising campaigns.
The ACCC says that the “Retail Food Group used these marketing funds, to which franchisees had contributed, to pay for non-marketing expenses in breach of the Franchising Code. In some cases, this allegedly included personnel costs for executives and employees who were not in marketing roles.”
Chair of the ACCC, Rod Sims has said in regard to the potential misappropriation of funds that “the Franchising Code makes it clear that marketing funds can only be used to cover legitimate marketing and advertising expenses, administration costs, expenses disclosed to franchisees or those agreed to by a majority of franchisees.”
“We allege that Retail Food Group acted in breach of the Code, and in some cases, unconscionably, by making improper undisclosed payments from the marketing funds for its own benefit, to the detriment of franchisees,” Sims concluded.