Donut King, Gloria Jeans Owner Taken to Court for Allegedly Lying to Franchisees

Donut King, Gloria Jeans Owner Taken to Court for Allegedly Lying to Franchisees
A woman orders coffee at the Bourke Street mall in Melbourne on July 10, 2020,(William West/AFP via Getty Images)
Daniel Y. Teng

The troubled company behind Michel’s Patisserie, Brumby’s Bakery, Donut King and Gloria Jean’s Coffee, is being sued by the competition regulator for allegedly lying to franchisees over the financial viability of its stores.

The Australian Competition and Consumer Commission (ACCC) alleges that between 2015 to 2019, the Retail Food Group misled franchisees when it sold or licensed 42 loss-making stores.

The group could face tens of millions in fines if the Federal Court of Australia finds in favour of the ACCC.

Retail Food Group (RFG), a publicly listed entity, is alleged to have withheld important financial information from incoming franchisees, including the potential profitability of the stores.

“We allege that RFG withheld critical profit and loss information about these corporate stores from incoming franchisees, and falsely represented that these loss-making stores were viable or profitable,” ACCC Chair Rod Sims said.

RFG would issue documents to prospective franchisees and claim they were unable to provide an estimate of the potential revenue of a store. The ACCC believes this was false, however, and that RFG was well aware of the financial position of their franchises.

A tamper is used to prepare coffee grounds. (Greg Wood/AFP/Getty Images, file)
A tamper is used to prepare coffee grounds. (Greg Wood/AFP/Getty Images, file)

“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,” Sims said.

The ACCC is also alleging RFG misused marketing and advertising funds, to pay for non-marketing expenses. All franchisees were required under franchise agreements to pay marketing fees to the group.

In the case of Michel’s Patisserie’s marketing fund, RFG is alleged to have diverted $22 million towards operational and non-marketing expenses, including changes to the business model of some stores, and covering losses in others.

“We allege that RFG acted in breach of the Franchising Code, and in some cases unconscionably, by making improper undisclosed payments from the marketing funds for its own benefit, to the detriment of franchisees,” Sims said.

RFG has been under fire for its poor relationship with franchisees that came to light during a December 2017 investigation into the state of the business.

Some franchisees were found to have poured their life savings into the business, some left with major debts or suffering depression.

It triggered a parliamentary inquiry in 2018 targeting the franchise sector and uncovered a litany of problems.

“The fact that the ACCC has taken an action against one of the largest and listed franchisors should send a strong and salutary message to the sector,” Rob Nicholls, associate professor at the University of New South Wales and competition law expert said.

“Sadly, this case is typical of the franchising sector,” he told The Epoch Times.

RFG responded to the lawsuit in a Dec. 15, ASX announcement saying the allegations were “historical” and occurred under executives who were “no longer with the company.”

“RFG considers the issues the subject of the proceedings are relatively narrow in scope and focus,” the statement read (pdf).

The ACCC is seeking declarations, injunctions, penalties, disclosure and adverse publicity orders, a compliance program order, redress orders, and costs.

RFG also owns and operates Crust Pizza, Pizza Capers and The Coffee Guy. These franchises are not subject to this action.