Hi, I would have pressed the like button for this but that would be the wrong message entirely. John
The franchise ripoff theme has hit the news again. As with with any news, cross check. For example, it doesn't talk about the successful franchisees. The franchiser at the heart of the article appears to be addressing the problem and complains about short-sellers undermining its share price and reducing its overall profitability
I also wonder if it's only the business model that has caused such a decline. Could it be the trend towards more healthier eating and higher standards in coffee consumption that has contributed?
Cup of sorrow: the brutal reality of Australia's franchise king
Since listing on the ASX in 2006 at $1 a share RFG has, for most of that time, produced record profits, double-digit returns on equity and fat dividend payouts for shareholders. In 2015 RFG stock hit $7.15. It built a reputation as a franchise amalgamator as it spent more than $500 million in the past decade on 15 acquisitions including Crust Gourmet Pizzas, Pizza Capers, coffee chain Gloria Jean's, Cafť2U, DiBella Coffee and Hudson Pacific, a food manufacturer and distributor.
That scale has also seen it become one of the country's largest coffee roasters, as it sells to its Brumby's, Michel's and Gloria Jean's franchisees. In an Australian franchise sector estimated to be worth $146 billion in sales, and where there are four times as many franchisors per head here as in the US, RFG had become a serious player.
But it seems this phenomenal growth has come at a cost. A three-part investigation by Fairfax Media into RFG has uncovered a brutal business model that is pushing franchisees to the wall.
Hi, I would have pressed the like button for this but that would be the wrong message entirely. John
I hear what you say Flynn, the media always gravitate toward the failures that bleat the loudest, there will never be a 100% business success rate, some fall over, that's the nature of private enterprise, and not surprisingly the failures seldom believe it's their own actions that led to the demise (human nature) not saying franchisors are blameless, simply the fact that going into business is risky, some pick em selves up and go again, others simply chuck in the sponge.
The article is well written and finally exposes a lot of facts and problems that were hushed up in the past. Franchises require a lot of research and extensive financial analysis. I assessed dozens of GJ and MP franchises over a dozen years ago, for myself and others. In every case, we walked away, as the ROI did not exist. Since then MP has changed owners many times. It has gradually declined in its offering.
In a nutshell the businesses (Michels and Gloria Jeans) are a dinosaur, and not relevant to what the market seeks. The same applies to most of the RFG brands. The stores are dated, and the quality of the food is not what the modern consumer seeks. There are many businesses that sell similar foods to say Michels, and are thriving. Their products are fresh, appetising, and in many cases a lot more expensive than what the RFG charges. Today with the advent of social media, many customers are happy to pay a premium for a tasty product that presents well.
There is no passion in any of the stores under the RFG banner, and this translates into loss of business. The franchisees claim a lack of assistance, and this is clearly evident. Franchisees need mentoring and guidance, after all, if they succeed , so does the franchisor.
There is potential to revive the brands, but it requires a massive makeover and huge investment.
The most valuable point made is the high cost of fitouts, rent and wages. This affects all retail businesses, and is why every enterprise has to be scrutinized and assessed for viability.
The Australian obsession with property is part of the problem, and high rents are a huge problem. I have yet to see a shopping centre 100% leased, with the norm being an increasing number of empty shops.
On a positive note:
A common theme lately, is that many new food businesses starting up, are shunning high rent shopping centres, and doing well in lower rent areas. With intelligent social media marketing, they thrive by keeping overheads low, but invest well in their marketing and offerings. Rather than rely on foot traffic, they rely on social media. I see this as a return to good old fashioned retail as it was, before the advent of shopping centres. These are the businesses that many customers are now supporting....
Why would you get a franchise? I don't see the point...
If you want to be a lawnmowing guy- buy a mower and edger and off you go...
Want to sell coffee to the masses, get a shop or a van and off you go.
Put your own name on the business, and spend the franchise fees on rum!
Personally I don't believe in franchises.
As they say, if you want something done properly do it yourself
You cannot lump all franchises in the same basket, some are garbage and try and bottle something good, Melbourne's La Porchetta for example, which is a great restaurant in
Melbourne but a rubbish franchise.
Others franchises take a lot and offer very little other then an average products, marketing and advertising, but not all are as bad as portrayed in the article.
Last edited by Lootee; 26th December 2017 at 11:44 AM.
I probably should be a little careful what I say here.... letís see how I go. I have a family member that works for RFG as a BDM in their Ďmobileí department. He has come all the way through with Cafe2U after starting working on one of their old vans as a part time job when he was at TAFE. RFGís mobile arm now includes The Coffee Guy and he has franchisees under both brands, but still mostly Cafe2U.
He doesnít have a lot to do with other departments except for the coffee related ones as they obviously use the same roasting facilities. Gloria Jeans probably still only exists in Australia and NZ due to being bought by RFG, but its future is still somewhat uncertain. Iíve noticed a few GJ outlets here in NZ have had a pretty decent refresh recently so they obviously want to put a little bit of money into keeping the brand alive, but it has needed a lot of work and needs more yet.
From what I can tell RFG are a reasonably good company to work for and are serious about ensuring their success. However the only reason they have any knowledge of the coffee industry in the company is due to the Cafe2U and DiBella acquisitions and they have relied heavily on experienced people that came with these two companies to help across the group. There were more than a few things that they wanted to do that made sense from a business point of view for the group that Cafe2U and DiBella told them not to do or that they simply couldnít do.
Personally Iíve looked at a few mobile coffee franchises. I actually went all the way through the process with Cafe2U back in 2012 when they were still privately owned. What Iíve learned from looking at all these options is that itís horses for courses. Cafe2U was and still is a fairly unique option as itís waaaay more expensive than any other mobile cafe and is actually almost as much as some non-mobile businesses. But what you get for this high initial outlay is one of the better equipment set ups and pretty decent support. You also have a better chance of selling the business at the end of your first 3yr contract. None of this is any good to you if you canít afford it, canít work within the framework of the franchise or end up with a territory thatís got lots of competition.
Iím still a little bit interested in buying a mobile van at some point. Thereís actually plenty of space here in my part of NZ. The reality is that Iíd never be able to afford a Cafe2U van, but a franchise of some sort is appealing. This is because I have no business experience and no experience selling coffee either so that assistance at the start would be really useful. There are a couple of local options here in NZ now that are less than half the price of Cafe2U so that would be what Iíd look at. I would be very wary of what I was buying though. I would have my eyes wide open when looking into it and would talk to current owners and get independent advice.
So I guess what Iím saying is that an article like this might seem a little one sided, but the good thing in a way is that itís educating potential franchisees on some of the pitfalls and it looks like it might also help current owners with some of the problems theyíre having. There is a place for this sort of business, but it is what it is and is certainly no guarantee of success.
As a retired lawyer I saw many franchise documents. If you are investing $1m you should get a return on capital for a risk venture of about 20% say $200k per year without working in or managing the business. Many instead decide to use their savings to buy a job to work or manage the business. Frankly, it mostly ends in slave labour and tears for the franchisees. The franchisor just rolls the dice again to lure another sucker.
Buying a franchise is something you need to go into with your eyes wide open. I have been a franchisee in the past and when I bought into it I had 8 years experience in my industry. The company had a solid, but unexceptional track record and I could see the potential for growth.
One thing I did was go over the contract with a fine tooth comb before I made the decision to buy an existing business.
Not every clause was to my advantage and I chose to take the risk that if business wasn’t performing that I could be forced to spend a lot more on advertising or in the extreme hand back the keys and walk away from the money I had invested.
To cut a very long story short the business grew through the hard work of myself and my staff. About three years into the agreement the franchisor had a change in the major partners who brought with them fresh ideas, more money for advertising and better supply chain deals. Turnover and profits grew at a much faster rate - I was very happy and even signed on for another term. There wasn’t much in the way of business support, but I knew that would be the case and it was never promised.
Fast forward several years to the third acquisition of the franchisor by a public company and I was fighting to keep my business. Turnover was still ok, but the franchisor didn’t want the old franchisees any more. They viewed my profits as theirs and a lost opportunity to swell their coffers. Advertising was nonexistent and the money I was required to pay was eaten up in ‘agency fees’. My phone numbers, electricity account and insurance were illegally rolled into their corporate accounts at higher rates. It took a lot of work and money to get them back; under my agreement I owned the phone numbers, building lease, electricity and insurances. Franchisees had their businesses targeted for hostile acquisition by deliberately misinterpreting clauses in the franchise agreement that meant that the franchisee had to spend a lot of money in court to defend their rights. In the end a lot of them gave up and settled for undisclosed amounts of money (some reasonable and some not) and handed the franchise back.
In my entire time as a franchisee I always paid what I owed under the agreement, but would vigorously defend my rights to ensure that I wasn’t being ripped off.
In an effort to get rid of the remaining franchisees altogether the franchisor then publicly announced the closure of the brand without telling the franchisees who were still under agreements that still have several years to run.
There was a lot of money spent in court to defend our rights over the closure of the brand - nearly 150k in my case. It was a war of attrition and a number of franchisees dropped out of the fight, which was totally understandable. There was a settlement offer for those remaining in the fight and the name was taken off the door.
In my opinion any franchisor that put shareholders ahead of the success of the franchisees should be avoided. A franchisor can’t make money log term without ensuring the success of the brands they own. There will always be under performing stores, but the franchisor needs to do their due diligence when it comes to the locations they want to open stores and also with the type of people they sign up and a franchisee. Some franchisees have no idea about how to run a business and shouldn’t have been allowed to sign up in the first place.
I could write rite a lot more on this topic, but there are always risks when investing money into a business and the only advice I can offer is to get good legal advice on the agreement and speak to as many franchisees as possible before signing up.
I think the Media Pitbull has latched onto something and isn't going to let it go for now, so hopefully the government/franchisors will be shamed into acting.
Advertising funds across the $170 billion franchise sector need closer scrutiny
nothing better than controlling everything from bean to milk when you do you're own thing.
and not be left to the whims of a franchise.
Just to add to another coffee franchise "gone very wrong", the ultimate owner only made one "minor" (he thought) mistake - he lost control of the roasting arm. So 250+ stores all over the planet should be buying their roasted wholesale coffee and top quality green beans from the "totally out of control" roaster who has mistaken the word quality for crap. To rub salt in the wound, their main green coffee supplier increased the store's direct minimum purchase by a factor of 5+ to the stores to try to help said roaster - who then jacked up the prices of the green beans to near larceny.
So the stores are now caught in a nasty bind - pay peanuts for crap roasts, pay a fortune for green beans by the tonne and use it by the kilo or buy crap beans elsewhere and try to make decent roasted coffee out of it.
Oh, and the roaster is complaining that no one appreciates his work!
No winners, all losers just because of one bad business decision by a guy who made one stuff up in over thirty years.
PS: I just realised the article was about Donut King. The Rockingham City Donut King store closed around a year ago. It still has all the equipment in situ (2 group Essab(?) espresso machine anyone, or a donut machine). It has a sign saying "temporarily closed". I wonder how long a permanent closure takes.
The machine would be a SAB E96 - it's now the current 'required' equipment for Donut Kings and Michels Patisseries after Brasilia went bust and Azkoyen stopped making espresso machines.
Often if a store closes due to the franchisee failing, RFG take over the store and keep it running as a 'corporate' store until they can resell it to a new franchisee. This seems to happen more easily if the majority of the staff are employed by the franchisee rather than them using family members, as RFG can just put in a temporary manager and keep the store running with the existing staff. It seems that business is currently listed for sale as an RFG operated store.
Sometimes sites close because the centre they are in doesn't want them any more, or raises rents beyond what the business can sustain, and the store will close then vanish almost instantly. Our local Michels Patisserie was sold to a new owner a few years ago, and the takings of the store dropped massively under the new ownership (the old owner still has his home machine serviced by us, and told us he was accidentally sent paperwork once from RFG that should have gone to the new owner, showing that takings were around 20% of the takings when he had the business). We do our grocery shopping every Saturday and walk past the Michels kiosk to get to Coles - one weekend the kiosk was trading as usual, next weekend the kiosk was not just closed, it had been completely demolished and the slab penetrations patched and retiled - the only evidence it had ever existed was a slight faded pattern to the tiles showing where the counters had been!
Any prospective franchisees should have a look at 60 Minutes Sunday night show on franchises. Just to add to my earlier comments few prospective franchisees get much accounting, financial, legal and valuation advice and even fewer follow that advice.