I was once a multi franchise owner of two of RFG franchise brands. I sold out of my last store approximately 5 years ago.
I can assure you their franchise model that has supported their revenues and share price until recently is not sustainable. A revised model that will be required for survival is nowhere near as profitable as the past, while still retaining a high capital requirement to maintain the business platform.
I sold out as I could see the changes being made over the years was purely to benefit RFG with no regard to myself as a business owner.
Major Revenue Sources - Unsustainable
1. Franchise Churn & Store Openings
This is the major drivers of revenue and both are not only in decline, but under immense pressure from the retail environment. Rent, competition, traffic flow are all macro factors that are outside the control of the company which is starting to tighten the noose on the major drivers of growth for the company. Less franchise fees, training fees, royalties and kickbacks!
2. Rebates & Kickbacks
RFG focused on products that provided the highest level of rebate to RFG (really a kickback, but rebate seems so much less offensive than kickback). As a group the individual franchisee should benefit from lower cost supplies through volume. Instead, majority of the time the franchise paid a higher cost than what they could have obtained as an individual business. The difference, plus the rebate was banked by RFG as revenue. This revenue is substantial, and its hard to see that it can continue.
The product quality declined rapidly in the last 2 years, loyal clients complained about the products. This was passed on to RFG with no response over 2 years.
This is a double edged sword for RFG as to make the model sustainable again they will need to give 100% of these benefits back to the franchise owners just to survive. I believe almost this entire revenue line will be extinguished.
3. Royalties/Marketing/Training Fund
Royalties, yes a legitimate source of revenue, but on top of these fees that you paid to RFG for everything else,overall costs are significantly higher than other franchise groups. Franchisees are paying heavily for a poor model.
Marketing & Training Fund. At first you might see these funds as a straight forward cost for service for the individual franchise owner, instead again they are a major revenue source for RFG well and truly above the costs. The marketing is almost negligible. And as we all know marketing spend is a key driver for growth. One year I worked out based on national store turnover, marketing fund % vs the marketing spend by the group, again RFG were pocketing as revenue & profit a significant portion of the cash which was being collected for marketing & training. Again if you were an independent business you could use the marketing royalties to actually spend on marketing for your store.
These are 3 major revenue sources used to support the share price and pay dividends, which in the majority are unsustainable even at a very low level.
Management
On top of these structural issues the company faced, in general, management at the company was of a poor standard, inexperienced and yes men/women taking orders without analyzing and reacting to what was happening in the frontline of the business. The whole platform was so internally focused it was truly frightening. The fact that their Regional Manager was shocked when I advised that I would not be renewing any of my agreements when they expired further reinforced that they had absolutely lost focus on what counts the most, the profitability of the individual stores.
The model is not broken. But to survive the model required is far less profitable, with high debt, poor management, current PR crisis, high re sale of current stores across all brands, new franchisees would have to be deaf, blind and dumb to buy into the current model....and how long can the company last without new franchisees.
Make no mistake the survival of this company is in doubt, should it survive, the model is far less profitable. Therefore to underwrite historical share prices this company will need to grow dramatically to match historical levels of profitability.
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