I believe Retail Food Group Limited (ASX: RFG) ("RFG") is great value at today's prices. It has a Price to Earnings (P/E) ratio of around the ASX average, and pays a 4.7% fully-franked dividend. The company grows primarily through a combination of acquisitions, and issuing licenses so people can open up new franchises.
Recently, Retail Food Group has bought Gloria Jean's and a couple of other coffee businesses, as well as a food manufacturer, Hudson Pacific. It is also ramping up its international expansion, with Master Franchisor licenses recently granted in Northern England, Pakistan, and Myanmar, among others. Retail Food Group also has a stake in a Gloria Jean's joint venture in China.
While Retail Food Group will win big if it can expand its international footprint, controlling its own food and coffee manufacturers provides significant support. In addition to capturing the 'wholesale' margin from these facilities, Retail Food can ensure high levels of quality and reduce the likelihood of the company hitting supply constraints as it expands. It also allows Retail Food Group more freedom to experiment with its franchise product offerings.
These are the main businesses for the Group, but the company also benefits by taking a small percentage of franchisee revenues, which means the Group will expand alongside its franchisees. An additional opportunity here is the fact that many of RFG's franchises have been under-invested in, in my opinion. Alongside something like Domino's Pizza Enterprises Ltd. (ASX: DMP) which is getting increasingly inventive when it comes to fresh new offerings and speed of service, many RFG franchises just haven't innovated the same way.
However, this is perhaps a blessing in disguise given that the company recently announced a variety of initiatives to improve its Brumby's, Michel's Patisserie, Donut King, and other franchises. With the global expansion of its franchises, RFG will be coming into competition with a variety of existing franchises and it needs to ensure its product offering is up to date. With Donut King reportedly getting the largest menu change in 30 years, we can imagine how these initiatives might help to retain customer (and prospective franchisee!) interest.
Foolish takeaway
Retail Food uses debt and share issues fairly aggressively in order to maintain its growth. With more acquisitions on the cards, investors should be prepared for that. However, with a modest price, good growth potential, strong cash flows and a great track record, Retail Food Group looks like a great buy today.
