Retail Food Group profit rises as Gloria Jean's Drive Thru, Crust Pizza bake in growth

Gold Coast-based Retail Food Group (ASX: RFG) has managed to serve up a 31.4 per cent profit rise despite the negative effects of the Delta and Omicron waves on its shopping centre and CBD-concentrated brands Donut King, Gloria Jean’s and Michel’s Patisserie.

The franchisees all saw their customer counts decline by more than a quarter in the December half, although Gloria Jean's Drive Thru outlets outperformed the group with 11.6 per cent same-store sales growth. 

RFG executive chairman Peter George describes the $5.1 million net profit after tax (NPAT) result as "reasonable" given it did not include the $3.7 million JobKeeper received in the comparative period in 2020, alongside the "sustained and unavoidable impact of COVID-19" across operations.

"1H22 was a challenging period for the Group, its franchise partners and customers, and was essentially bookended by the Delta and Omicron waves," he said.

"The full impact of Delta induced lockdowns, border closures, vaccine mandates and other trading restrictions took effect during Q1, particularly in NSW, Victoria and the ACT which endured extensive and sustained lockdowns.

"Subsequent emergence of the Omicron wave and resulting close contact isolation requirements further influenced consumer shopping habits and operational effectiveness, including lost trading days or hours for many outlets."

On a more positive note, average transaction value (ATV) grew by 7.4 per cent across the domestic network.

"Not only does this significant improvement validate the marketing and new product strategies which have been implemented by the Group as part of its ‘franchisee first’ turnaround strategy, it positions RFG’s Brand Systems well to respond to less volatile trading conditions in the future," George said.

"Strong operational performances across the Group’s QSR (quick service retail) division, Gloria Jean’s Drive Thru and Brumby’s Bakery networks were also pleasing, together with the momentum being generated by the company’s international division," he said.

RFG's international operations as at the end of 2021 comprised 570 outlets across 42 countries.

The company added 36 new outlets outside of Australia during the six months, including Gloria Jean’s first new outlet in the USA since 2018 and the commencement of store operations in Vietnam, although this was offset by 56 closures of which more than a third were in the UAE.

"More than 50 outlets across 16 countries are currently programmed for 2H22 launch," the executive chairman said.

"When coupled with the recent establishment of a supply-chain solution for the Donut King brand that will enable entry into the Middle East, North African and Central European markets, the Company continues to maintain considerable optimism regarding the potential contribution of international operations to RFG’s future success."

International franchising however only accounted for $4.5 million in revenue paid to RFG itself from franchisees, out of total revenue of $49.9 million which represented an 11 per cent decline year-on-year.

Sales improved somewhat for RFG's bakery cafe and QSR systems, but revenue was ultimately dragged down by its coffee system brands that witnessed a 13 per cent decline in trading hours, as well as Di Bella coffee, which recorded around $500,000 in earnings despite COVID's impact on independent café and contract roasting customers, plus reduced margins as freight costs and environmental factors led to a rapid increase in the price of Arabica green coffee beans.

"The value models successfully introduced to the Crust and Pizza Capers networks during FY21 continue to resonate with customers and have been complemented by the introduction of compelling new products such as Crust’s first ever plant-based protein range," George said.

"These initiatives have driven a +7.7 per cent increase in Crust 1H22 SSS (same store sales) and customer count, without impacting ATV which remained flat.

"Whilst Pizza Capers 1H22 SSS growth was less vigorous at +0.7 per cent, it reflects a +18.5 per cent SSS increase versus 1H19, demonstrating the significant headway made by the brand in recent times."

Brumby's Bakery had a 2.3 per cent rise in average transactions per customer, with same-store sales up marginally at 0.5 per cent.

"These outcomes partially offset COVID’s significant impact on coffee Brand System performance, best illustrated by the customer count declines on PCP experienced in NSW, where a large proportion of outlets are based, of -31.5 per cent, -26.1 per cent and -27.9 per cent for Donut King, Gloria Jean’s and Michel’s Patisserie respectively," George said.

The group highlights new outlet growth remains a priority for the group, even though this was frustrated by COVID-related travel restrictions and the postponement or cancellation of recruitment opportunities.

Four new outlets were established during the 1H22, including two new Donut King mobile vans, following a warm reception to the concept’s launch in August 2021.

"The company has also developed a strong pipeline of potential new franchise partner candidates, with 20 having passed initial review/approval stage and more than 50 pending further vetting," the executive chairman said.

"Over 40 1H22 existing store transfers and renewals, which exceeded internal budgets, also demonstrates the continuing relevance and attraction of RFG’s Brand Systems and franchise offer."

George also noted that further advancement of various strategic growth drivers factored to deliver future positive outcomes for the Group complements the focus detailed above.

"Donut King is set to imminently launch a new ‘mini kiosk’ concept that incorporates a smaller footprint and establishment cost, providing access to non-traditional site locations," he explained.

"As well, design of a Gloria Jean’s Drive Thru container model has been finalised and, pending Development Approval, is anticipated to be established in South-East Queensland later in the year.

"A number of additional Drive Thru sites are also significantly advanced, albeit have been impacted by COVID or developer influenced delays."

He said the group had also received commitments from three franchise partners to roll out the intra-territory satellite store concept for Crust in a trial later this year, while positive results have been seen from a new menu trial at Gloria Jean's.