Former RFG CEO accused of using franchisee to hide lossmaking stores

Written on the 6 July 2018 by David Simmons

Former RFG CEO accused of using franchisee to hide lossmaking stores

The ex-chief executive officer of disgraced food franchise operator Retail Food Group (ASX: RFG) has been accused of using a Brumby's franchise owner to hide loss-making stores.

During the parliamentary inquiry into franchising in Australia, Baden Burke, the former owner of a Brumby's Bakery, claimed Tony Alford "groomed" him and used him to hide stores that were losing money under a special management deal.

The accusations detail how Alford would spoil Burke with free interstate trips to see Alford race the Donut King branded race car, and invited him to his family home, all whilst using him to hide the losses of RFG.

"Mr Alford groomed me over a period of time, used me to hide loss-making stores off-book - which I later realised and left me financially destitute and bankrupt," says Burke in his submission to the parliamentary inquiry.

RFG, a listed company, controls the Gloria Jeans, Donut King, Pizza Capers, Michel's Patisserie and Brumby's Bakery chains.

Burke's latest accusations follow a string of widely reported controversies surrounding RFG's corporate practices and treatment of franchise owners.

Burke alleges Alford and RFG entered into "management agreements" to hide the losses of RFG and mislead the market into believing RFG is more profitable than it actually is.

As reported by the Sydney Morning Herald, RFG confirmed the existence of these short-term "management agreements" but denied they were created to mislead the market and investors.

"Whilst not privy to personal conversations between former management and Mr Burke prior to the commencement of those arrangements, Mr Burke was an experienced operator who had the opportunity to seek intendent advice to assess the commercial arrangements presented to him," says the RFG spokesperson.

These "management agreements" involved Burke setting up a company to manage stores and take on the loss-making and underperforming corporate Brumby's Bakery stores, according to Burke.

"He indicated that there were about 10 loss-making corporate stores that were collectively losing around $1.1 million per year and there was a good opportunity for me to take them on under a management agreement and then turn them around into profitable stores," says Burke.

Burke said in the parliamentary inquiry that Alford told him his wife, through her management company Exit 57 Investments, was involved in the same agreement.

"The moment the CEO told me his partner was doing it too, I thought to myself, those two are together and there is no way he would sign her up to a bad deal," says Burke.

Under the agreement Burke received special incentives to take on each store including weekly payments. The deal included a take on fee of $1000, a further payment of $750 per week to Burke and no payment of franchise fees. Burke also says he received a two-year interest free $20,000 loan for each store he took on.

As part of the deal he was responsible for rent and operating expenses, products and stock, all staff costs, insurance requirements and tax.

Burke says eventually Alford cut him off entirely following a string of acquisitions by RFG, which left Burke in the gutter, unable to keep the stores he was looking after afloat.

"I was forced to eventually go bankrupt and stop doing what I love," says Burke.

This latest accusation follows months of bad news for RFG, which has been struggling to recover ever since a Fairfax Media investigation uncovered the limited support the listed company offered to its franchisees.

In late May 2018 CEO of RFG Andre Nell was replaced by Richard Hinson after the company failed to pick up from the battering by the media and investors.

The company expects a full year loss for FY18. The group blames "difficult retail market conditions" for its downturn over the last financial year, as well as the closures of a number of stores in its portfolio and the negative opinion of the company in Australia.

The company's share price plummeted by more than 50 per cent in a single day of trade, after it emerged from a two-day trading halt to reveal massive half year losses and the closure of up to 200 stores.

RFG went into the trading halt because of a dispute with its auditors and it then revealed plans to close up to 200 outlets on the back of a net loss after tax of $87.8 million, compared to $32.7 million profit in the previous half year and $138 million in writedowns in the value of its brands.

The company cited "challenging trading conditions" while acknowledging its own "disappointing performance" as it outlined its business-wide review to turn the company around.

RFG is one of a number of franchise networks, including 7-Eleven, Domino's Pizza and recently Red Rooster and Oporto's parent company Craveable Brands, to be accused publicly of mistreating franchisees or similarly underpaying staff.

A federal parliamentary inquiry into the franchise sector is now underway in response to the string of allegations across several companies.

Shares in Retail Food Group closed at $0.46 per share on Thursday afternoon.

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Author: David Simmons

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