RFG repeatedly declined to provide the committee with important information about its operations.
“The lack of cooperation by both current and former RFG officers is striking, and indicative of a poor corporate culture at the company,” the report said.
While the committee received evidence about churning and burning in other franchise systems, the problem appears to be far greater within RFG, the report said.
Churning refers to the repeated sale at a single site of a failed franchise to a new franchisee while burning refers to continually opening new outlets, some of which are unlikely to be viable, to profit from upfront fees, while leaving existing outlets to struggle and close.
The committee said “churning” is “particularly serious” and when it tried to verify such allegations RFG on multiple occasions refused to provide data. This behaviour, the report says, by RFG executives means they “not only have engaged in unethical business practices, but may also have misled Parliament.”
Over a three year period RFG opened, closed and transferred about 200 outlets respectively on an annual basis. Given such high rates of outlet turnover, the committee found it “incomprehensible that nobody in an organisation the size of RFG undertook sufficient due diligence to ascertain whether certain outlets were being churned. If that was the case, it points to negligence on the part of the board and senior executives.”
The committee said it was concerned the ‘burning’ of franchisees is occurring at RFG, which should be investigated by the ACCC and ASIC.
The committee recommended that the ACCC be given an intervention power to identify and act on the marketing and sales of franchises where a franchisor shows a track record of systemic churning and/or burning.
“RFG has implemented a Board renewal strategy and has significantly changed and strengthened its senior leadership team,” it said in a statement.
“The current management team and board completely understand that RFG’s future success is directly linked to the profitability of its franchisees,” Mr George said.
“We have instituted a comprehensive program of investment and improvement to materially help existing and new franchisees grow and prosper.”
He add that, “RFG has an established history of cooperation with regulators and takes its compliance with all of its legal obligations extremely seriously.”