Your premise that the profit and cash flow remains unchanged is likely flawed in the context of recent events. The fact is that the co. are currently undertaking a review with a focus on the domestic franchise operations to ensure RFG's strategic business model, and those of it's franchisees, are appropriate for a retail model which remains challenging. As noted above this review looks at the business models from both perspectives ie: franchisee and co. With that in mind it is acknowledged that both parties are carrying out their operations with a view to make a profit and also to obtain a reasonable return on capital employed. Therefore, the co. has to ensure that their strategic business model is fair and reasonable so that franchisees are also commercially successful.
If as noted in the media numerous franchisees are failing then the franchise model appears to have flaws in terms of the typical business metric benchmarks ie: profitability and returns on capital. Alternatively franchisees are failing for other reasons such as mismanagement or under performance which is individually specific and not related to the franchise model. In this regard the co. should have an in depth independent audit and analysis of franchisees across the board and in each of the various business segments.
It is hard to envisage that the findings of a comprehensive review preserving the status quo (profit & cash flow) and the company will have to take some remedial action via adjustments to the business models which will provide higher returns in both profitability and ROCE to franchisees.
RFG Price at posting:
$2.85 Sentiment: Sell Disclosure: Not Held
