BUS 200 Year test 1 – 2025 – Pre-release information 9 May 2025 15:00 – 18:00 CA PROGRAMME UP Examiners BUS 200 team Internal Moderators BUS 300 team PICK N PAY GROUP LIMITED Assessment instructions – pre-release information: Students are encouraged to use the pre-release period to undertake research that will fully prepare them for the assessment. The objective of the research undertaken during this period should primarily be: • • • to obtain a more detailed understanding of the industry provided by the case study scenario; to absorb, reflect on and disseminate the details of the case study scenario; and to perform analyses, as required and as indicated by signals (triggers) in the case study scenario. Such research may be undertaken by the student on his/her own or may include consultation with other current year students. Consultation with all other persons is specifically excluded. Internet resources may also be used where appropriate. Students may make notes on the pre-released information provided, and this may also be brought into the test venue on 9 May. No additional pages may be added. Even though the information refers to real-world companies, all the transactions and amounts provided in this task are fictitious and are not intended to accurately depict reality. 1 FRANCHISEE DISPUTE Judge rules for embattled Pick n Pay after franchisee says group crippled its business Daily Maverick by Georgina Crouth on 25 February 2024 Pick n Pay’s attempt to “commandeer” the business of one of its biggest franchisees, after the retailer took it to court over a disputed R300-million debt, has succeeded in the Gauteng Division of the High Court in Johannesburg. On Friday, the court granted the retailer permission to attach the property of the AJP Group’s stores, potentially shuttering a family business built over more than 30 years. It’s an acrimonious ending to a relationship that had been lucrative for both franchisor and franchisee. The falling out came after a change in PnP’s discount payment terms, which were subsequently changed. AJP Group CEO John Baladakis says PnP’s redrafting of its discounting model (introduced in 2018 during former CEO Richard Brasher’s term) crippled franchisees’ costings and profits, causing the AJP group to rack up debt. While PnP’s model changed again last year, the group and other franchisees have been saddled with a historic debt. It is this alleged debt that PnP is now calling in. 2 On Wednesday, Pick n Pay was in the high court, seeking urgent relief against the AJP Group of retail, property development and management companies. Baladakis says PnP’s unilateral imposition of the new model — without proper consultation — distressed franchisees, who were fearful of the group seizing their stores and then charging them a management fee to operate. It is believed a significant percentage of PnP franchisees are unhappy and struggling. Judgment reserved Judgment was reserved, with the judge instructing both parties to find “practical solutions” to the problems. Baladakis has been a PnP franchisee for more than 30 years, with 10 stores, nine liquor stores, 650 staff and an annual turnover of R1.5-billion. Soon after judgment was handed down on Friday morning, PnP had already attempted to attach some of the stores, but Baladakis has applied for leave to appeal. The appeal will be heard on Wednesday, 28 February. Baladakis, a former chairman of the Franchise Association of South Africa, said: “We are extremely disappointed in the court’s ruling. Pick n Pay are attempting to forcibly gain control of our family-run business which has been part of their success over the last three decades. The ruling was made despite the fact that the debt is a result of changes Pick n Pay made itself. We will continue to fight this matter with all means at our disposal.” Before the new discounting model was introduced, they were trading “so happily” with PnP, Baladakis said — a relationship established over decades, that they were building their business and grateful to be with the group. “But when they started this discounting model we started seeing the gross profits decreasing as the percentage of discounts, given to customers, started increasing. Sales flatlined. Obviously, that isn’t a desirable situation, especially when you’ve got your expenses increasing, with load shedding etc. So the effect of the 3 discounts was huge on our business, which affected our profitability extensively and placed our business in a much less than acceptable position.” Unlawful and unfair The AJP Group believes that the model was unlawful and unfair, specifically in terms of competition law and the Consumer Protection Act. “We also believe that the model contravenes Pick n Pay’s own franchise agreement.” Baladakis says the new model was intended to increase their sales and cover any losses around promotional activity. Instead, they saw sales flatlining. At first, franchisees saw a discount percentage of about 1-1.5%. Towards the end of 2018, that accelerated to about 7% in some of the stores. The net effect is that they sold 10% to 15% more promotional items at zero profit. “Not only were we selling at 0% profit, but we also weren’t making our previous profit margins on those items. That has brought us to this stage — despite countless assurances by Pick n Pay to address the situation.” Franchisees started complaining about the model soon after. PnP did address the situation — in June 2023, when it introduced a new and better model. But that still doesn’t address the past harm caused by the previous model. Baladakis says they had also tried repeatedly to resolve the debt situation with PnP management over the past three years, to no avail. PnP’s franchise division accounts for 50% of the group’s profits. The AJP group’s turnover for the year ending September 2023 was more than R1.46-billion. Out of that, they pay PnP — their biggest supplier — about R100million a month in business, but they are losing more than R70-million a year. Their total losses are now approaching R390m, with R100-million in gross profit lost. Should PnP be successful in this application, it will run the store. “Thirty years on, they’re going to walk in, take our business and run it and then expect us to pay them a fee to run it.” 4 Livelihoods at risk The livelihoods of 450 employees, up to 250 subcontractors and 80 support staff would also be at risk. “We’re very, very worried about what happens to those employees because if PnP manages to take over our stores, they have their own structure so we probably have between 80 and 100 people who are going to lose their jobs. We’re extremely concerned.” Tamra Veley, spokesman for Pick n Pay, called the matter an “unfortunate situation” with the franchise group that had developed over a protracted period. “In light of there being no improvement to the debt position of this group, we are left with no alternative but to take action to protect Pick n Pay’s interests.” “Our franchisees are a very important part of the Pick n Pay family, and it is sad when we are faced with little choice but to protect our position.” “We have franchise groupings larger than this one, as well as individual franchisees, which are both profitable and fully paid up without any outstanding debt.” “Whilst we do not agree with the allegations made by this franchisee group, the issues raised are complex and are the subject of legal proceedings between the franchisees and the company. We do not wish to deal with these outside the legal process.” PnP ‘lost its way’ Pick n Pay, which has bled market share to Shoprite-Checkers and Woolworths, has scored a number of own-goals in recent years, with its newest CEO, Sean Summers (its third in a decade) admitting it had lost its way. On Friday, PnP’s share price tumbled by almost 19% after announcing it was unbundling its discount grocery chain Boxer discount to rein in its debt. The retailer, which posted its worst results in October 2023 since listing on the JSE, said it hoped to “strengthen liquidity, unlock shareholder value and set a platform for long-term sustainable growth”. 5 In October, Summers returned to the group, which had booted out Pieter Boone, he told investors: “The truth is, Pick n Pay has fallen out of love with its customers, its people and its suppliers. This is what lies ahead of us. This is why it’s so exciting. Because from here, we go up.” Although the Court ruled in favour of PnP, the case highlighted critical governance and ethical challenges within franchise models, especially regarding transparency, fair dealing, and responsible business conduct. Please also familiarise yourself with the key stakeholders of PnP according to their 2024 Integrated report – see below the extract. 6 BULK DISCOUNTING MODEL Sean Summers, the chief executive officer (CEO) of PnP, recently received the following email from a PnP franchisee. He requires you, the chief financial officer (CFO) of PnP, to investigate the matters raised in this email. To: ceo@pnp.co.za From: franchisee201@pnp.co.za Subject: Profitability of bulk discounting model Date: 7 May 2025, 9:00 Dear Mr Summers I hope you are doing well. I am writing to raise a concern regarding the current bulk discount pricing model for chocolate bars, which has been impacting the profitability of my franchise. While I understand the intention behind offering bulk discounts to increase sales volume, I have noticed that the model may not be as beneficial as expected, especially considering the associated costs and the potential strain on our margins. I am aware of the franchisee dispute as per the Daily Maverick article, dated 26 February 2024. Although the bulk discounting model has changed, in my opinion there are still issues relating to the bulk pack chocolate bars. A bulk pack is made up of five individual chocolate bars which are packaged together for sale. Pick n Pay’s head office dictates the selling price of these bulk packs and also requires franchisees to keep a minimum stock of these bulk packs. Although we sell both individual chocolate bars and bulk packs, the bulk packs seem to be the reason for losses in my business. To give you a clear picture of the financial impact, I can provide you with an absorption costing income statement for chocolate bars and a breakeven point calculation based on the existing pricing structure. This has been prepared using my knowledge of cost-volumeprofit analysis and the related assumptions. Let me know if you would like this detail. Yours faithfully Franchisee 201 7 GOING CONCERN You are the senior accountant for PnP and you have received the following email from the Financial Director of PnP. To: senior.accountant@pnp.co.za From: financial.director@pnp.co.za Subject: Stakeholder meeting Date: 9 May 2025, 8:03 Dear Senior Accountant, We will be hosting a stakeholder meeting soon to address issues relating to our ability to operate as a going concern. We are doing this to stimulate conversation about the issue in an open and transparent manner. Our stakeholders have differing views on the going concern note in our published unaudited interim financial statements for the 26 weeks ended 25 August 2024. The interim financial statements can be found at pnp-h1-fy25interim-results-booklet-singles.pdf. I have also provided the going concern note (note 14.2) on the next two pages for easy reference. As you know our financial year end is 25 February and we are still hard at work preparing the integrated annual report for 2025. In the meantime, we have the interim financial statements to rely on. I need your assistance in preparing for the stakeholder meeting. I have been busy with other accounting matters and I am not up to date with the latest developments relating to going concern. My role during the meeting will be to facilitate the conversation and therefore I need to understand the views of both sides of the going concern conversation, i.e. those stakeholders that believe we are a going concern and those who are questioning whether we are in fact a going concern at this point in time. Can you please do a deep dive on what going concern means as per the Conceptual Framework and the different factors that need to be considered when determining whether we will remain a going concern or not? I am also interested to know what we have done from our side to ensure that we remain a going concern. I need an understanding of all the factors that contribute to being a going concern and how we are performing in relation to those factors based on news articles post the interim financial statements. An example of an article that you can refer to can be found at: https://businesstech.co.za/news/business/811713/pick-n-pay-under-siege/ Any reference to amounts and growth rates in the financial statements needs to be based on our latest results, i.e. the interim financial statements for the 26 weeks ended 25 August 2024 compared to the interim financial statements for the 26 weeks ended 25 August 2023. Some of the factors you may consider include (but are not limited to): losses for the period, turnover growth, trading profit, market share etc. I look forward to your input! Kind regards Financial Director 8 9 Source: Unaudited interim financial statements for the 26 weeks ended 25 August 2024 10
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