Judge rules for embattled Pick n Pay after franchisee says group crippled its business

25 Feb 2024

Friday’s judgment allowed the group the right to attach the property of a large franchisee, which ran into arrears because its new discounting model caused it to operate at a loss.

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 API 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.

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 itself made. 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 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 R100-million 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.”

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”.

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.” DM

Categories:

Tags:

DM is much better if you are signed in...

Business Maverick

Judgment reserved

‘Unlawful and unfair’

Livelihoods at risk

PnP ‘lost its way’