/ 9 November 2012

Franchisees lash out at Pick n Pay

Struggling Pick n Pay franchisees say unfair franchising agreements
Struggling Pick n Pay franchisees say unfair franchising agreements

At the heart of the issue is what the franchisees claim are unfair franchising agreements exacerbated by variations to those contracts, which make it impossible for businesses to stay afloat. Pick n Pay strongly denies the allegations.

The problems emerged in the North Gauteng High Court in Pretoria this week when Pick n Pay failed to secure urgent court orders allowing it to effectively repossess three struggling franchisee stores in Mamelodi, Groblersdal and Pretoria. A fourth store in Kimberley faced similar action in the high court. The applications were postponed, however, to be heard at a later date, likely only in March 2013.

The requirement by Pick n Pay that franchisees purchase stock from its distribution centre, rather than nominated or approved suppliers, is a particular bone of contention.

“As a result, franchisees are not paying a better price for their goods,” said Grant Seton-Smith, director at Seton Smith & Roberts Attorneys, the firm representing the franchisees. “Instead, they are purchasing goods at a slight premium.”

In an answering affidavit filed on behalf of the Groblersdal store, it said that “the goods and products which each franchisee is compelled to purchase from [Pick n Pay] through its distribution centre” were at a “higher cost than those goods which each franchisee could independently and individually obtain from a direct supplier or a nominated or approved supplier”.

General notarial bond
The gross profit margins these stores were left with meant franchisees could not make ends meet, argued Seton-Smith.  

This, according to the affidavit, has caused franchisees to default on payments to Pick n Pay and run into millions of rands worth of debt with the company, until Pick n Pay opts to exercise its security over the businesses by perfecting the general notarial bond on the stores.

But Chris Reed, franchise division director at Pick n Pay, said it was committed to ensuring its franchisees received “the highest level of support from the company”. It embarked on these types of interventions only when it appeared that all other avenues had been exhausted.

Three of the stores involved in the dispute, Mamelodi, Groblersdal and Kimberley, were formerly Score stores. In a bid to boost black entrepreneurs, Pick n Pay sold 65 of its former Score-branded shops in 2008 to black business people for conversion to Pick n Pay family franchise stores.

In 2010, the Mail & Guardian reported the unhappiness of a number of black franchisees, who claimed that they had inherited deeply troubled businesses. They criticised Pick n Pay’s actions, which they claimed exacerbated the poor performance of their franchises. But Reed said many of the converted stores were some of its most successful franchise stores, although a few, “but not many”, had traded below expectation. These stores were given monthly financial support from Pick n Pay to allow the franchisees to return their stores to profitability.

Market-related price
The company was “regrettably” in the process of perfecting the notarial bonds in isolated cases in the northern region, he said. This was necessary because the debt of these stores had reached “unacceptably high levels and continues to increase”. Once the perfection was granted, Pick n Pay would assess the viability of the stores and attempt either a relaunch or sale of the store at a market-related price, said Reed.

Of the original Score conversions, four have been sold to other franchisees, five have been sold by franchisees to Pick n Pay’s Boxer brand, which is aimed at the lower end of the retail market, and two have been converted to corporate stores.

Reed denied that the purchasing system’s requirements harmed franchisee’s businesses. Franchisees can buy produce and fresh meat from any supplier, provided it has passed Pick n Pay’s quality standards and all legal health and safety requirements. Stores can also receive direct deliveries from suppliers whose goods are not stocked in the centralised distribution centres.

About 30 unhappy black franchisees have organised under the banner of the South African Franchisee Representative Association (Safrep), alongside other Pick n Pay franchisees, according to Seton-Smith.

The association has been trying to engage with Pick n Pay on members’ problems. Reed said Pick n Pay had no relationship with Safrep because  franchisees were independent business owners, but it did engage with franchisees in a range of representative forums.