Franchisor behind Donut King and Brumby’s posts impressive profit

Retail Food Group, the brand manager and franchisor behind the Donut King, Brumby’s Bakeries, Michel’s Patisserie and bb’s café brands has posted 33% rise in net profit to $23.5 million for 2008-09.

Despite the downturn putting the brakes on household spending, RFG managed to boost sales by 6.8% to $632 million across the company’s 1,063 franchised outlets. The company opened 51 new outlets during the year across its four brands.

Michel’s Patisserie and Donut King are the company’s best performing divisions. In 2008-09, Michel’s Patisserie posted a 28.5% increase in earnings before interest and tax to $15.2 million, while Donut King’s EBIT jumped 27.6% to $13.5 million.

Total EBIT increased 17.2% to $40.3 million weighted average weekly sales (AWS) across all franchised outlets grew by 4.1%.

RFG chief executive Tony Alford was particularly pleased with the company’s strong cashflow performance, with net operating cash inflows jumping 75% to $23.2 million. The company also managed to reduce its debt of $21.8 million or 18.5% and increased its dividend by 9% to 9.25c for the full year.

Alford says the result is “exceptional” given the state of the economy and says the downturn in consumer spending has only hit certain sectors of the retail industry. Franchises, and particularly those based around food, have performed quite well.

“We didn’t feel that the state of the economy was going to impact greatly on franchised system. That performance is testament to the reliance of the franchised system.”

One of the company’s biggest challenges has been the continuing integration of the Michel’s Patisserie chain, which it acquired in December 2007. Unlike most franchise systems, where the franchisor receives a royalty fee based on a franchisee’s weekly turnover, the Michel’s system operated under a “wholesale margin” model, whereby the franchisor supplies and delivers all products to the franchisee and adds a margin onto the wholesale price.

“It’s one that doesn’t suit the franchisees and it certainly doesn’t suit the franchisors,” Alford says. In the last 12 months, 100 of the 340 Michel’s franchisees have transferred to the royalty model and RFG will shift those who did not move voluntarily gradually, as their franchisees arrangements come up for renewal.

Alford says the current economic environment has seen more franchise systems come up for sale, but RFG will stay cautious.

“There are more opportunities and we are investigating a number of opportunities. But it’s also a market where a greater degree of conservatism is required. You’ve just got to make sure that the integrity of the franchise system and the brand actually exists and also that the acquisition will be earnings accretive.”

The main focus for the next 12 months will be organic growth. Alford says that when RFG acquired Brumby’s and Michel’s, their new outlet pipelines were not strong. The company now has one office dedicated to finding new leasing opportunities.

“You’ve just got to build that pipeline and create those opportunities.”