ACCC takes action against Gloria Jeans, Donut King owner

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 that found serious failings in RFG's dealings with franchisees and recommended an investigation by the ACCC, the corporate regulator and the tax office.

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.

RFG said it will closely review the allegations made in the proceedings and will engage further with the ACCC as is necessary.

"The proceedings concern allegations that are historical and which occurred under various senior executives who are no longer with the company," the company said.

The group said its new leadership had improved and enhanced its franchise systems for the benefit of its franchisee partners. RFG said it considers the issues that are the subject of the proceedings to be relatively narrow in scope and focus. It also noted that ACCC had investigated it for other breaches, including its implementation of the Michel's Patisserie "Fresh to Frozen" model, the level of training and support provided to franchisees and the competitiveness of price of goods sourced on behalf of franchisees but did not take action.

RFG executive chairman Peter George said the new management of RFG had already proven they had benefited franchisees.

"RFG will maintain its focus on improving franchisees’ current turnover. It is operational improvements that provide franchisees with a platform to successfully operate their business” he said.