Retail Food Group frustrated by lack of landlord compassion

Retail Food Group (ASX: RFG) has come out swinging against its commercial landlords claiming an inherent power imbalance makes the process of negotiating rent relief impossible.

According to RFG executive chairman Peter George the company is frustrated by the lack of progress when dealing with landlords and the unwillingness he has seen from lessors to provide meaningful assistance.

This is despite the Federal Government encouraging landlords and tenants to come to agreements and a national Code of Conduct crafted by The National Retail Association (NRA), Australian Retailers Association (ARA), the Pharmacy Guild of Australia (PGA) and the Shopping Centre Council of Australia (SCCA) intended to give landlords and tenants some guidance.

"The National Cabinet has encouraged landlords and tenants to engage and agree on commercial arrangements that can see both through this crisis, and has provided a list of principles which should underpin those discussions," says George.

"Whilst the key elements of this guidance are conceptually sound, they fail in terms of practical application due to the significant power imbalance which exists in favour of landlords. In reality, it is our experience that tenants have very limited bargaining power to drive meaningful and timely outcomes in these circumstances."

Further, the chairman says landlords simply deferring payments of rent for RFG's franchisees, who run food and beverage outlets like Gloria Jean's, Brumby's, Pizza Capers and more, will only serve to delay a significant financial impact.

"It is abundantly clear that the reduction in foot traffic attributable to government restrictions intended to combat the coronavirus has materially reduced the benefit otherwise derived by RFG and its franchisees from their leases within shopping centres," says George.

"Deferral of rent in these circumstances is simply unacceptable, and will achieve nothing for our franchise network other than to delay the adverse financial consequences arising from the current situation."

Ultimately, George believes the Federal Government must step in to address the considerable uncertainty faced by retail tenants nationwide.

"Where the government's objective is to hibernate business so that it is able to contribute to restarting the economy and preserve jobs, RFG considers that robust and urgent government intervention is necessary to address fixed cost bases such as occupancy costs, and limit the uncertainty that is necessarily influencing current decision making," says George.

The plea for government intervention comes as Retail Food Group announced around 90 domestic franchisees have chosen to temporarily close their stores.

The main impact on franchisees has come from a lack of foot traffic in stores as the population dutifully self-isolates.

The situation is most evident in shopping centres where RFG franchisees have experienced 50 per cent reduction in customer count.

Ultimately franchisees have seen a consistent and increasing decline in revenues compared to this time last year and have shut up shop because trading conditions have become untenable.

Internationally temporary closures because of government restrictions have increased to 481, with a further 141 outlets limited to take-out orders. Just 51 outlets continue to operate normally but are subject to increasingly difficult trading conditions.

RFG has implemented a number of measures to support franchisees and preserve the long-term sustainability of its network.

"The steps we have taken differ by brand system, are directed at those franchisees most in need, and include the waiver or reduction of certain fixed and percentage based fees, waiver of fixed royalty and or marketing levy 'floors' so that these are calculated solely by reference to a percentage of, albeit declining, sales, and the deferment of outstanding debt and RFG provided finance," says George.

The trading update comes just days after the group announced it would be standing down or reducing the working hours of the majority of its staff.

RFG employs around 500 people directly, but there are thousands of staff employed by its franchisees around the country.

The company does not actively track the total number of staff employed by the franchisees themselves. However, in a submission to the Franchising Code of Conduct Inquiry, which released its findings in March last year, the company claimed the network employed approximately 15,000 team members across the country.

Shares in RFG are down 11.36 per cent to $0.04 per share at 3:28PM AEDT.

Updated at 4:55PM AEDT on 2 April 2020.