The Retail Food Group Limited (ASX: RFG) share price fell 6% to $2.68 this morning, its lowest point in over 5 years, following the release of the third part of Fairfax Media's ongoing investigation into the company's franchise practices.
They say in the modern era that business journalists are judged by their impact on a company's share price. Unlike previous similar investigations into Aveo Group (ASX: AOG) and Domino's Pizza Enterprises Ltd. (ASX: DMP) that saw measurable, but one-off declines, RFG shares continue to tumble and are down 39% since the start of December.
RFG shares are still more than 12% short sold, unchanged from recent levels. Volumes traded suggest that approximately one quarter of the shares on issue have changed hands in the past week or so.
With short sellers not covering their bets, that suggests that RFG shares could continue to fall, as buyers will likely be spooked by the media coverage and plunging prices.
A big fall in the company's value would ordinarily suggest it's time to start brushing up on RFG. However, the key question to my mind is one that is very difficult to answer – what are the true economics of the franchise store network?
You can't get blood from a stone, so depending on what % of the store network is unprofitable and underpaying staff, a significant number of stores may be unviable. This is concerning because media coverage will likely frighten away any buyers, which may result in store closures or in RFG having to absorb back any underperforming stores – not to mention the impact of possible penalties for underpaying staff.
It's not just store closures that could be a concern, it's also loss of sales from the coffee and bakery divisions that were previously supplying those stores. Additionally, RFG may have to amend its franchise and supply agreements to improve the sustainability of its network, which could result in lower fees and narrower margins.
RFG shares have now fallen far enough that I have been looking at them as a possible turnaround. However, without a view to what the performance of the underlying stores looks like – information that Retail Food Group management is not exactly forthcoming with – it's very difficult to establish a price at which the company might be a genuine opportunity. As a result I'm inclined to leave RFG on the shelf for now.
