Fairly reasoned except the bank stuff, what rubbish to connect the Royal Commision to this. If the EBIDA covenant is 3 than watch out, but yeh I assume they will get a refinance at higher rate.
You speak in glowing terms about the business model, yet the irony is that you are in this stock at those prices because of the unsustainability of it!
They will have to reduce system fees and royalties in order to attract and retain franchisees, it's that simple. Poor food and beverage environment in shopping centres has just brought this to a head. It was never a fair partnership deal for franchisees.
In terms of the vertical integration that is true, though selling products at big mark ups to a captive fee ridden frachisee system smacks of explotation. RFG may have to reduce margins here as a easy way to help frachisees. Fairfax example of Gloria Jeans coffee sold to frachisees for more than coles retail price is one outrageous example.
The company will likely survive with much higher funding costs, permanent reputation damage, less profitable operations and major capex needed to refresh network and assist franchisees.
However, don't underestimate the short to medium term impact of this investigation on sale, re-sale and ability to maintain store count. This will be significant.
I also think it is naive to think this won't have an effect overseas as this has been a high profile collapse. International investors and frachisees will naturally want to conduct due dilligence on the flagship operations in Australia.
As an investor if you would not buy a franchise yourself, then is buying the franchisor a sustainable conclusion to come to?
Good luck.
RFG Price at posting:
$2.39 Sentiment: Sell Disclosure: Not Held
(20min delay)
