Donut King’s days may be numbered, but Crust and Gloria Jean’s are safe

The dramatic fall in fortunes of Aussie franchise giant Retail Food Group may spell doom for Donut King and Michel’s Patisserie, but Crust Pizza, Pizza Capers and Gloria Jean’s are probably safe.

That, at least, is the view of one analyst at IBISWorld, who dampened fears RFG — the controversial owner of these franchise chains — is headed for collapse on the back of a year of massive losses.

It’s been a terrible year for RFG, which also owns Brumby’s Bakeries. Negative press, changing consumer behaviour and rising rents have pummelled the company’s bottom line and the share price.

Most damaging to the company’s reputation was a series of exposés by Fairfax’s Adele Ferguson alleging the company was seriously mistreating its franchisees.

Since those articles were published in November, RFG’s share price has plummeted from around $4.50 a share to a record low of 74 cents today. That’s a fall of 84%.

Negative investor sentiment was compounded by a huge round of store closures — between 160 and 200 nationwide — announced earlier this year.

As a result of all this, RFG announced on Tuesday that it was expecting to report full-year losses of $87.6 million, for which it blamed “negative sentiment”, along with “persistent difficult retail conditions” and the large number of store closures.

While investors have read all this as a clear sign to sell — with hedge funds rushing in to make a buck out of RFG’s woe by shorting the stock — incoming chief executive Richard Hinson last week insisted that the business was “fundamentally sound” and was not going bust.

“We are revitalising the network to focus on our customers first; improving performance, driving innovation and improving communication and transparency with our franchisees. This is a 12-18 month turnaround of the RFG business,” he said.

“Trading conditions in food retailing continue to be tough. The actions we are taking in collaboration with franchisees are starting to see a positive response.”

Bet on pizza, not doughnuts

Nathan Cloutman, senior industry analyst at financial research house IBISWorld, told The New Daily that while RFG would probably survive, it would have to consider if some of its franchise brands were worth maintaining.

“Some stores are doing a lot worse than others,” he said.

“The pizza businesses are actually doing quite well. They’re priced well and they’ve got innovative products.”

But he said it was the pizza chains’ ability to jump on the explosion in popularity of food delivery apps like Deliveroo and Uber Eats that was really giving them an advantage over some of the other chains.

He said doughnut stores and bakeries don’t really lend themselves to this sort of distribution model.

“RFG is trying to make amends [for the behaviour uncovered by Fairfax] and support its franchisees. But at some point they are going to have to make a decision about the failing bakery businesses. Can they really see a long-term future for those businesses?” he said.

“There’s a chance that they could pour a lot of investment into the businesses and save them. But it’s hard to see the way things are going.”

Meanwhile he said RFG’s biggest franchise, Gloria Jean’s, would also likely survive.

Last year, Gloria Jean’s alone accounted for a quarter of RFG’s revenue, according to IBISWorld analysis.

Its bakeries — including Donut King, Michel’s Patisserie and Brumby’s — accounted for almost 19% of revenue.

The pizza chains Crust and Pizza Capers, meanwhile, accounted for just 5.5% of revenue – meaning their strong performance does not significantly boost the business as a whole.

Last year the bakeries and pizza joints had huge profit margins — about 66% each.

RFG did not reveal which brands would be affected by the 160 to 200 store closures planned before 2019.

This article was first published by The New Daily. You can read it here. 

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