Balance, reason and common sense, page-11

Hemis,

I believe you might be missing the point about the business model of RFG. In my view, the reason why sales, cash flow, earnings, dividends, operating margin, EBITDA are all UP is precisely the reason why the business is likely fail.

Let me explain: in a franchisor/franchisee system there is only so much profit that can be made. The generation of this profit is a zero sum game, i.e. the more a franchisor makes, the less a franchisee will make and vice versa. Thus, by opting to make more money by not investing in the brands and turning the screws on its franchisees, RFG has reduced the profitability and sustainability of its its franchisee network. It has rotted the core of its network, which will mean store closures, leading to lower royalty fees and a reduced ability to sell franchisees high margin consumables.

Because RFG makes money by clipping the revenue of franchisees, it does not matter to them if their network is profitable, only that they have sales. While in theory it should matter to RFG, apparently it does not, otherwise it would have opted to make less money to preserve its network.

RFG is a company built on a predatory business model with no sustainability, unless it invests in its brands, which it has not done, opting instead to make itself more profitable. RFG itself has pointed this out in past presentations through its disclosures that its EBITDA per store has climbed while sales per franchisee has fallen.   

Another point - RFG does not sell coffee or donuts or pizza, it sells franchises. Without a marginal buyer of a franchise, RFG does not have a business. Now that the jig is up and potential buyers are aware that they will not make money by purchasing a franchise from RFG, they will stay away. This will eventually lead to RFG having to assume lease liabilities of franchises as they go out of business and can't find a buyer to take on that lease. Combined with the $270m (and climbing) bank debt, RFG is likely to run into material financial stress over the medium term.  While this may take some years, I expect it will happen faster than you might expect.