Assume you have recently been assigned to the audit team working on the financial statement audit of Town Groceries Limited (TGL). As a member of the team you are now in the process of gaining an understanding of the company’s business, environment, and risks.
From the 20X4 Town Groceries Limited Annual Report you have learned the following about this business and its strategy:
TGL is Canada’s largest food distributor and a leading provider of general merchandise products and services. TGL is committed to providing Canadians with a one-stop destination in meeting their food and everyday household needs. This goal is pursued through a portfolio of store formats across the country.
It operates across Canada under various operating banners (including Maritime Grocery, Western Groceries, and other banners). These banners are set up as 658 corporate-owned stores, 400 franchised stores, and 519 associated stores. The store network is supported by 32 warehouse facilities located across Canada. Some 130,000 full-time and part-time employees execute its business strategy in more than 1000 corporate and franchised stores from coast to coast. TGL is known for the quality, innovation, and value of its food offering. It also offers a strong private label program, including the unique Choice of Choice and OurTown brands.
While food remains at the heart of its offering, TGL stores provide a wide, growing range of general merchandise products and services. In addition, their Town Financial Inc. offers personal banking, a popular credit card, auto and home insurance, plus the Town Points loyalty program. TGL seeks to achieve its business objectives through stable, sustainable, and long-term growth.
It seeks to provide superior returns to its shareholders through a combination of dividends and share price appreciation. Its willingness to assume prudent operating risks is equaled by its commitment to the maintenance of a strong balance sheet position.
In executing its strategies, TGL allocates the resources needed to invest in and expand its existing markets. It also maintains an active product development program.
TGL is highly selective in its consideration of acquisitions and other business opportunities. Given the competitive nature of its industry, TGL also strives to make its operating environment as stable and as cost effective as possible. It works to ensure that its technology systems and logistics enhance the efficiency of its operations.
It strives to contribute to the communities it serves and to exercise responsible corporate citizenship.
a. Based on the preceding information, discuss the industry, regulatory, and other external factors that are relevant in understanding TGL’s business and its environment. Use the risk factors outlined in Appendix 6A as a guide.
b. Link the risk factors you identified in part (a) to the risks in TGL’s operations. Link these operating risks to risks of TGL’s financial statements being materially misstated.
c. Outline TGL’s strategy and describe, in general terms, the business processes you expect to find the company using to achieve its strategy. Consider the four typical business processes discussed in this chapter to develop your response.
d. While reading through the business section of the newspaper, you also came across the following article on TGL’s third-quarter results for 20X5 (see box below). What strategic risks are illustrated in the results being described in the article? Speculate on what strategic errors and/or business process deficiencies at TGL have contributed to these “woes.” What impact do you expect these events to have on TGL’s financial results for 20X5?