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:
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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.
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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.
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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
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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.”
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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”.
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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
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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
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Source: Unaudited interim financial statements for the 26 weeks ended 25 August 2024
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