Why Retail Food Group Limited is no longer on my watchlist

Retail Food Group Limited (ASX:RFG) is still a good business, but it's not for me.

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Retail Food Group Limited (ASX: RFG) is the master franchisor behind a number of different food chains including Gloria Jean's, Michel's Patisserie, Crust Pizza, Cafe2U, Donut King and Brumby's.

It has a long list of brands, but here are some reasons why I no longer think Retail Food Group is a buy for me:

Ailing chains

A number of its chains are struggling to find any meaningful growth. These businesses are finding it hard to grow sales faster than inflation.

It may be because less people want to buy a sugary snack or (fairly) expensive coffee. It may be because the overall retail sector is struggling. It may be that there are too many competitors out there, which is what SumoSalad had an issue with Scentre Group (ASX: SCG) about.

Whatever the reason, it isn't a good sign for future organic growth of the business. My colleague Sean O'Neill covered Retail Food Group's recent update, which didn't have much positive news.

Internet retailing

Food is one of the hardest things to disrupt through the internet. It's not like someone can create a digital version of food, unlike REA Group Limited's (ASX: REA) phenomenal evolution of property marketing.

The worst that the internet can do is through the internet ordering of food which Domino's Pizza Enterprises Ltd (ASX: DMP) has mastered superbly.

The problem for Retail Food Group is that if a lot of customers start internet shopping instead of going to shopping centres, then they won't be near a Gloria Jean's. US shopping centres have seen a huge fall in foot traffic over the last few years, this translates into a lot less mouths to feed at the food court. Australia could see a similar trend.

Diversification

Retail Food Group has so many different brands that it probably has too many. It's much easier to focus on a handful of brands rather than more than ten.

It would be much better for the business to sell off underperforming brands and concentrate on ones that do have a positive future.

Foolish takeaway and a silver lining

I still think that Retail Food Group has a lot of potential. It has plans to grow in the USA, China and indeed Australia.

It has a grossed-up dividend yield of 8.95% and it has increased its dividend every year since 2007.

I'd much rather own Retail Food Group shares over cash for the next five years. I just think that there are better options for your capital to be invested in for the long-term.

Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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