Brand write-downs and restructuring drive $149m loss for Retail Food Group

Written on the 2 September 2019 by Matt Ogg & David Simmons

Brand write-downs and restructuring drive $149m loss for Retail Food Group

Store closures and a heavy FY19 loss capture the tone of a challenging year for Retail Food Group (ASX: RFG), a franchisor that is finetuning its focus against a backdrop of significant asset impairments and restructuring costs.

Brands are everything in the food business, particularly if brand IP is a key part of your model like RFG which posted a loss of $149 million for FY18.

Close to $100 million of that loss can be explained by write-downs of brands and goodwill, along with $35.2 million in restructuring costs as RFG eliminated redundant roles and closed unprofitable outlets. 

The operator of such household name brands as Brumby's Bakery, Pizza Capers, Donut King, Gloria Jeans and Michel's Patisserie shut down 173 stores in the year, including 130 outlets and 43 coffee vans following a store network reset.

Brand system revenues dropped $29.9 million and a further $17.9 million was ground down for the Di Bella coffee business, mostly due to an exit of the capsule business in FY18 and the loss of key customers in the competitive contract roasting sector.

Overall, revenue was down 6.5 per cent at close to $350 million, despite the benefits of a new accounting standard AASB 15 which added $23.8 million to RFG's bottom line. 

Management may be able to take some consolation in this loss being about half what it was in FY18, but underlying net profit after tax (NPAT) still dropped 54 per cent to $15.4 million.

The results follow a brutal year for RFG, a company singled out and slammed by the parliamentary inquiry into Australian franchise businesses.

The committee said RFG "damaged the reputation of franchising" in Australia, and that the franchisor took advantage of the power imbalance implicit in the franchisor-franchisee relationship.

The company's share price collapsed by 20 per cent following the report's release.

Since then, the company was continually battered by a series of bad news, including the group's failure to divest the Donut King brand, a sticky expose by the Sydney Morning Herald containing allegations that the company extended the use-by dates on products used by its franchisees, and ASX concerns about the sudden lift in its shares in July this year.

RFG has also experienced investigations by the nation's competition watchdog, the looming threat of potential class actions and a possible recapitalisation with Soliton Partners.

Now executive chairman Peter George says the company plans to refocus, repair its reputation, and get it back on track in FY20.

"We are committed to doing more to help and protect our franchisees, both existing and prospective," says George.

"This includes making sure that prospective franchisees understand exactly what is associated with buying and operating a franchise and then helping them make an informed decision on whether their situation is suitable, or not."

The company has announced a six-point plan as part of its 'Fresh Focus'. This includes refocusing its core retail food and coffee operations (and divesting non-core businesses), strengthening the balance sheet, redesigning the group's organisational structure, improving franchise performance through strategic initiatives, leveraging Di Bella Coffee's competencies to profitably service external markets, and driving growth in the franchise business by leveraging its franchise network.

"RFG is making solid progress in the execution of its Six Point Plan and expects to see stabilisation and future growth through the strategic initiatives underway," says George.

"The new management team is rebuilding the culture of RFG and will continue to strengthen our franchise-first focus and position the Group for growth in the medium term."

Taking a closer look at the group's results, the division hit the hardest was the company's manufacturing & distribution division. This component saw a 112 per cent dive in underlying EBITDA during FY19, down to a loss of $1.2 million.

Di Bella Coffee similarly saw a significant decrease in underlying EBITDA, down 57 per cent to $3.5 million.

Despite the poor results from Di Bella, RFG management remains optimistic about the division and intends to leverage the brand's reputation to pursue organic growth opportunities in Australia and internationally.

The only division to see improvement was the group's Coffee Retail Division, which was up four per cent to $8.8 million.

RFG says it is actively pursuing options to secure the financing arrangements of the group for the future, including the potential to raise up to $160 million in conjunction with Soliton Capital Partners.

Shares in Retail Food Group are down 2.86 per cent to $0.17 per share at 11.06am AEST.

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Business News Australia

 
Author: Matt Ogg & David Simmons

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