Last years Annual Report showed a 30% drop in franchisee royalty which is the leading indicator of group revenue in both key revenue streams of franchise royalty and wholesale revenues. RFGs model is to take the royalties (approx 10% of t/o) for use of established brand image/trademarks whilst also providing the gross product (approx 40% of t/o) which it has built up steadily through a range of wholesaler acquisitions over the past 5 years so they now provide the cakes, coffee beans, pizza ingredients etc.
This works well when the number of locations grow and per site revenues grow as they receive more royalty and more gross product movement. Unfortunately when the number of locations decline and per site revenue also declines it's a bitter pill as we are now seeing. RFG has been careful to continue acquiring wholesalers over the years to hide the rate of revenue from product movement to franchisees however the royalty rate for the first time is unaffected by acquisitions and can be used as a measurement of gross product decline.
What I make of the 30% decline in royalty is that the gross product sales must decline at this same rate albeit off a much higher ticket given that they are generally 40% of revenue. Given the rate the fixed costs (of the wider group) have decreased over the past 12 months compared to the rate income is decreasing, I simply cannot see how the business continues as a going concern regardless of the banks covenants.
