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Retail Food Group share price crashes lower on franchise inquiry report release

In morning trade the Retail Food Group Limited (ASX: RFG) share price has crashed 13.5% lower to an all-time low of 16 cents.

This latest decline means that the embattled food and beverage company’s shares have lost almost 85% of their value since this time last year or a massive 97% over the last two years.

Why are its shares crashing lower again today?

Shareholders have been heading to the exits in their droves since the release of the “Fairness in Franchising” Report by the Federal Parliamentary Joint Committee on Corporations and Financial Services yesterday afternoon.

According to the release, the inquiry identified the “systematic exploitation of some franchisees by a subset of franchisors and a regulatory framework that does not provide adequate protection against such practices.”

In light of this, the committee is “proposing substantial changes to the Franchising Code of Conduct and to the responsibilities and powers of the ACCC.”

These recommended regulatory changes address issues including disclosure, franchise registration, supplier rebates, whistleblower protections, unfair contract terms, cooling off periods, exit rights, collective action, dispute resolution, binding commercial arbitration, alignment of industry codes, churning, education, and leasing arrangements.

One recommendation that was specific to Retail Food Group was recommendation 4.2.

It recommends that the ACCC, ASIC and the ATO “conduct investigations into the operations and dealings of Retail Food Group, its former and current directors and senior executives and companies and trusts they own, direct, manage or hold a beneficial interest in, with regard to matters including, but not limited to, the Australian Consumer Law, the Franchising Code of Conduct, insider trading, short selling, market disclosure obligations (including related party obligations), compliance with directors’ duties, audit quality, valuation of assets (including goodwill), and tax avoidance.”

The company responded to this recommendation this morning, advising that it “has an established history of cooperation with regulators and takes its compliance with all of its legal obligations extremely seriously.”

Fellow franchisor Domino’s Pizza Enterprises Ltd (ASX: DMP) was under scrutiny in the report but was not deemed to be the most culpable. This may explain why its share price is largely flat on Friday.

Should you buy the Retail Food Group share price dip?

Although its shares are trading at an all-time low, I would suggest investors stay well clear of them.

Especially given how there has been speculation that the company has been considering the appointment of administrators in the near term. Although management has denied that this will be the case, the way things are going I wouldn’t be surprised if this did occur later this year.

For this reason, I would focus on other options in the industry such as Domino’s or Collins Foods Ltd (ASX: CKF).

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Motley Fool contributor James Mickleboro owns shares of Collins Foods Limited. The Motley Fool Australia has recommended Collins Foods Limited and Domino's Pizza Enterprises 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 Scott Phillips.

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