Retail Food Group Limited (ASX: RFG)

RFG Details
 
It was seen that investors in Retail Food Group Limited (ASX: RFG) started exiting from the stock as securities of the group fell about 26% on December 11, 2017, with the news that few franchisee holders of Donut King have suffered heavy losses and debts and that RFG is minting on a cruel business model. There were many franchisees who have been financially devastated as when they got an assurance from RFG, they realised that they were losing thousands of dollars per year under store management. RFG had become a serious player in the franchise market but sooner its’ recently labelled ‘brutal’ business model has been unveiled to be punishing franchisees. Multiple incidents have been probed through court cases and it was also seen that the group needs to restate its accounts to meet new accounting standards. It was seen that all most 200 stores were closed during past 12 months. There have been claims that RFG also spies on franchisees and charges high franchise fees letting to the brands suffer losses. On the other hand, RFG has defended itself against the negative media reporting on its way of doing business. The group has also responded to the ASX price query with regards to the recent trading scenario.
 
Acquisition a major driver: Retail Food Group Limited is a food and beverage company with brands such as Donut King and Di Bella Coffee among others and also develops and manages coffee roasting facilities and is a wholesale supplier of coffee and allied products to existing brand system. The group has acquired many brands for performance growth. Its FY17 revenues have grown 26.97% from 275.10m to 349.30m while net income improved 16.81% from 53.01m to 61.93m. There has been an increase of 7.9% in EPS from last year and dividend also increased by 8.2% as compared to last year. The biggest achievement is that it has enhanced its focus on its international operations which has delivered a 17.4% increase in international licensed territories. After the acquisition of the Brumby’s Bakeries and Michel’s Patisserie franchise system, RFG completed its transformation into a multi-system retail food franchise owner and became a manager with a considerable standing within the Australian marketplace. As a consequence of these acquisitions, RFG has around 2516 franchised outlets which are already in excess spread across 81 international territories. According to many media reports, RFG’s current market strategy focuses on responding to challenging retail market conditions which includes efforts to support its Franchise Partners and their team members and improving its financial and operational performance. During 2017, RFG diversified its business segment into warehouse, procurement, distribution and manufacturing by acquisition of Hudson Pacific Corporation.
 

Diversification Scenario (Source: Company Reports)
 
Gloria Jeans continues to be a biggest contributor in its international growth which resulted in an increase of more outlets and more revenues. There was one more acquisition during current financial year of Associated Foodservice which resulted in significant increase in the scale of food service activities undertaken by the group. It targets a c.6% of NPAT growth despite the challenging domestic retail market. In addition, RFG has also created its international presence in Middle East through a joint venture with leading UAE based partners through a new master license policy. The biggest achievement was that RFG became a centre of Digital space which resulted in the launch of Donut King’s gamification application, “Donut Rush”, which resulted in emergence of new breed of consumers which in turn led to an increase in market share. As mentioned above, RFG is facing issues with few franchisees with the revelation of documents that indicate that stores are manipulating their sales to hide the royalties charged by RFG on every transaction. While ASX has been swinging to small gains and losses, RFG has been a big drag. The group has been darted by franchisees and media, but the guidance and on-going performance deserve for a wait and watch approach as we give a “Hold” at the current price of $3.25

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