The competition watchdog has taken court action against the owner of the Michel’s Patisserie, Donut King and Gloria Jeans chains alleging it misled franchisees into believing the stores they bought were viable businesses.
The Australian Competition and Consumer Commission commenced proceedings in the Federal Court against Retail Food Group today alleging the group engaged in systemic unconscionable conduct and made false and misleading statements to franchisees.
‘The ACCC also alleges the company misused marketing funds which were paid by franchisees for advertising of specific brands within the RFG network. This alleged misuse includes using the marketing funds to pay for executive salary and other head office costs.
The financially stricken group could face fines stretching into the tens of millions if found to have breached both the Consumer and Franchise Codes.
The action comes three years after The Age and The Sydney Morning Herald first revealed that Retail Food Group was running a brutal business model that was squeezing franchisees and pushing some of them to the wall.
Those reports sparked a parliamentary inquiry which found serious failings in RFG’s dealings with franchisees and recommended an investigation by the ACCC, the corporate regulator and the tax office.
RFG went into a trading halt after its shares tumbled 23 per cent on Tuesday morning following the ACCC’s announcement of its legal action against the group
The ACCC’s case homes in on 42 franchisees of RFG who it alleges were given incorrect information by the franchise giant before purchasing a franchise.
The regulator alleges RFG claimed to incoming franchisees in company documents that it could not estimate earnings for a particular franchise, when it knew stores being sold were loss making and the exact extent of those losses for each store.
“The prospective franchisees simply had no way of knowing the true financial performance of
the stores, and we allege that Retail Food Group took advantage of this when selling or
licensing the stores,” Mr Sims said.
The case also includes allegations that RFG used funds paid by franchisees for marketing and advertising activities for non-marketing expenses including staff costs.
The ACCC alleges that RFG paid around $22 million from the Michel’s Patisserie marketing fund to cover a range of costs not related to brand promotion including the cost of implementing the brand’s controversial shift in its business model from fresh to frozen cakes and to cover the losses from some corporate stores.
The ACCC is seeking declarations, injunctions, pecuniary penalties, disclosure and adverse
publicity orders, a compliance program order, redress orders, and costs.
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Source: Thanks smh.com