Retail Food Group pulls off turnaround

Retail Food Group pulls off turnaround

Retail Food Group (ASX:RFG), the franchise operator of Brumby's Baker, Gloria Jeans, Michel's Patisserie and more, has pulled off a major turnaround project in spite of COVID-19 impacts.

The company, which was singled out by a parliamentary inquiry into Australian franchisors for damaging "the reputation of franchising", made a number of positive changes during FY20 to improve its losses from $142.5 million last year to just $4 million at 30 June 2020.

But the unexpected global pandemic was a downer for the company trying to pull itself out of the dumps.

Customer counts in shopping centres declined by around 50 per cent at one stage, driving the temporary closure of approximately 100 domestic outlets and 480 international stores.

Overall, the group's underlying earnings fell to $35.5 million for FY20, and revenues dived by 24.4 per cent to $263.9 million as a result of COVID-19 market conditions.

Speaking to Business News Australia, RFG chairman Peter George (pictured) says after a year of hard work, including refinancing the balance sheet and paying off debt, the group was in a position to begin repairing its relationships with franchisees.

"I think the problem that RFG had was, at its peak, it had 13 different brands systems, but that it didn't have the breadth, or depth of capability to manage all the strategic and operational challenges that that that implies," George said.

"And in the meantime I think it ventured outside of its core expertise into coffee roasting and into food distribution, cheese shredding, and biscuit baking. And I guess that took already limited resources and stretched them even further.

"This company is better placed than most in the food services area to survive and thrive in the future, when some semblance of normality does return."

In addition to the company stretching itself beyond its means, George says there were a number of cultural issues within RFG that had to be dealt with.

"The company has a history of a sort of a dictatorial style of management," George said.

"A lot of all of them embraced the challenge, a lot of them knew that we weren't doing the best we could for our franchisees, so those people have been identified and have key positions in the organization.

"The ones that are clearly in it for reasons other than that, they self-identify, and you soon see who the influencers are."

COVID-19 closures take their toll

In FY20 company simultaneously was working on two fronts. The first was the corporate turnaround, but the second, and arguably more urgent fight, was working out how to manage the threat of COVID-19.

George says the group's franchisees managed to deal with the restrictions well during the period, with brands like Brumby's Bakery and pizza restaurant Crust outperforming expectations and Gloria Jean's drive-thru coffee shops demonstrating 20 per cent year on year growth.

"We thought we were going to spring back to normal but then Victoria hit, so it'd be a brave man confidently predict where this is all going to end," says George.

"But all I can say is the company has the balance sheet, has the people, and has the structure now to not only get through it but to take advantage of the inevitable opportunities that present themselves at the other end of it."

Another big moment during the height of the pandemic when many stores were forced to close nationally was the issue of rental payments.

RFG came out swinging against its commercial landlords back in April, claiming an inherent power imbalance made the process of negotiating rent relief impossible.

However, in the months since, George seems to have come around a bit, saying that if border restrictions are to remain in place for a prolonged period of time than the government needs to step in and lend both landlords and businesses some assistance.

"The rental WALE in Australian commercial properties is like $500 billion, and you can't expect the property owners to cover all of that," George said.

"I think we would be probably heading now towards joining forces with them to lobby the government that if it wants to keep borders closed and lockdowns in place then it probably needs to contribute to that problem as well."

RFG poised for growth

In terms of the future, George acknowledges there is still a way to go for the company's turnaround plan.

He points to a number of projects in the pipeline, including a brand refresh for Gloria Jean's that will likely take a page out of Subway's playbook and trailing a cheaper line of pizzas at Crust which traditionally targets a more affluent customer.

Despite COVID-19 still impacting Victoria the chairman is optimistic about FY21.

"Well we do a budget based on a more sombre view, but we're doing better for the first eight weeks, not withstanding Victoria," George said.

"That's always better than being the other way around."

Shares in Retail Food Group are down 1.41 per cent to $0.07 per share at 2:17pm AEST.

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