The company’s shares went into a tailspin on the ASX, falling 23 per cent, before a pause on trading was implemented.
It is also alleged RFG collected marketing funds from franchisees and used it for non-marketing activities including, in some cases, personal costs of executives and employees.
RFG manages and operates a range of brands including Michel’s Patisserie, Brumby’s Bakery, Donut King and Gloria Jean’s Coffee.
It has been alleged about $22 million from Michel’s Patisserie marketing fund was used in non-marketing activities, which included funding the losses of some stores and the changing of a business model.
The case brought by the Australian Competition and Consumer Commission relates to a period when RFG sold or licensed 42 loss-making corporates stores to franchisees between 2015 and 2019.
The ACCC alleges RFG withheld important financial information relating to the stores’ viability and profitability, the watchdog’s chair Rod Simms said.
It also claims RFG collected marketing fees from franchisees and spent it on non-marketing activities.
“We allege that RFG withheld critical profit and loss information about these corporate stores from incoming franchisees and falsely represented that these loss-making stores were viable or profitable,” Simms said.
He said in documents given to the franchisees, RFG said it could not estimate the earnings of a particular store whereas the ACCC alleges it not only knew that sort of information but was well aware they were loss-making in the current or previous financial year.
“The prospective franchisees simply had no way of knowing the true financial performance of the stores and we allege that RFG took advantage when selling or licensing the stores,” Sims said.
The ACCC said it was seeking declarations, injunctions, pecuniary penalties, disclosure and adverse publicity orders s well as a compliance program, redress orders and costs.
Maddison Johnstone, who campaigned against RFG, took to social media to welcome the news.
“This is amazing news for franchisees who lost so much operating Donut King, Brumby’s, Michel’s Patisserie, and Gloria Jean’s. Franchisees finally feel heard,” she said.
“They risked so much by speaking to the media, by making submissions to Parliament, and then talking to a government regulator. It’s a really hard thing to do. But they grouped together and I am so proud of all of them.”
RFG said it considers the issues that were subject to the proceedings were narrow in scope and focus.
It said under the leadership of Peter george RFG had taken steps to improve and enhance the franchisee system.
“The recent performance results during the turbulence of the COVID-19 impacted trading period is testament to the value of RFG’s financial and management support of franchisees,” the company said.
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