Why RFG is acquiring Gloria Jeans

RFG CEO Tony Alford sheds light on what prompted the Gloria Jeans acquisition and responds to a JP Morgan analyst's comment.

Retail Food Group (RFG) announced last week its entry into a Sale & Purchase Agreement (SPA) to acquire the global business and intellectual property assets of Gloria Jean’s Coffees. Alford answers questions from QSR Media, opening up on some key issues regarding Gloria Jeans and its acquisition.

QSR Media: What attracted RFG to Gloria Jeans?

Tony Alford: The business represents an opportunity that has long been of interest to the Company. Indeed, RFG’s aspiration for Brand System alignment with Gloria Jean’s Coffees dates back to as early as RFG’s ASX Listing in 2006. All aspects of the Gloria Jean’s Group are appealing for two reasons:

• They perfectly mimic those of RFG’s present business drivers; and
• As a result of the significant areas for growth identified.

Importantly, the Gloria Jeans Group meets RFG’s three key criteria for acquisitions, being:

• Immediate EPS accretion
• Capability for generating increased supply-side scale (which importantly benefits all franchisees under RFG’s stewardship)
• Enhancement of the number of Brand Systems and outlets under RFG stewardship
• All of which are consistent with RFG’s ‘strength in brands’ philosophy
• Not often has an opportunity presented itself to RFG that better satisfies these criteria, as well as providing a plethora of opportunities for the Company both domestically and internationally. These opportunities exist not only in franchise operations but coffee roasting, packaging, distribution and sales, a growing global market in which RFG has significant interest and experience.

QSR Media: What does GJ's acquisition mean for the company? Are you looking into expanding to other industries? (Manufacturing, etc?)

Alford: The acquisition of Gloria Jean’s Group genuinely transforms RFG into a global franchising powerhouse:

• RFG’s outlet footprint will number in excess of 2,400 outlets across over 40 countries
• RFG will have a fully integrated international coffee supply chain of c.4.5m kgs p.a.
• With strong brand equity and consumer recognition, the Gloria Jean’s Coffees Brand System enhances RFG’s brand portfolio, positioning the Company as a leading multi-brand coffee and food franchising group
• The addition of two state of the art coffee roasters in addition to the three already operated by RFG, triples roasting capacity to c.16m kg p.a.
• Coupled with RFG’s existing specialty coffee brands, the addition of another sophisticated national supply chain provides a gateway to achieving further penetration in the specialty coffee brand market and increasing the Company’s third party wholesale business

QSR Media: Is there a tentative date for the official acquisition?

Alford: The SPA is subject to usual and ordinary conditions with a completion timeframe of December 2014.

QSR Media: Are there any updates of La Porchetta and Cafe2U acquisitions?

Alford: The acquisition of Café2U was successfully finalized on Thursday 11 September 2014. The La Porchetta transaction is subject to RFG completing due diligence investigations, with the SPA also subject to usual and ordinary conditions.

TONY ALFORD RESPONDS TO COMMENTS BY A JP MORGAN ANALYST

Last week, QSR Media published Armina Soemino's, Equities Research at J.P. Morgan two cents on the Gloria Jeans acquisition, where she presented some pros and cons of the Gloria Jeans acquisition.

Click here to read her comments

Tony has responded to the points raised by Soemino.

Point Raised #1 Re-exposes RFG to shopping centres – 75% of outlets are in shopping centres and RFG was making a concerted effort to get out

Alford: RFG has always maintained it will continue to have a high presence in shopping centers; however we are motivated to continue to exploit opportunities for our Brand Systems outside of traditional site locations. Through Project Evolution we have developed significantly greater outlet opportunity by diversifying outlet design to meet ever changing consumer requirements and preferences – which is exampled both inside and outside of the traditional shopping centre. Project Evolution and its positive outcomes do not mean that RFG will no longer operate in shopping centre environments, or has been ‘making a concerted effort to get out’, indeed, RFG has developed new opportunities both inside and outside of shopping centres to facilitate both medium and long term sustainable outlet growth. Given our success in Project Evolution to date across the Michel’s Patisserie, Brumby’s and Donut King Brand Systems, we are confident we have the expertise and blueprint to successfully transition Gloria Jean’s Coffees the same way.

Point Raised #2 The business almost went insolvent in 2010 and has had to close 150 unprofitable stores with RFG expecting to close another 22 at least (potentially up to 40) so that doesn’t sound like the most healthy of businesses

Alford: In the first instance, we have no knowledge or insight into the statement that ‘the business almost went insolvent in 2010’. Indeed, there is no evidence to support this statement and we believe it does not factually represent the history of the Gloria Jean’s Coffees Brand System.

More generally, Gloria Jean’s Group commenced a store rationalization program in 2012 which has now been substantially completed, and did see the closure of some outlets. The rationalization program was a result of a previous shopping centre focused growth strategy, and RFG believes that the new pilot concept currently being developed, coupled with a migration outside of shopping centres into more strip, neighbourhood and regional locations, is where Gloria Jean’s Coffees will achieve significant growth.

Point Raised #3 Global execution risk – what does RFG know about being an international franchise licensor?

Alford: RFG has been an international franchise licensor for well over a decade, with Donut King first licensed internationally in 1995. In fact, the Company’s existing Brand Systems are represented in New Zealand, the United States, Indonesia, China, Singapore, the United Kingdom, South Africa, Saudi Arabia and Papua New Guinea. We’d therefore like to think we know a little about being an international franchise licensor. The acquisition of Gloria Jean’s Coffees provides access to a number of new international markets for RFG, a significant benefit to the Company as it holds the global franchising and intellectual property rights to every one of its Brand Systems but for Esquires, which is limited to Australian and New Zealand ownership rights. The acquisition provides RFG with the addition of a highly skilled and experienced international team and structure. RFG will simply look to bolster the existing team to cater for future international growth plans.

Recent research revealed that Gloria Jean’s Coffees is the most preferred coffee chain in Australia, and with a renewed focus on increasing the food range, reinvigorating elements of the brand, and adding model versatility to drive outlet penetration, we anticipate a bright future for the Gloria Jean’s Coffees Brand System domestically and internationally.