Mr Gilles Bisson (Timmins-James Bay / -Timmins-Baie James
Mrs Claudette Boyer (Ottawa-Vanier L)
Mr Brian Coburn (Carleton-Gloucester PC)
Mr Garfield Dunlop (Simcoe North / -Nord PC)
Mr Raminder Gill (Bramalea-Gore-Malton-Springdale PC)
Ms Frances Lankin (Beaches-East York ND)
Mr Pat Hoy (Chatham-Kent Essex L)
Mr David Young (Willowdale PC)
Substitutions / Membres remplaçants
Mr Ted Chudleigh (Halton PC)
Mr Michael A. Brown (Algoma-Manitoulin L)
Clerk / Greffière
Ms Anne Stokes
Staff / Personnel
Ms Susan Swift, research officer, Research and Information
The committee met at
1001 in the Holiday Inn, Sault Ste Marie.
Clerk of the
Committee (Ms Anne Stokes): Good morning. It is my duty
to call upon you to elect an Acting Chair. Are there any
Mr Michael A. Brown
(Algoma-Manitoulin): I nominate Mr Chudleigh to be the
Clerk of the
Committee: Mr Chudleigh is nominated Acting Chair. Are
there any other nominations? There are no other nominations. I
declare Mr Chudleigh Acting Chair.
FRANCHISE DISCLOSURE ACT, 1999 / LOI DE 1999 SUR LA
DIVULGATION RELATIVE AUX FRANCHISES
Consideration of Bill 33, An
Act to require fair dealing between parties to franchise
agreements, to ensure that franchisees have the right to
associate and to impose disclosure obligations on
franchisors / Projet de loi 33, Loi obligeant les parties
aux contrats de franchisage à agir équitablement,
garantissant le droit d'association aux franchisés et
imposant des obligations en matière de divulgation aux
The Acting Chair (Mr
Ted Chudleigh): I call the meeting to order. Welcome,
all, to Sault Ste Marie. Having a very benevolent winter, we can
only hope we get some snow for next weekend's festivities. We are
here to accept deputations to Bill 33, an act to require fair
dealing between parties to franchise agreements.
CITY OF SAULT STE MARIE
Chair: Our first guest is Stephen Butland, mayor of the
city of Sault Ste Marie. Your Worship, would you come forward,
please. We have 20 minutes to spend together. You may use as much
of that time in your presentation as you wish, and we will fill
the remaining time with questions. Thank you very much for coming
Butland: I don't believe I will take my allotment of 20
minutes' time. I hope you don't ask me difficult questions,
because I don't think I'll have the right answers.
Chair: Did you study last night?
Yes I did. Actually I was at this at 7 o'clock this morning.
First of all, it's
appropriate to welcome the committee to Sault Ste Marie. I think
I have met all the faces before in Sault Ste Marie. Thanks for
coming. Please come more often. We're far away and we're quite
expensive to get to. I think you're all aware of that. Gas prices
are outrageous and airfares are more outrageous. It probably cost
you over $800 return per person to get here, and that's
difficult. But we're not here to talk about the price of fuel;
we're here to talk about Bill 33.
I would like to acknowledge
the government for this franchise legislation. I need to
acknowledge Tony Martin's efforts. He has renewed the efforts of
a revered former MPP from Sault Ste Marie, and a member of the
Conservative Party at that time and Ontario's Attorney General.
He capsulized his rationale as: Legislation was needed to deal
with the evils of franchising. Then MPP Jim Wiseman also brought
legislation forward and it died on the order paper. I believe
this legislation's time has now come. Its intent is to offer a
level playing field. That may be a euphemism for the real issue
at hand, that is, to protect the little person against the big
The dictionary meaning of
"franchise" suggests that it's a right or a privilege to hold a
franchise. It makes no reference to franchisor or franchisee. So
I suggest it's a right and a privilege for both. It connotes
working together in the interests of both parties. But also, more
significantly, one would hope it works to the benefit of the
consumer, who should be paramount in your discussions.
I offer little expertise in
this area. I have not done a great deal of research into this. So
I'm sure I will not say anything you have not already heard or
read about. Nevertheless, I would like to proffer some
I know that legislation such
as that tabled can, if implemented, impact tens of thousands of
lives in our great province. There are volumes of anecdotal
tragedies and it hits home on all fronts. Locally, I make
reference to some large grocery chains. We lost three franchisees
in our community in the last five years. It may be a personal
opinion, but it's shared by many, that really they were driven
from the grocery retail business. Two of those three people no
longer live in our community.
In a previous political life
I was involved with some of these franchisees at the federal
level and quickly found out that there was no protection at any
level of government. These people were scurrying at that time,
right across Ontario, to come together and attempt to speak as
one voice. That was nigh on
impossible for them to do, and the only recourse they had was to
hire legal counsel at great expense. So I have seen it at the
federal level, you people are dealing with the provincial level,
and there has been impact in the municipalities.
The people we lost were
really good corporate citizens, and it was a loss to our
community. I suspect that Mr Martin and others have recounted
some of the very harsh realities as to why they left our
I don't want to be completely
parochial, but it was, if nothing else, coincidental but also
fortuitous that just last month, on February 10, we read,
"Franchisor Leaves Travel Agents Stranded." I'm not here to
implicate any of the major grocery chains, but in this one a
couple of individuals opened a travel counter in a grocery
outlet. The hierarchy is grocery chain, franchisor, franchisee.
The chain did not pick the appropriate franchisor. The franchisor
went bankrupt. The people in the travel agency at the grocery
outlet were left in limbo. Each of them lost a $60,000
It goes on: "The `corporate
solution,' however, turned out to be an agreement with another
franchisor ... ," and I'm not going to name names here, "which
immediately demanded a new round of franchise payments and higher
royalty fees from the tapped out ... " previous
The individual had a record
of less than sound financial wherewithal. The only obvious
victims of the failure were the franchisees.
"`It is not our job to
monitor franchise agreements,'" says head office. "`People should
go into such deals knowing that if the franchisor messes up, the
subordinate franchisees automatically suffer.'" So it's almost a
matter of fact. "If this happens, it's too bad. You're fresh out
of luck," said the franchisee. "My mistake was to believe" blank
"would be careful in its choice of franchisor and would not write
us off." But indeed, they were written off.
"Franchisees should recognize
that most franchise agreements give them `no say whatsoever' in
the main aspects of the business." Again, I don't want to be
completely parochial. It's at the provincial level and I'm sure
you're well aware of these stories.
The bill itself-and I need to
thank Susan Swift for providing this individual at least, and I
suspect others, a comparison chart that's very easily read and
understandable. I just want to highlight a few of the items I
want to note.
I think the concept of
incorporating minimum standards is good. I suspect that Mr
Martin's bill is more restrictive, more onerous, if you will, and
I read into it, for the most part, that it's good. One thing I
really endorse is this dispute settlement mechanism. I would
encourage you to support that-I guess in the way of an amendment,
would it be, Tony? OK. I would hope the franchisor and the
franchisee could go to mediation first before they go to court,
because that's a very costly exercise. I suspect it would be
complex, but again I remember very well under the free trade
agreement and NAFTA that there is a much-ballyhooed dispute
settlement mechanism. So if something as complex as those
agreements could have a dispute mechanism, I suspect this kind of
legislation could as well.
I'm looking at the government
bill and, as I say, I would endorse this and I think Mr Martin
has gone on just a little bit more and added-is it flexibility or
is it onerous restrictions? That's for you to decide. They don't
seem that onerous to me, but then I'm not involved.
Under fair dealings and
standards of conduct, it sets out minimum standards of conduct:
good-faith dealing, enforcing only reasonable performance
standards, exercising rights in a commercially reasonable manner,
non-encroachment on territory, and it goes on. I suspect this
should be described as flexible as opposed to restrictive.
The right to associate: I go
back to the franchisees in Sault Ste Marie and right across the
province at that time. They had no association. It was difficult
to assemble them. There was no designated leadership and there
was no unified front. I think Mr Martin is looking to deal with
that in a more formal manner.
The bottom line is that the
legislation, I believe, should be looked on as a positive piece
of legislation. Who knows? Franchisors and franchisees may
develop a healthy and a profitable relationship rather than one
that seems to be built, from everything we read, on anxiety and
I certainly thank you for the
opportunity to make this presentation to you.
Chair: Thank you very much. That leaves us with about
eight minutes of questions, and we'll start the first round with
the Liberal caucus.
Thank you, Mr Chair, and thank you, Your Worship. Some of us have
looked at this legislation and wondered how we could make the
golden rule work a little better, ie, he who's got the gold makes
It appears that this is a
good step. Back in the 1990-95 Parliament, my former colleague Mr
Mahoney, who has strong links to Sault Ste Marie, also offered
franchise legislation. He is now in the federal Parliament, as
you might know. But this is a problem here.
In Sault Ste Marie, of
course, one of the interesting topics of great conversation is in
terms of access to shelf space in independent groceries, for
example. For the committee members who aren't from here, we have
two competing dairies, which is a good thing, both attempting to
have their product offered for sale in various retail outlets. I
wonder if you could indicate, from the city's point of view, how
that is impacting on the consumer. When it all comes down to it,
this is really about consumers, at the end of the day.
Thanks for that question, and please give my regards to Mr
Mahoney. I wasn't aware that he also had tabled legislation on
The dairy issue in our
community has met with some concern from some individuals that we
are promoting one dairy over another, and we are not doing that
whatsoever. We are just looking for that level playing field. If
shelf space is available
to one, the other, or the three or four of them, should have an
equitable share of that shelf space and not be restricted.
The specific example is that
the totally local dairy had, I think, about 10% of shelf space
and was selling a full 40% to 50% of the dairy product off that
limited shelf space. That is probably good from the operator's
perspective, but the store operator was saying, "We have to fill
the shelves every half hour, and it has to be delivered to the
store on a regular basis." So it's a major inconvenience to the
operator, to the grocery retailer and to the consumer who is
going into the store saying, "I want to buy this product." Yes,
the consumer is of primary concern. Again, we are not looking to
pit one against the other, but just to make it a level playing
Mr Tony Martin (Sault
Ste Marie): Thank you for coming today, Steve. It's
certainly good that another voice tells the Sault Ste Marie story
for this concern. That is where I started to be concerned about
franchising and regulating that industry. You make the point
about three franchisees. We had three very dramatically public
debacles as far as franchisees are concerned. I would guess there
were probably hundreds of others in that five or six years who
have struggled in one way or another. Some are gone; some
struggle on. And who knows their stories as they try to do
business, as they try to be good business people and good
corporate citizens in this community? I am told that 75% of new
franchisors die as the system evolves, and with them their
franchisees, because one is tied to the other-you talked about
the story in the paper.
What I want to get to today
is an issue that I think will be a bit of a theme, which Mike has
already introduced, which is the question of sourcing, of
franchisees' ability to not be tied to buying from the parent
company but to source product where they can get it at a
competitive price and in that way help themselves in terms of
their profitability and success and also help out local
economies. In the north, local economies are getting killed at
the moment, and I think part of the problem is that most of the
deals are cut someplace else and most of the supply comes from
someplace else, and that doesn't leave much room for our small
local producers to get their materials on the shelves.
I have a number of articles-I
was doing this all day yesterday-some more research that Susan
Swift has done for me on just that issue. There is quite a bit of
information out there. One is an article by Joseph Thompson on
sourcing and pricing, "Anti-Trust Developments in Franchising."
I'll give everybody a copy. Another is a summary of an article on
purchasing supplies by franchisees, with some interesting
commentary as well, most of them raising the same issue: Why
can't the local franchisee source-supply where he can get it at a
competitive price and help out local economies, because if a
local economy is healthy, chances are they'll be more
I've got about three or four
different pieces of information here that I will give to the
committee and leave on the table over here for anybody else who
wants copies. But maybe you could talk a little bit, Steve, to us
today. We'll have three dairies in particular coming before us.
I'm not sure if you know the story about My-T-Fresh Eggs, but
they no longer exist. Maybe you could share with the committee
that story and how it impacts the local economy here, because you
were the MP when Beatrice left town.
Chair: We're coming rapidly to the end of our time. A
brief comment, please.
The corporate giants in the dairy field we've all read about
recently, one perhaps controlling 50% of the world's distribution
in dairy products. The bigger they get, the more difficult it is
for the local to survive in that marketplace. I guess what Mr
Martin is getting to is the theme that if we can't support our
own local industry-because we in northern Ontario are very much
interdependent and look to support one another. It's not much of
a comment, Tony, but thank you.
Mr John O'Toole
(Durham): Thank you, Your Worship. It's wonderful to be
in your great community and good weather.
I suspect that the important
thing for us is to, in a general sense as people looking after
the welfare of your citizens-and I think it's the same
responsibility of this government, and I think that's the intent.
I respect the fact that, whether it was Mr Mahoney or Wiseman or
Martin, there have been attempts by previous governments to
examine this rather faulty area for doing business. Are you
convinced, just with a quick look at Bill 33, that the three
fundamental goals or objectives of disclosure, fair dealing and
the right to associate are a very good first step to ensure some
sort of fairness in the marketplace for new people in business?
Disclosure is an important part of the whole thing, and the right
to associate, the experience of others who are more experienced,
can avoid a lot of pitfalls, I think.
The answer is yes.
Chair: I appreciate that. I think a background as a
federal MP I appreciate even more. Did you have a very brief
comment or question?
Mr Raminder Gill
(Bramalea-Gore-Malton-Springdale): No. My question has
been covered by Mr O'Toole.
Chair: Your Worship, thank you very much for joining us
this morning. We certainly look forward to spending the day in
your marvellous community.
CANADIAN ALLIANCE OF FRANCHISE OPERATORS
Chair: The next witness will be the Canadian Alliance of
Franchise Operators, Mr Les Stewart. Mr Stewart is an expert
witness. Welcome to the committee, Mr Stewart. We have a period
of time to spend together here, 45 minutes.
Stewart: Thank you, Your Worship, Madam MPP and
The Acting Chair: He's the Worship;
I'm the gentleman. But I appreciate the respect, because I don't
get a lot of it.
I'm sure it's more than earned.
My name is Les Stewart. I've
come to speak to you in the manner that I think one of the
witnesses yesterday, David Michael, spoke to you. As you recall,
David was with the Pizza Pizza franchise system. I hope to be
able to go through a good deal of information and leave lots of
time so that I can fill in the blanks.
I am first and foremost a
business person. I have had training in business. I have an
operating business in the Barrie area. I have 780 customers who
seem to like what I'm doing in the lawn care business.
Please excuse me for being
nervous, but it has been quite a few years. If I might go through
a bit of personal history, I received my BA and MBA at the
University of Western Ontario in London. I have extensive
McDonald's restaurant experience, starting when I was 13 years
old as a crew member and culminating in 1980, when I was first
assistant manager in the Orillia McDonald's. At that time, I was
employed by a franchisee who owned the Barrie, Midland and
Orillia McDonald's. At that time, the ownership changed from that
franchisee to McDonald's Canada Corp. That happened at the same
time the Midland McDonald's was being certified as a union. From
there I went back to finish my BA at Western. For three summers
during the time at school I was a painting contractor; I ran a
painting contractor business in Barrie. I worked also during the
summer of my business program as a real estate researcher for a
fellow who owned 28 Harvey's and Swiss Chalets out of Sarnia. We
were successful in developing the real estate work to get five
new stores going within the year.
I was also a medical audit
coordinator at St Thomas Psychiatric Hospital after school. I
learned that if you are going to start looking at medical records
and dealing with physicians, psychiatrists, psychologists, you'd
better have their trust. As a president of the only franchisee
association in Canada, that is all I have: the trust of the
people who have experienced franchising. The sound that you hear
is the sound-the silence-of all of the successful franchisees in
this country who are saying: "Mr Stewart, the message you are
bringing here today is wrong. There's nothing wrong with
franchising." I am not contradicted in my assertions by operating
business people who have extensive knowledge of franchising.
What prevents them from
communicating are a number of things that we will go through, but
the only thing I have-CAFO, the Canadian Alliance of Franchise
Operators, is my hobby. I have subsidized this for two and a half
years from the operation of my business, and to anyone who thinks
this is a money-making endeavour, I have the net worth to prove
I was a financial analyst for
three years at Victoria Hospital in London, which is a large
teaching hospital with an operating budget of $350 million a
year, so I have some experience in financial matters. I was laid
off from that position in March 1992. I conducted a traditional
job search for nine months in an outplacement program at Price
Waterhouse in London. I signed a franchise agreement after what
has been deemed at trial to be the most extensive due diligence
the judge has ever seen. I signed that franchise agreement one
week before my unemployment insurance benefits ran out.
So what happened to me in my
franchise? I operated it for four and a half years. The first two
years I lost $130,000. I achieved less than 25% of my pro forma
income statement revenue. I am a fourth-level CMA, certified
management accountant, and I have seen, in the four and a half
years of the system that I was involved in, 17 ownership changes
in the 24 markets that are served in Ontario by this lawn care
If it were just me, I would
never be here today. But in the process of trying to find out
what the devil happened, because first I had to explain to myself
and then I had to explain to my wife and mother why she needed to
mortgage the house after having it mortgage-free for 20 years, I
needed to understand why. That is just all this is, an inquiry
into understanding of, why the devil does this happen? Why do
hard-working, bright, competent people get themselves into a
situation where it seems that there is almost a system to strip
life savings away from you?
After four and a half years
in a small business, cash is king. Working capital is the only
thing you can't borrow. You have to either put it in in equity,
or through the profitable operations of a business you increase
your working capital. The cash ran out. Their solution was, "Just
get your mother to put in another $50,000." I said, "No, this is
enough after four and a half years." They said, "Well, I guess
you've got to sell."
I tried to sell it for nine
months. I received an offer for $35,000 two days before the
injunction hearing. That was for a business that was listed and
worth-and the franchisor agreed-$171,000. When I represented
myself in the Barrie courthouse for the request by the franchisor
to stop me in the lawn care business, the judge said, "Mr
Stewart, isn't half a loaf better than nothing?" I said,
"Absolutely, and if I had an offer that was anywhere close, I
would have gone." The judge looked at it and said: "You owe them
some money for product. Pay them, and let's let the lawsuit carry
on." I have been engaged since February 1998 in a legal battle
with a $350-million-a-year company. They control the trademarks
of six franchise systems and at last count, when I checked their
Web site, they have 1,600 franchisees. I am an example. It's not
about money; it's all about control. I'm the one who just
wouldn't go away.
I started the Canadian
Alliance of Franchise Operators simply because I was trying to
figure out what to do with myself. I tried to gain some
assistance. I did everything by the book. Some people have
characterized me as a bit of a Boy Scout, and that's probably
true. I am a product of central Ontario, of a small community. I
have gone on and received an education to become a productive
member of this society. I have been involved with a system that
has destroyed me financially and will probably win. As my wife and I started to gain
understanding of this-when I say "my wife and I," I want to make
this very clear: These are family businesses. Anybody who wants
to elevate this to the level of Time Warner and AOL is trying to
sell you something. What they're trying to sell you is that it's
OK. The gentleman to my right in the back of the room will tell
you: "It's OK. What's the problem?"
The stories I was hearing
from the guys-my bookkeeper lost $50,000 in a gas tank franchise
system. My largest customer lost $60,000 in an asphalt paving
franchise. When you start looking at these things, and you've
gone to school, you start saying: "What's going on here? Does
everybody have to deal with this in this way?"
I went through the injunction
in Barrie. I represented myself, the most frightening thing I've
I've run a McDonald's
effectively: a 35% sales increase, an AAA rating, the highest
McDonald's can give. I have gone through an MBA program at
Western, and I know pressure. This is nothing compared to this.
If you control a man's economic life, you control his will.
My wife and I made one
decision and that is, we will not lie to take the short-term,
easy solution. What I have done here, working with Tony and a
small group of people, is simply because I believe it's true, and
I can prove it. As I'm sitting here, if it weren't true, the
avalanche of statements of claim from this industry would just
crush me, because I am a vocal advocate for billions of dollars
of franchisee investment. But they have had their tongues cut out
by the perversion of civil law. There's nothing civil about this
law. It's being used and twisted to extract the last nickel from
a dying man.
Some of the truths that I've
come to understand: Franchises are bought and sold as a consumer
good; they are not a business-to-business relationship. I've
brought a couple of examples of the trade magazines. When you
start talking to people about their dreams and "the freedom to be
what you can be," you are not talking to Sam Bronfman; you are
not talking to skilled people. You are talking to people who got
laid off from Molson's and are looking, this fall, at having a
$200,000 payout after 20 years in a brewery. If you don't think
the blood's in the water and that inexperienced people are going
to have that problem solved for them in that they've got too much
money, then I think-it's a word that I've gotten to use because I
hang around way too many lawyers. It's called "disingenuous."
Where I come from, when you
know something, you have responsibility for it. If I tell you
something, you have responsibility. It seems that there is not
much responsibility in this industry over a period of time. There
is a pre-sale veneer of free enterprise and competition,
market-driven. That is a veneer. As soon as you sign a franchise
agreement, you're in a monopoly situation. Franchisees need
protection at the time when they can afford it the least, and
that's no coincidence, by the way.
As a responsible father, as a
responsible husband, I did everything I possibly could do, and I
probably invested too much money in a system that wasn't
particularly predatory, when you compare it to everybody else. It
was just incompetent. They didn't know what they were doing. But
it doesn't matter. It doesn't matter if you're predatory or
you're incompetent in the behaviour that you exhibit, because
it's not your money. It's other people's money.
Franchising in a business
administration sense is just-Wal-Mart is not franchised. They own
all of those stores and they seem to have done pretty well.
Franchising is just a way of raising capital, that's all. It's a
way of raising capital and expanding the system quickly, and it
also avoids all the security laws.
When people say franchising
is extremely successful, I say: "Yes, you're right. That's true.
But it's the distribution of that success, it's the allocation
within the chain, between the franchisor and franchisee." That's
the issue: It's the relationship. It is what happens, where you
find yourself, the decisions you have to make. Control tactics
are used within the relationship, the greatest being fear and
divide and conquer.
People buy franchises because
they're afraid. They're afraid that they won't be able to feed
their family. They've been laid off, they are out of school, they
don't have experience. People look for a solution. Within the
relationship, it's fear of losing everything you've put in, your
sunk costs, being trapped by your own decisions. Afterwards, it's
fear of being prosecuted by some of the gentleman you saw
yesterday. It's the fear of the letterhead from the law firm in
downtown Toronto. It's the fear that "we are going to bury you
I have seen good people, very
good people, not be able to speak. How can you deny a part of
your life? It's like not being able to speak of a death or not
being able to associate with people to understand that you're not
The people I deal with are at
my kitchen table. They're invited into my home, because that's
where the truth about franchising comes out. Only franchisees add
value to the economy. Everybody else is overhead or parasitic.
Lawyers are parasitic, the industry is parasitic, salesmen are
parasitic. It's the capital. In an economic sense, we are the
ones who add or subtract from the economy. When you are in a
relationship and you are afraid, you don't invest any more money
in that relationship, in that activity. I am a specialist in
fertilizing and the control of pests and weeds. When I was a
franchisee, I withheld any money I possibly could because I knew
it could be stripped away from me. It is not good economics, and
Gillian Hadfield will talk about that tomorrow.
The fundamental thing in
franchising: franchisees provide the money; franchisors control
the money. That's the fundamental issue in franchising and that's
where the opportunity for abuse comes in. Not that every
relationship is abusive; it's the opportunity to strip that away.
Not everybody robs banks, but we have laws against bank
Lawyers are more of a
hindrance than a help and the reason for that is because 95% of
all the legal work in this industry is bought and paid for by the
franchisor. It's their
contracts, it's their loopholes to close up. They are the ones
who spend money; they're the ones who have repeat business. I'll
never buy a franchise again. My lawyer will only see me once, but
if he were predominantly a corporate lawyer-he has a referral
business, a reputation. He knows how to get these guys. He knows
how to write the tough contracts, the 85-page contracts. He knows
how to write those letters. That's his job. That's the
franchisor's job, to write those letters and, in a sense, act as
What I've seen would
absolutely chill you. I don't think it's an overstatement to say
most motorcycle gangs have better internal discipline than some
of the systems that I have seen. They have discipline only
because they know they've got to keep it out of the
The only thing I have ever
had is the protection of the law-and a very unusual lawyer-and
the free press, because if it's true and I can prove it, I am
safe. But all of us around this table know that only goes so far.
I have my telephone swept and I get the threats on the phone and
I hear about people getting physical threats. This is an
extremely good model for making money-brilliant. There are some
brilliant minds at work.
The important thing in this
industry is image-the only thing. I've sold things a bit in my
life and I suggest everyone around this table has too. What I'm
selling is an idea, but what you need to do is to say: "Look, do
I trust him? Does he seem credible?" If you're doing to accept my
idea, that's the first obstacle. If I can't overcome that, then
we can't do business.
The selling image of this
industry is extremely well managed. They dislike any kind of
questioning of their success rates. They dislike doubt. When
you're selling someone and their life savings are on the line,
and they know it, believe me, salesmen who are on commission at
trade shows do not like the message I bring. It's not because I
bring the message that franchising is all bad, but what I bring
is that fundamentally there's an imbalance. Right now, people may
be making good money in a franchise and all I want them to do is
to say: "Can you please put it in writing that you can guarantee
me that it's going to make good money next year, the year after
and the year after that?"-because you've put $3 million into your
grocery chain. Can you guarantee me that or could any franchisor
The markets change. I'm
aware of that. I love competition. I love beating the brains out
of the Weedman, taking their customers, and I do that by offering
superior service and quality. I do that by supporting my
community. I don't do it by holding my customers hostage and
forcing them to be my customers.
Lawyers: Franchisees are
rotten customers for lawyers. We're chippy. We don't like
lawyers. They're expensive.
Franchise systems: The
gentlemen you heard yesterday, with the exception of a couple,
represent franchise systems. What I would like to know is, where
are the principals of the major franchise systems? Why aren't
they here? They've sent the gentlemen behind me. But if they're
such free-enterprise, market-driven people-you know, "Let the
buyer beware and let's go. We want to be able to do this, a level
playing field." If that is true, then why are they in Toronto
waiting for the phone calls that are going to happen when we have
a break here? Why aren't they here? Because they don't like
scrutiny. They don't like independent questions. They don't
engage in games that aren't fixed.
As far as dispute
resolution, the way it's resolved is that franchisees go broke.
That's how it's resolved. You can't afford it any more. An
injunction costs you $10,000 to $15,000. A trial is going to cost
you $30,000 to $50,000, if you're lucky. To be able to say, "You
have the private right of action," when you have no money is just
like saying, "You have the right to be a millionaire as long as
you're not bankrupt."
The bankers always get
paid. That's a bit of a truism, but certainly small business
loans are primarily what are used to finance franchise leasehold
improvements and assets. I was told to my face in a meeting with
a director of one of the very large banks in Canada that
franchising is the most lucrative form of commercial lending.
When I asked him, "Why is that?" he smiled, and I said, "Could it
be because the franchisor always guarantees that your debts are
covered when he transfers it to the new owner?"
This is extremely
lucrative, and you can really tell by looking in the trade
magazines. Just look at the back page. The people who are paying
$5,000, $10,000, are the banks and the banks know all about this.
You ask any regional bank manager in this province if he's had
horror stories with franchisees and you'll get an honest answer,
but you don't get the same kind of answer on Bay Street.
In franchising, a fraction
of a law is worse than no law. Let me explain that. In the US
there is an FTC rule and it says that a franchisor can disclose,
"We take all the rebates and the discounts; they belong to us."
If you sign the agreement with that disclosure document, then if
you're being charged, say, 500% above the market rate for your
products from the franchisor, or you're getting rebates, when you
take that to court, the judge generally says, "You said here that
he gets all the rebates and discounts."
What I'm afraid of is that
there we're going to create a law that gives the illusion of a
solution so that the salesman at the trade show can say: "Ah, see
this law? We can't do that any more. We can't be unfair. You have
the right." I'm not sure if the salesman is going to also say,
"But you'll have to have $50,000 to take it to court to prove it
yourself." The onus in Bill 33, in large measure, is on the
franchisee to prove damage. The franchisee is in no economic
position, in most cases, to do that.
When I talk about this I
differentiate between the single unit franchisee-the normal
guy-and the multi-unit, larger economic interest. Most franchises
are sold as a consumer good to consumers, people who have never
been in business before. They are the ones who are going to have
to shoulder the great amount of weight of enforcement of Bill 33 if it were to go
without any amendments.
When I talk about what we
should be looking at in franchising, there are six elements:
We would be looking at how
open or transparent the process would be, like an ongoing
That it's accessible to
people, that it's sort of auditable in an accounting sense. It's
not behind closed doors, like the deals aren't done in the back
That's it's flexible, that
we can deal with things in the future.
That it's reciprocal. I
don't think franchisees are asking for any more rights than the
franchisors already benefit from. The rights should be reciprocal
in a partnership.
That they should be
portable. We're signatories to international trade agreements,
and I think we should learn from other constituencies, other
It should be measurable.
I've learned in business and at school that if you want a result,
an outcome, then you'd better measure for it. If you don't
measure for it, you'll never get it. If you're not looking for a
profitable business, then you will lose money. You have to
I have before you a
schematic called the Franchise Life Cycle. What I've attempted to
do is show you the actual elements that occur before and during
the relationship of franchising. This is based on my experience
and the experience of hundreds of franchisees I've talked to.
I've vetted this with most of the experts on the franchisee side.
It's a bit of a working document.
Once you've signed the
agreement you have entered into a hidden world, a world that is
certainly never disclosed to you. If you have a positive
response, then that's terrific. You sign the next franchise
agreement and the franchise agreement after. If you have
difficulty, though, your alternatives-and sometimes you can
control this and sometimes a franchisor controls it-the three
alternatives are to abandon your business, to transfer it, or to
go independent. Those are the only three ways out.
Everything is geared for
you to transfer. Very few franchise businesses go bankrupt. It's
in everyone's interest to keep the store going because of the
high cost of litigation, the threats of the new money you would
put in. What I have done makes no economic sense whatsoever. In
the situation I was in, I should have transferred to the next
owner, taken the $35,000 and walked away with $80,000 worth of
debt. That would have been the best economic alternative when I
was faced with it.
The next sheet is a number
The reason we are here is
that I believe we have been successful, to a degree, in being
able to gain access to the media. That chart, Published
Franchising Articles, gives you an indication of what has
happened. These volumes certainly aren't complete. This is my
best effort to document the 4,629 franchise families whose
stories have been so egregious that they've been able to reach
the pages of the Toronto Star, the Globe and Mail and the Report
I believe we have an
industry that is sadly in need of a new image, and the image is
this law. I believe the franchise industry is coming to Queen's
Park, coming to our democratic system, and what they want to do
is use elected officials to save, to paper over, a deeply
I believe that if there are
no problems, then what's the problem? If there are no problems-am
I an unreasonable gentleman? I'm a business person. I make no
money from doing this work. As Dave Michael says, "This has been
put on me." I tried to do the best I could as a business person.
It's not the result I expected, but that's what happens in
business. But if you are playing a game of cards, shouldn't it be
a full deck?
All I can do is provide you
and Tony the information and put it in your lap and say, "Here's
the information that I understand to be true." It is your
responsibility to act on the information presented to you and to
formulate public policy. I hope we can move towards that in a
collegial manner, because I believe there are overarching needs
here, pressing needs.
I'm not interested in
history. I'm interested in the future, in what I can do and what
I can bring back to the 40,000 people who are in this quandary
right now. Those are the people, the $6 billion worth of
investment, the 40,000 families, the 600,000 employees-they're
franchisee employees; they're not franchisor employees. I write
the cheques. I always look to see where the money comes from, who
is writing the cheques, who is opening the doors in the morning.
It's guys like me. It's not guys in downtown Toronto.
Chair: Thank you very much. That leaves us about eight
minutes, about two and a half minutes per party. We'll start with
Thank you very much for coming today, Les. I think it's important
to put on the record right off the bat, so there's no
misunderstanding, that I've worked with Les for about two years
now, with the present government, preparing for the series of
hearings we are having this week, so that the story could be told
and, at the end of the day, we could do something helpful for Les
and others like him in franchising who simply want to be good
business people, as he has shared with us is possible if there is
a level and fair playing field.
Les, this package you put
together, which represents, as you said, some 4,600 families, is
actually just the tip of the iceberg of stories of franchisees
who have been damaged in this province alone, over only some five
or seven years. In it, you have been quoted in a couple of
articles that have been written. One of them is from the Globe
and Mail on June 16, 1998, on page B14, if anybody has been able
to lug them along on this trip. You say: "This legislation is a
10% solution. If they think this is going to clean up the
industry, they're wrong." Could you elaborate?
Stewart: The information provided to you before you
actually sign is carefully crafted. The salesman explained very
clearly what you can and can't tell a candidate. Yesterday Susan Kezios explained that
30 years of disclosure regulation in the US doesn't work, and the
reason is that the salesmen are very good. They are good
salesmen. As Mr Levitt said yesterday, they can sell around a
What will happen is,
through your best efforts you will provide what in good
conscience you feel will be a solution or recommendations for it
after first reading. That will be immediately gamed by the
industry, "How do we get this?" That's what the industry trade
associations are for, to figure out how to get around it.
Chair: Parliamentary assistant.
O'Toole: Thank you very much, Les. I was looking forward
to your presentation. I'm sorry I had to move out a bit, but I'm
quite taken with your commitment to this thing.
You say it is a 10%
solution-and these are more statements than anything in response
to your position. I can assure you that I believe we are trying
to find some balance. A 10% solution might be a bit critical. I
don't want to refer to you in the Boy Scout mode, like the world
is ideal. Forget it; it isn't. Sorry for that awakening here, but
the judge said the same thing to you. He said half a loaf is
better than no loaf at all. I'm not trying to be harsh on you.
You have to realize that the only thing that's perfect is that
one plus one is two, and beyond that it's a bit of a binary
Can you suggest one thing
within the framework we've defined that would improve-not totally
correct; we've passed that, we're not astronauts-but one thing we
could do that would make a real impact on these 40,000 victims,
self-imposed victims in some cases? What could we do?
Stewart: Outlaw gag orders. Outlaw gag orders.
O'Toole: Wouldn't the right to associate-you now have an
association, and you could probably be the president of it, where
these people can all get together and say, "These are the do's
and the don'ts of buying a business." Actually it's buying a job;
it's not buying a business.
Stewart: If it's buying a job, then there should be
labour laws, Mr O'Toole.
O'Toole: For the employer.
Stewart: The employee, too.
O'Toole: Well, agreed. I don't disagree with that. But
I'm saying they are buying that. That's what their investment is
trying to do.
I guess I'm trying to say:
Do you think the right to associate would in some way help that
or at least be the first good step in that direction-for
instance, the experience you could share with them as a seminar
leader. You could be a guest speaker at some of these
Stewart: I'd love to be able to do that.
O'Toole: I'm sure you would.
Stewart: And do you know how many would be able to show?
Exactly none. There's an article in here that appeared in the
Toronto Star and it said, "Les Stewart loses." That was faxed. In
your first in camera session you heard from a system and the
lawyer just before that-that was faxed to those people. That was
a message: "Do not touch Mr Stewart. Do not get close to him. If
you get close to him, I'll set up a retail outlet right next to
you and charge half the price, because I have that right." This
is about power, plain and simple.
Thank you, Mr Stewart. One thing you make very clear is the
inequity or the inability of legal systems to deal with these
questions, in a way. Obviously, he who has the gold can afford
the lawyers. In the American experience-and I'm not very familiar
with that-often many of these things can go on contingency, which
isn't permitted in Ontario. Has that, in the American experience,
assisted franchisees in any way in dealing with the
Stewart: I certainly think the issues of contingency
help in the US system. Also, there are a lot more jury trials
with franchisees, and the courts will issue punitive damages as
opposed to-it's like they want to send a message to the franchise
community, so they will say, "Yes, you've had $150,000 in
damages, but you get $500,000 in punitive damages," as a message
to the industry to stop doing that. That's done through a jury
trial. That's why franchisors in the US don't like juries. In
Canada, it's almost impossible to get a jury trial.
Due to the expense of getting the case that far?
Stewart: In Canada, the courts have generally been a
great deal less willing to understand franchising, the unique
relationship, because it is not employer-employee and it's not
independent contractor. It's a hybrid, in the middle. The courts
understand what's written on the piece of paper, the four corners
of the contract. Gillian will talk about that tomorrow. If it's
not on the piece of paper, it doesn't exist, in most courts'
Chair: Thank you very much for appearing in front of the
committee. We appreciate it.
ALGOMA FEDERATION OF AGRICULTURE
Chair: Our next witness is the Algoma Federation of
Agriculture, Mr Connolly and Ms Bonnett. Welcome to the
committee. We have 20 minutes together. You can use that time as
you see fit in presentations. We'll fill in the remaining time
Bonnett: Good morning. We are here this morning
representing the Algoma Federation of Agriculture. Thank you for
the opportunity to address the hearings on behalf of our area
agricultural producers. We understand that these hearings are
primarily concentrating on the business relationship between
franchise partners, but there are aspects of modern marketing
relationships that have an impact on primary producers and need
to be identified and addressed. Our comments relate to the issue
of market access in large chain stores.
The Algoma Federation of
Agriculture represents the farming community surrounding the area
of Sault Ste Marie. Our principal focus is to help producers by
trying to ensure that
economic and social issues affecting their farming operations are
dealt with. On the economic side, Algoma farmers, like their
counterparts in many parts of the country, are fighting to cover
operating costs. Over the last several years, prices paid to
farmers for their raw product have been stable or declining.
Farmers have been involved in further processing of their goods
as an attempt to try and increase economic returns.
Government policies and
programs have been developed to assist farmers in these
endeavours. These attempts at diversification into the processing
side of the industry have benefits for the rural community and to
local farmers. The Algoma Federation of Agriculture is currently
undertaking an economic impact study. These studies are designed
by University of Guelph researcher Dr Harry Cummings. They're an
attempt to quantify the economic activity generated by
An interesting fact to come
out of the recently completed studies is the amazing multiplier
effect that primary agriculture has in an area. In most cases,
for every job created on the farm, four off-farm jobs are
created. Job creation, increased municipal tax base and economic
stability for rural communities have been side effects to the
What does all this have to
do with franchising? Modern retail relationships such as
franchising are based on the premise that joint purchasing,
marketing and distribution systems lead to savings for the
consumer. The retail sector has been competition-driven, with
participants attempting to find any edge over their competitors.
One tool used to increase competitiveness has been centralized
Local suppliers feel shut
out of the process, either because they cannot supply the volume
of product required or because of the exclusionary stocking
arrangements that have been signed with large distributors. The
reality of modern retailing is that if your product is not in the
large chains, you do not have adequate access to the market.
Local processors who do not have merchandise on the shelves of
the large chains have a very difficult time creating consumer
exposure for their product. Franchise operations have become
expert at marketing, advertising and product placement. As a
result, consumers are more apt to seek these venues rather than
the traditional independently owned operations.
Properly worded franchise
agreements could help alleviate the problems that many small
rural businesses are facing. If local producers and processors
could place their product in the large chains, they would gain
market access. This would enhance consumer choice. This exposure
could lead to increased sales for local producers and
The main point that we feel
should be considered within the context of a franchise agreement
is the issue of retailer independence. Retailers should not be
tied strictly to purchasing from the main distributor. A certain
amount of flexibility to source products locally and
independently must be part of a franchise arrangement. It would
allow local entrepreneurs to take advantage of the good points of
franchising, those being excellence in advertising, exposure to
high consumer traffic, marketing advice and brand
There is an opportunity for
franchise operations to develop a "buy local" campaign. Dedicated
retail space could be set aside for local products. Naturally,
there would have to be criteria established; for example, what is
a local product? Minimum amounts of product turnover would be
required. A campaign of this nature would not only provide area
entrepreneurs with an outlet for their goods but would also
demonstrate the commitment of the franchise to the community.
This can happen if the language in the franchise legislation
encourages managers to capitalize on local marketing
As mentioned, the Algoma
Federation of Agriculture is concerned about what is happening in
our rural communities. Our children are leaving for jobs in other
areas, our municipalities are crying out for tax revenue and farm
family incomes are below provincial averages. Adding value to
farm product creates an opportunity to alleviate some of these
concerns. A few small changes in the way large chains source
their product and stock their shelves could make a huge
difference to rural businesses. Thank you.
Chair: Thank you very much. That leaves us with about
four minutes per caucus. Mr Gilchrist.
Mr Steve Gilchrist
(Scarborough East): Thank you very much for your
presentation here this morning. I bring to these hearings a
25-year experience with a particular franchise, Canadian Tire. We
had similar experiences. The dealers would find locally sourced
products that were less expensive than what head office had
supplied. But there is a conundrum faced by a national chain in
particular, and I guess I would invite your feedback. There were
certain things that were very freight-intensive, not unlike milk
and other dairy products, low cube but high weight, and
ultimately Canadian Tire did allow things like salt or fertilizer
or windshield washer fluid, so that if there was a factory closer
than the one supplying head office in Toronto, you could go to
them. They certainly put in place quality standards but they were
not unreasonable in allowing dealers to go out.
But for something that
isn't freight-intensive, you've got the trade-off that while it
may, on the surface, look cheaper to buy locally, you then can't
have a national promotion. How can I advertise Black and Decker
drills in a flyer that's going to every household in Canada if
you decided that Makita drills were a better deal because the
local distributor offered you a rebate or a discount? How does a
national chain confront the problem that if you're trying to find
efficiencies on one level, say, advertising, and have a
compelling message to bring people into the store, then you've
got to have a brand name on that flyer? How do you reconcile that
with the message you're bringing to us here today?
Connolly: Well, you could have a local brand name. The
fact that it is Algoma, I agree, you couldn't advertise
nationally, but you could advertise within the area that you're selling into.
Possibly that would make more money than the national product you
are trying to sell.
Gilchrist: The problem is when Canadian Tire goes to
Quebecor or whatever company is printing the flyer right now,
there is one flyer. Literally there is one run of millions of
pieces of literature. It really becomes a brand new flyer if you
change the picture or the name on any one section. It's not that
I'm not sensitive to the message; it's sort of the trade-off. If
in fact the national chains aren't giving you access but you can
supply it for a lower cost because they're paying the freight to
bring it from, let's say, a dairy in Toronto, doesn't that
suggest that there may be some smaller stores in the area that,
if they stocked the local product, would have a price advantage?
And in time that's how small stores become big stores, by
offering something their competitors can't offer.
Connolly: And I think we're at that point. We do put our
products into the small stores, into the local butcher shops and
into some of the independent stores, but we're completely cut out
of the large chain stores.
Gilchrist: Why is that? Is it price?
Connolly: When I approached them to sell my product in
there, they simply had no system of purchasing it and paying you.
The purchasing was done centrally and it was simply a "no."
Gilchrist: Do you have the support of the local
retailers up here? Did they help to carry that message to
whichever company's head office you were going to?
Gilchrist: Because you hadn't approached them?
Connolly: When I approached them, it wasn't possible to
do it and that was the end of the deal.
Gilchrist: So they feel constrained by pressure from
head office to not side with you.
Connolly: I assume that.
Bonnett: Can I also add that a lot of the times in the
flyers I receive in my home they will advertise, for example,
that pork chops are on sale this week. It doesn't say Maple Leaf
pork chops, it doesn't say Canada Packers pork chops; it just
says pork chops. They could be my pork chops.
Gilchrist: That's true. If a chain wanted to make it
generic, that is an option.
Bonnett: Exactly, and a lot of the flyers are that way.
So the national advertising campaign would not impact at all
because they're just saying it's pork chops.
Gilchrist: I would be genuinely astounded if a retailer
was not going to the lowest possible price. That is so contrary
to the most fundamental rules of business. If there's something
buried with rebates and advertising discounts and volume
discounts being offered by Beatrice or some of the national
chains and they really are cheaper, even after you've paid the
freight, that's one thing. But if it's just the top-line price,
I've got to believe that with something as weight-intensive as
milk you would be much more competitive if it was locally
Bonnett: There are a lot more products involved in this,
though, than strictly milk. Milk is one. But we're representing
all producers so we're talking meat, we're talking vegetables,
we're talking value-added products in that respect as well. It
has been our understanding, and our producers have told us, that
they simply cannot access space on the shelves because of the
franchising agreements. That's why we were pushing for the
wording to be such that a certain amount of the shelf space would
be at the option of the local owner-operator versus if you have
12 feet of space, all 12 feet have to be displaying brands that
the store sells.
Gilchrist: I think I've used my time. Thank you.
O'Toole: I'd just encourage you to encourage the Ontario
Federation of Agriculture to make that an issue, because that's
the higher-level order of-it's the same issue Steve is talking
about, the one-ofs across the province. Your federation has a
policy position on this and it should be articulating that now on
behalf of all farmers of Ontario.
Bonnett: Actually, they are, in London.
I'm sure Cathy knows somebody on the executive of the Ontario
Federation of Agriculture who can do that quite well.
This is an ongoing problem.
First, the Algoma Federation of Agriculture and its members have
been diversifying their product range quite dramatically, at
least over the last few years. I actually had a young woman maybe
in her early twenties going into the garlic business coming to
see me. She can sell all her product without even marketing it;
But my real point is that
we know that in fresh fruits and vegetables and the horticultural
industry, which is starting to blossom-sorry-and many others,
access to retail markets is the issue. Although we're talking
about franchises here, some of these stores are directly owned,
some of the large chains, where we have problems getting the
access in. I go back to Jim McGuigan, who was the member for
Essex some time ago, who had great problems getting his tomatoes
to market. I'm sure that's something that's going on here. So you
think there needs to be written into the legislation a guarantee
of some sort? I'm trying to figure out how we do that.
Bonnett: I don't know that it has to be a guarantee of
shelf space or that sort of thing. I think the wording has to be
such that there is a certain amount of discretion for sourcing
product given to the owner, operator, manager, whatever term you
want to use for the franchise manager. Otherwise, if they have to
stay to the letter of the agreement, they're limiting themselves.
There are a lot of opportunities out there, not the least of
which is being a good community citizen. In a lot of areas that's
really important-in every area that's important. People tend to
be very cynical about large corporations, and this is a good
opportunity for the corporations to become part of the citizenry
of the area.
My friend Mr Gilchrist made a good point, and I don't really know
how to quantify this, but there are all kinds of issues. It's not just the
price you pay that's important here; there is a huge number of
commercial issues that impact on the price of product on the
shelf. Just because the price is the same doesn't mean the value
to the retailer is the same.
I'm wondering about some
kind of system where the price is known and those other factors
are taken into account in some way, the value of the promotion,
the value of the mass marketing. If you can compete, why
shouldn't you be in there? That sort of thing needs to be looked
at, I believe. I'm not quite sure how to do it, but I guess
that's why we're here.
We've heard a lot about price here in the last couple of minutes,
and the other piece that I'd like to enter into the mix is, what
about consumer choice? I want locally grown stuff because it
doesn't have chemicals and all those kinds of things, and I may
be willing to pay a premium for that, but if it's not on the
shelf, I can't buy it, which is part of the issue that you're
bringing here today. This is having a terrible effect on the
local economy. I've been looking at this for about five years
now. I remember 10 years ago when Beatrice moved their processing
someplace else and the stories that were told at that time of the
effect that would have on local dairy farmers. I think either you
or your brother was one at the time; I'm not sure which one.
Then we have the story of
My-T-Fresh Eggs, which is now out of business. That was a small
producer in the Iron Bridge area that hired people, paid taxes,
was a good corporate citizen, and they're now gone. The local
economy is being killed because of the distribution systems that
are in place and all the things that you have laid on the table
I'd like to hear from you a
bit further on the effect of some of this, not just on the
specific farmer but on the local economy in general. How many
dairy farmers are still in business in Algoma today as compared
to, say, 10 years ago when Beatrice was processing here?
Connolly: I'm no longer a dairy farmer myself, but I
think there are 17 dairy farms left. When I started 20 years ago
there were 50, so it has decreased, but it has decreased over the
whole province too. How much more effect there is here than there
was elsewhere, I'm not sure about that, but it has had an effect.
It changes the economy. It changes what happens with our local
co-op, how much feed is put through there, and it dramatically
changed down the line all the way.
On the other end of it,
some of the other industries have picked up, the sheep industry
and the beef industry. Those products could move from our farms
into the Soo, and a certain amount do. We have the system in
place of trucking the product or getting the product processed
and getting it moved to the Soo, but the problem is that we're
limited in the number of retailers in the Soo that will take our
product and sell it for us-only the independents or the small
butcher shops on the meat end of it. There are only a few places
you can put your product into. I put my product into three places
every week in the Soo, but all the other places are selling the
same product, and it is a generic product, it's meat, as long as
it's of the same quality. I'm sure our pricing is very
competitive, because we live in a competitive market, but you
just can't get in the door.
When I challenged Kevin Ryan yesterday, from National Grocers,
who came before us to tell us of their concern and approach to
this, they actually like the way things are, because they're in
control. They're saying to us that in order for them to get their
product into Kapuskasing, for example, they have to have in place
these larger purchasing efforts and distribution efforts or else
they won't be able to get it there.
Connolly: We ship with their transport. They come to the
packers and pick it up, and it's loaded on there and it's shipped
just the same way as it would be shipped if they were purchasing
from anywhere in Ontario.
So that argument doesn't hold any water.
Connolly: I would say not.
Chair: Thank you both for coming before the committee.
We appreciate it very much.
Chair: Our next witness is Mr Javor from Tim Hortons.
Welcome to the committee, Mr Javor. We have 20 minutes to spend
Javor: Just for the committee's knowledge, I'll be
forwarding a copy of my prepared text in the next day or two for
everyone to have for your review later on.
Good morning, Chair, and
committee members. Thanks for the invitation to speak with you
today. My name is Nick Javor. I have been involved in franchising
since 1987. For six years I was president of a medium-sized
franchisor in the automotive sector, Mr Lube. When I left in 1994
we had 90 outlets, 50% corporate and 50% franchised. We had
system sales of $65 million.
I have been with Tim
Hortons for some five nears now. My current capacity is regional
vice-president of southwestern Ontario operations. I have 375
stores in my region, operated by 160 franchisees. Tim Hortons as
a whole had some 1,840 locations at year-end 1999, with
chain-wide sales of $1.5 billion.
I also want to point out
that I have been an active member of the Canadian Franchise
Association since 1987. I served on the board as a director for
10 years and served a term as chairman. I also represented Canada
at the first World Summit on Franchising in Mexico City in 1992.
I was the first Canadian to receive the certified franchise
executive designation from the International Franchise
Association, also in 1992.
I have also been very
committed to the process of bringing franchise legislation to
Ontario, having served on the Franchise Sector Working Team since
its inception in December 1994.
I come here today on behalf
of my organization to offer our support for the proposed Bill 33.
We applaud the efforts of the Franchise Sector Working Team and
the ministry in bringing legislation to this province. I echo
many of the comments we
heard yesterday at the committee meeting in Toronto, namely that
disclosure-based regulation is long overdue and is a very
important first step and, may I add, a huge first step, for a
province that has been unregulated in this area.
This industry team has
worked very hard to discuss and debate the issues. Under the
leadership of Joseph Hoffman and the ministry staff, we reached
consensus on the direction of the proposed legislation. Our team
should be very proud of our efforts and the impact we have had to
date in helping shape the bill. I am delighted also that the
ministry has committed to involving this same working team when
the time comes to discuss the regulations.
My remarks today will not
be a total repeat of what you have already heard from the other
presenters supporting this bill; I have a few additional points
to make. The consistent message we heard yesterday from those who
supported the bill was that the three key elements are included
in the proposed legislation and that they must remain: first,
disclosure of those material facts that are pertinent and
necessary to allow someone to make a good investment decision in
a particular franchise; the right of association for
franchisees-I have not heard of any objection to this aspect of
the bill to date; and third, duty of fair dealing. I will speak
to this in a bit more detail in a few minutes.
My remarks instead will be
a commentary on some of the broad-brush statements made yesterday
by those who are not fully supportive of the bill in its proposed
state. At times we heard strong views that franchising in Canada
is some 30 years behind the US and that every franchise agreement
should come wrapped with a warning label. We heard franchise
lawyers say that franchisors can't be trusted, and one lawyer in
particular stated that perhaps Tim Hortons should close some of
its units to satisfy a three-mile-radius clause.
I quite frankly take
exception to these general and brand-specific points, especially
to the often biased portrayal of the franchisor side of the
I want to deal first with
this one-sided portrayal of the franchise relationship, namely
that franchisors are to blame for the woes of franchising. There
were calls for relationship legislation to be included in the
bill so as to protect the investment of the franchisee, because
the post-sale relationship is at the heart of the problems in
franchising today. We heard that yesterday. We also heard that
franchisees do lose their life savings, they cannot afford to
hire lawyers, and are terrified to speak and be heard. I also
heard that franchise start-ups are not as successful as small
business start-ups in general and that there are some 5,000
lawsuits a year in Ontario.
I also heard that the Pizza
Pizza affair was the lightning rod that changed the franchise
landscape forever in Ontario. Quite frankly, on a personal note,
I'm sick and tired of the Pizza Pizza situation. No one can argue
that it was a very unfortunate example of the franchise
relationship having gone sour and what can happen when industry
best practices do not occur. I feel this is an extreme case and
that those who are against Bill 33 are using it as the failure
standard and barometer against which to try and create
legislation that will prevent it from happening again.
Legislation cannot prevent fraudulent behaviour. You cannot
force, through legislation, the promise of a 100% money-back
guarantee and the need to protect totally the unsophisticated
investor. There is risk in any business, whether it's franchised
The answer partly lies in
the following point: The CFA coined a phrase a few years ago,
"Before you invest, investigate." This to me is the single most
powerful piece of advice that any person should be given
regarding starting their own business, again whether it's
franchised or not. The use of a disclosure document absolutely
speaks to this point.
Let me comment on the issue
of pre-sale disclosure, duty of fair dealing and the post-sale
relationship management. First off, mandatory disclosure required
by law is a terrific way to ensure that the franchisee prospect
gets meaningful information. This is a big step and will have the
most impact on improving the quality of franchising in Ontario.
Because of Bill 33, there is a civil right of action available by
franchisees against franchisors for the misrepresentation of
disclosure information. Don't you think this will serve as a
disincentive and deterrent to those bad apple franchisors? The
bill even has full accountability for those who sign the
disclosure document. We heard yesterday from the president of the
American Association of Franchisees that US legislation does not
even provide such a remedy for violations of a FTC order.
Everyone is also aware that
Ontario law now requires mediation prior to going to trial to
settle civil disputes. This too is a terrific new development
that can only help franchising in this province.
We also heard yesterday in
the remarks of the Canadian Federation of Independent Business
that their member research in February 1995 noted that 48% of
respondents felt that franchise agreements are private business
deals and governments should not have the right to interfere.
Consultation with legal and other advisers prior to the signing
of the franchise contract provides effective protection for the
The Canadian Bar
Association of Ontario has also confirmed their position against
relationship standard legislation. They cite the reason of
complexities of types of franchise offers, from the small
investments like home services to the large real estate
investments made by institutional players. No specific industry
standard or definition can apply uniformly to this broad scope of
franchise types. They also commented that the level of
sophistication of franchisors and franchisees is widespread.
What's best for the less sophisticated franchisee's prospects are
education programs from franchisors, the government and trade
associations such as the CFA and the CFIB. They need to be given
financial and legal advice.
My experience in the Tim
Hortons system is that our franchisee candidates today are more
prepared than they have
ever been. They come to interviews demonstrating an incredible
amount of due diligence. In this day and age, unlike perhaps
during the early 1980s, we do not see folks paying $10,000 on the
spot at a trade show to secure a territory or franchise.
With respect to the duty of
fair dealing issue, I think a major point has not been emphasized
enough in the commentary so far. Bill 33 does address fair
dealing. Fair dealing is a statutory requirement for the entire
franchise process. Section 3 states clearly, "Every franchise
agreement imposes on each party a duty of fair dealing in its
performance and enforcement." It is not limited only to the
pre-sale disclosure stage, as some presenters tried to position
I do not agree with other
commentators that the definition of fair dealing must include the
component of commercial reasonableness. This already exists in
contract law and is adequately covered there. I too agree with
the CBAO in thinking that increased litigation will result
because of interpretation difficulties, thus increasing the
burden on the judicial system.
Governments everywhere in
this day and age are looking at streamlining and reducing red
tape and bureaucracy. There must continue to be an incentive for
those small, emerging franchisors who are going to generate jobs
and create opportunities as they expand.
Back to statistics for a
moment. The notion that there are 5,000 civil cases filed every
year in Ontario has not been substantiated. The notion that
franchising is 85% more successful than independent start-ups has
not been substantiated either. I encourage the ministry to carry
on with their discussions with the CFA and the sector working
team on how best to obtain statistics. No one can, with any
degree of confidence, discuss the extent of the franchising woes
in Ontario, because data are not available. We cannot continue to
rely on anecdotal evidence, and we surely cannot expect those who
draft legislation to rely solely on this type of evidence either.
It would not be fair to craft legislation to deal with a
marketplace perception situation versus marketplace reality.
The Franchise Sector
Working Team members are aware that a research methodology was
being discussed in the spring of 1999, but was put on hold due to
the calling of the summer election. In my opinion, it should be a
priority of the ministry to deal with this critical issue of lack
of data on the franchising sector.
I would also like to
comment on two other areas of franchising that have been cast in
a very negative light: the fact that franchise agreements are not
written in plain language and are often 80 pages long. Some have
said that they have to be this long so as to capture all the
one-sided rules that franchisors must have. I agree that the
language must be made simpler and more user-friendly. I also
agree with the comment made yesterday that franchising should not
be the major contributor to the retirement fund for lawyers.
However, I take exception to the statement that franchise
agreements are all one-sided and intentionally crafted that
One of the major,
fundamental cornerstones of franchising in my experience has been
the need for system-wide standards and consistent application of
these standards. When franchisees sign up for the Tim Hortons
system, they absolutely expect us, as their franchisor, to have a
rule book that requires standards for quality, service,
cleanliness and value. If and when a franchisee decides to behave
out of the box and does not buy into the QSCV formula, they
threaten the other franchisees' investments, they erode the value
of the brand and jeopardize the relationship with the customer.
Those critics who say that franchisors always put forward this
argument to justify their heavy-handedness, quite frankly, in my
opinion, do not understand this is a cornerstone of
Protecting the integrity of
the brand is paramount in franchising. Franchisees enter into a
long-term relationship with the franchisor for the purpose of
accessing the brand and the ongoing support that the owners of
the trademark provide. Part of this ongoing support is the
national buying power that it can provide. Bulk buying is a
positive element of franchising when managed well. In Tim
Hortons, our franchisees clearly enjoy this benefit. Bill 33 will
obligate franchisors to disclose how they treat their volume
discounts and what policy they have in place to handle this area.
This will be addressed in regulations. The same goes for ad fund
Let me conclude that, based
on my experience in franchising, the best way to help increase
the positive impact that franchising can have on Ontario commerce
is to introduce Bill 33. Over the past 10 years, because of the
efforts of the CFA, government agencies and educational
institutions, the investing public is getting better at making
the right franchise decision. Numerous franchise specialists and
experts can be turned to for advice. The Internet, as we all
know, is becoming an incredibly valuable tool to provide instant
access to franchise company information.
At the risk of
self-promotion, I wish that all franchisors, regardless of size
and maturity, could embrace the same philosophy of franchising
and demonstrate the respectful and franchisee-first attitude that
Tim Hortons has shown over the years. We have been in business
since 1964. Our founder and chairman has been awarded the Order
of Canada. He was the 1999 Canadian entrepreneur of the year. He
has been inducted into the Canadian Business Hall of Fame. We
have four, soon to be five, Children's Foundation camps that send
thousands of monetarily underprivileged kids to camp each year.
Marketplace success and a family of dedicated franchise owners
allows us to do this and be recognized for it.
We have copied other
successful franchisors over the years. We have marketing managers
in the field, as well as operations managers. They call on our
franchisees for the purpose of helping them be more successful,
following our national franchise standards. We have a national
advisory board and a joint operations committee. They meet three
times a year. We have regional chain-wide meetings in the spring
and fall across the country. Our ad funds are audited each year by an independent
third party. Our founder's philosophy has always been that "the
franchisee's success will help make the franchisor successful."
He has always said we will turn down a deal if it can't make the
franchisee a buck in the long term.
We are not perfect; we do
have disputes from time to time. We have asked franchisees to
leave our system. But we go to incredible lengths to do
everything in our power to deal with those challenging situations
and to help operators operate their businesses in a more
successful way. As a brand, we treasure the special place we
occupy in the hearts of Canadian consumers-consumers who are
incredibly loyal, I might add.
In conclusion, Bill 33 in
its current form is all that the Ontario franchise community can
embrace and implement at this time. Hopefully, we can also get
organized to collect statistics to demonstrate that we are headed
in the right direction for franchising.
I honestly feel that if we
do not move forward with the bill at this time, we will have
missed a great opportunity. The people of Ontario have given the
government of the day the mandate to enhance the standard of
living of its citizens by creating jobs and opportunities.
Franchising is a proven vehicle for doing this.
I would be pleased to
answer any questions the committee may have.
Chair: Thank you, Mr Javor. Two minutes each, and we'll
start with the Liberal caucus.
Mrs Claudette Boyer
(Ottawa-Vanier): I commend you for giving the good
things in Bill 33. You say you support it. The disclosure is
important as far as you're concerned, and fair dealing. Since you
were at the hearings yesterday and heard about it, we were told
by this American presenter that she thought it didn't have enough
teeth and that it should go further, that it doesn't go far
enough. You said when you were resuming your presentation that it
was time the government did implement this. Do you think we
should try, before implementing Bill 33, to go further? I know
you did give a couple of things that we should add, but do you
feel it is strong enough as it is now?
I do. I feel that we have a window of opportunity to move forward
with the bill in its current form. Again, I have been involved
with this process for five years to get this far. I know how hard
the FSWT has worked to try to balance the needs and wishes of all
the stakeholders. It was not easy. It was a lot of hard work to
get this far. Yes, there's always a better mousetrap somewhere
and yes, you can always hold off on key decisions that can impact
folks by waiting for the next best answer. I'm always a
proponent, and I always have been, in my personal business life
that you go with the 80-20 formula, that if you have 80% of what
you need, that can perhaps get you down the road to where you
want to go long-term. Then you should show leadership and move
forward in that regard.
I don't think there's anybody who's suggesting that there aren't
good franchise systems around, and certainly Tim Hortons presents
at this time as one of those good systems, for all the reasons
you've laid on the table here today. What you have we want for
all the systems, because when a system goes sour, as you suggest
in the Pizza Pizza case, you're all painted with the same brush.
That's unfortunate. It affects a good business relationship and
ultimately probably affects the franchisee the most because
they're the most exposed and vulnerable.
My concern is when good
systems get sold, and that's happening. There's a trend today
where the bigger guy eats up the smaller guy and the relationship
changes. We had that experience here in Sault Ste Marie where
Provigo bought out Loeb and wiped out two of our best corporate
citizens overnight. They slept in their stores for two weeks to
protect their interests. That's how difficult that was.
We've heard that 241 Pizza
has just bought out Robins Donuts. What happens if tomorrow Pizza
Pizza buys out Tim Hortons? Do you have anything in your
agreement with your franchisees that protects them in that
That's a very good question, Mr Martin, because this is the day
of mergers and acquisitions. This is the business strategy of a
lot of folks. I would answer your question with perhaps a
description of our franchisee relationship. I think successful
franchisors and chains and brands get successful not by accident
but because of the hard work and everybody's focused on a mutual
goal. The mutual goal in our organization, and other franchisors
who have been privileged to be as successful as us, is clear: to
deliver customer service and realize that the way we get
excellent customer service is by having franchisees who are
committed to that. We have a strong culture of excellence and
commitment. I think it would be very difficult for a new
ownership group to come in and absolutely take away what's taken
us 30 years to earn and to grow together with our franchisee
The fact that we involve
our owners a lot in our business at the advisory board level and
committee level that I mentioned earlier I guess is a testament
to the strength of that commitment we have to ourselves in the
marketplace, and that is bigger than the contract. It takes many
years to change cultures at corporations. Those of us here who
have been in private business over the years understand that.
Truly, yes, the top of the house or the CEO and president help
set the tone-that's well-documented research-but also when you
have a strong commitment at the grassroots level in your
community, where your franchisees are absolutely actively
involved in supporting your community, because they know where
they're bread is buttered. It's not downtown Toronto, it's all
the communities where we have stores in our particular chain
across the country.
I honestly think that when
a merger and acquisition comes along the strength of the brand
will come through based on these types of commitments and
Thank you very much for your presentation. There has been a lot
of discussion about local sourcing. Do you want to shed more
light on that, local sourcing in terms of purchasing? I know you touched on that
saying that it might not be economical. Can you shed some more
light? Let me give you a scenario: Sometimes the distribution
chains do build warehouses in different places where they pick up
the merchandise locally and then they deliver it locally. Could a
similar situation not fit into your systems?
We have that. We have regional distribution centres across the
country that are located strategically to deliver our branded
product and items to our operators who have a contractual
commitment to sell certain branded Tim Hortons items, obviously.
We have proprietary flour mixes and baking mixes, that kind of
thing. But we do allow local flexibility for items that, quite
frankly-and I heard earlier presentations and I know the agenda
today has a strong voice from the dairy group. It's important to
our type of business that there be the ability to source that
locally, quickly, in case of runouts. You can't wait for the
truck to come three days later from Kingston or wherever the
plant happens to be.
We have strategically
looked at those items and products where it makes sense to have a
flexibility locally, like dairies in our particular case, where
we have the ability, through good planning, through good
logistics management, through correct buying power, to have our
key suppliers of record deliver to our distribution centres.
Where we can handpick and then deliver the order as per our
franchisee's request, we will do that, realizing that this is an
economics-driven arena in terms of logistics management. But we
also balance that with what will help the store operators run
their business, because when you're out of 18% cream in our
stores, customers get real upset.
O'Toole: Just a quick one: You're well recognized at Tim
Hortons, the branding name, and understand all of the vertical,
top-down directions. It works, why not? I'm just wondering, as
products change and people decide they like tea better than
coffee-heaven forbid-how does Timothy's fit into this new
marketing strategy? Is that owned by Tim Hortons?
O'Toole: It isn't? I hope I'm not-
If you want to start a rumour that Timothy's is for sale-it's
separate ownership. It's a different category in the coffee
arena, if you will, in terms of the gourmet players. They are two
separate companies. They were clever enough to name themselves
after us to a point.
Chair: Thank you very much, Mr Javor, for satisfying the
curiosity of the parliamentary assistant.
We will improve our decaf, I promise.
FARQUHAR DAIRIES LTD.
Chair: I'd like to now call Mr Don Farquhar of Farquhar
Dairies. Welcome to the committee, sir. We have 20 minutes to
Farquhar: Good morning. I have reviewed Bill 33 and it
seems fine as far as it goes. I'm not a franchisee or franchisor,
but it does seem to be some useful legislation. However, if
you're going to introduce a bill, why not get to the root of a
problem that a lot of these franchisees have, which is
restrictions that franchisors put on them on where they can
source products and services?
We are Farquhar Dairies
Ltd, an independently owned fluid milk processor and distributor
that was founded in 1935. We employ 40 full-time employees and
have processing plants in Espanola and Mindemoya. Our historical
trading area has been from Manitoulin Island to the south,
Espanola to the east, Blind River and Elliot Lake to the west,
and all communities in between.
In June 1997, the
provincial government opened competition throughout northern
Ontario in the fluid milk business, including our area. This was
done "to allow for the licensing of additional fluid milk
processors and/or distributors and to enhance consumer choice of
products." I'll be getting back to enhancing consumer choice of
products. That quote was taken from the Ontario Farm Products
Marketing Commission memorandum dated May 29, 1996.
Since June 1997, Farquhar
Dairies have expanded our area throughout northern Ontario. We
have been fortunate that many independent retailers and consumers
have thus far found our products to be of high quality and we
have been somewhat successful moving into these new markets.
However, we have had almost no success getting our products on to
the shelves of any major food stores or franchises outside our
historical trading area.
We have had many
discussions with various franchisees who wished to purchase our
products for a variety of reasons. In some cases our pricing or
service was better in their minds. In some cases the franchisees
simply wished to purchase products from someone they perceived as
local. Whatever the reason for wanting to purchase our products,
in almost every case the franchisee or store owner was stopped
from doing so by their respective head office because of national
agreements between the franchisor and corporate dairies such as
Parmalat, Natrel, Dairyworld or what have you-bigger dairies.
A couple of examples of
this would be that there are several Country Style Donuts
franchisees in our immediate areas. I have relationships with the
owners. Because of the volume that we have, we buy some products
from other dairies and resell them in our own market. We are able
to offer the same product that these Country Style Donuts were
presently purchasing from Natrel, 10-litre 18% cream, at a 10%
discount, a greater volume of delivery. These franchisees were
very interested, only to have the franchise head office stop them
from buying from anyone but Natrel. This not only removed
potential customers from me, but also made those particular
Country Style franchisees less profitable.
Another example would be
that recently we made a proposal to an owner of a Loeb grocery
store here in northern Ontario. We proceeded to sell various
fluid milk products to him-butter, ice cream-for the week of
February 10 to 17. That
Loeb store's customers seemed to enjoy the choice, as previously
there were only Parmalat products available in that store. The
store owner expressed that he was very pleased with the turnover
that the Farquhar products had on his shelf. It was then relayed
to us that a Parmalat representative complained to the Loeb store
head office, which is ADL Foods in Rouyn-Noranda, Quebec, which
subsequently had us removed from the store. The consumer wants
our product, the store owner wants our product, and we're very
happy to service that store, and yet we can't. There is something
fundamentally wrong with that.
These are only two
instances out of hundreds where store owners, managers or
franchisees were interested in, in the very least, having us
quote on their business, only to be informed by their respective
head offices that Farquhar products would not be allowed on their
shelves at any price, no matter what the consumer demand.
Our repeated proposals to
various head offices are ignored. For the most part, our phone
calls and inquiries go unanswered. So while I applaud the
Minister of Consumer and Commercial Relations in his attempt to
protect some of the rights of franchisees, in my opinion this
bill does not go nearly far enough. We cannot continue to allow
large conglomerates with deep pockets to pay off all corporate
head offices and franchisors, thereby eliminating
Smaller regional companies
like mine pay taxes and we employ people in communities where
these grocery chains and franchisors operate. All we're asking
for is a fair opportunity to bring our goods and services to
I recommend that this bill
and the fair competition legislation be re-examined in an effort
to make it possible for smaller regional companies to compete
with larger national companies on an even playing field. We can
no longer allow corporate dairies to buy shelf space at head
office levels, making it impossible for individual store owners
or franchisees to access products that their customers want.
I'm certain that this
government, through the Ontario Farm Products Marketing
Commission, did not intend to enhance consumer choice of products
by allowing corporate dairies to pay head offices to eliminate
competition. That is what is happening today. If these
anti-competitive policies are allowed to continue, regional
suppliers such as ourselves simply will cease to exist. I don't
think anyone wants to see the dairy food industry completely
dominated by any single supplier. I think politicians must ensure
that fair competition exists for the franchisees and owners, for
the suppliers, and, most importantly, for the consumer.
That's all I had prepared.
But in listening to some of the other discussions this morning, I
think it's important to note that when the gentleman was talking
about franchisees not being able to make a living, it's been my
experience that the real problem franchisees have is when a large
dairy-not necessarily dairy; I'm talking dairy because that's the
industry I come from, but it could be pop or chips or bread or
what have you-goes to the corporate head office and buys shelf
space in all the stores across the country. They have to get that
money back somehow, so they increase the price going to that
individual franchisee. I can go into a franchisee tomorrow and
give them a quote that's generally cheaper than what they're
getting from their preferred supplier. The franchisees cannot
remain competitive when they are losing money in the process. The
franchise head offices are doing very well. They've received the
Chair: Thank you very much. That leaves us about three
minutes per caucus, and we'll start with the NDP.
Thank you very much. Right off the top, I wanted to-I know you
said it, but I want you to say it again, if you would. You and
others like you, small local producers-we had the agriculture
association here and you heard them earlier-are not looking for a
special or privileged opportunity. You're just looking for an
equal opportunity, a chance to get your product on the shelf so
that consumers can have a choice and perhaps buy yours for
whatever reason. Is that correct?
Farquhar: That's absolutely correct. When I go and
approach a store and quote them a price, I don't want the whole
shelf space. I want a portion of the shelf space. Generally, our
pricing and our service and our quality are as good as or better
than the competition, yet we have absolutely no access to their
Yesterday in Toronto, Kevin Ryan with National Grocers suggested
that it was a distribution challenge that was causing this to
happen, that in order for them to deliver on-time, quality
product to every community that they have a store in across
Canada, they need to do this kind of Bay Street dealing that is
hurting your particular business. You're suggesting today that
it's not, that it's about money.
Farquhar: I would suggest to Mr Ryan that if he would
open a channel of communications with my company, I'm sure we
could show him that it's easier to deliver product to Kap or
Timmins or what have you from Espanola than it is from Quebec or
Toronto. I'm sure I could do it as cheaply or cheaper than their
I just wanted to say quickly, if I might, on your last comment
about who actually was making money in these transactions, that
it's certainly not the franchisee and it's certainly not you.
Farquhar: That's correct. And, I might add, it's not the
Gilchrist: Thank you for your presentation. It's kind of
interesting. On the one hand, we're hearing the message that all
the shelf space is going to these national chains, but then you
use terms such as "but they're not competitive." If Beatrice is
my only choice and they're giving the same shelf space allowance
to Loeb that they're giving to Dominion stores that they're
giving to everyone else, presumably they are competitive. It's at
a higher price. Perhaps what you meant to say is the consumer is not benefiting
from any perceived competition out there.
Farquhar: The pricing at the store level would probably
be the same throughout the community, whether it's a chain store
or not, but they control all the sales. The consumer has one
choice of what product he's going to buy.
Gilchrist: Right. So it's a question of choice.
Let me ask you this. In
this bill, we're proposing to make it mandatory that there be far
more complete disclosure than there's ever been before. If you
were a prospective franchisee and I was required to disclose to
you that I'm going to keep all the volume rebates, I am going to
effectively have a price to you that's 10% higher than you could
supply locally, and marry that with the ability, the absolute
guaranteed right to associate. So now all of the Loeb stores can
Is it not likely that
putting those two things together, the information and the power
to negotiate as a more equal partner, without the government
coming out with a law to say, "You must have 5% or 10% or 20%,"
and would it not make sense that the nature of that business
relationship would change if we gave these powers to the
Farquhar: It could very well change. Why not just give
the franchisee the right to purchase product from whomever he
Gilchrist: I guess because I hearken back to my Canadian
Tire days. I don't want to suggest that's the be-all and end-all,
but there were many comparable examples, where it didn't make
sense to ship a bag of salt for $2 that was going to take $5 in
freight from Goderich all the way to Thunder Bay. They would let
the dealer in Thunder Bay buy it. If there was somebody packaging
salt that was more competitive for northern customers, they could
do that. On the other hand, sending a package of screws doesn't
really cost an awful lot. So Canadian Tire went to the Orient and
bought millions of packages of screws. Sure, I know that somebody
could have a clearout on a different brand name for this week and
could have come in and offered me a better deal, but it would
have made no sense to change your national marketing for
something like that. Do you not recognize that it's almost
impossible for the government to micromanage which products
should have greater local exposure and which shouldn't?
Farquhar: I agree. I think it should be up to the
company. Using your example, if they can buy packages of screws
in the Orient for a cheap price, if there's a screw company in
that community, even if their prices are somewhat higher, should
they not be available to the consumer in that location?
Gilchrist: I guess my question comes back to you: Where
do you do the trade-off where you lose the ability to send a
national message? When you walk into a Canadian Tire store, they
want you to know not only that you'll find the same products, but
they actually put them in exactly the same spot in every store.
They want that common marketing vision to be part and parcel of
what you know to be Canadian Tire. So I guess there's a trade-off
there. If I went into a Canadian Tire store in one community and
I found one brand of drills, and I wanted to buy parts or
accessories for it and I couldn't find it in the next store over,
that's far more confusion than there is strength.
Farquhar: I suppose you could have both types of drills,
if there is some local affinity for that one product that
particular store owner wants to have. Shouldn't it be up to the
store owner to have a choice to put that product in his store if
the consumer demands it?
O'Toole: Would there be any difference dealing with a
Loblaws corporate store or a franchise store? In both cases you'd
be isolated because of the corporate-
Farquhar: Basically, if it's a corporate store owned by
the company, you have absolutely no choice. The managers are very
strict. They will follow the guidelines of their head office. I
hate to say they're a glorified stock boy, but they do not make a
lot of decisions for themselves. If you go into an owned store, a
Loeb store, a Tim Hortons store, something like that, the manager
will at least talk to you, possibly run it up the ladder to their
corporate head office. Nine times out of 10, the head office will
call him back, even though his pricing may be better or service
may be better, and say: "No, we have corporate contracts in place
with other suppliers. You are not allowed to buy off that
O'Toole: The future ability to associate may improve
Farquhar: It may. I really don't know.
Thank you for appearing this morning, Don. For those on the
committee who don't know, you should try Farquhar's ice cream.
Farquhar is are a major employer in the constituency of
Algoma-Manitoulin, particularly in the eastern part of the
constituency, and have been an important family business and
family in politics in the area.
I'm interested in the
payoff for shelf space and other corporate payoffs that may be
made. Do you have the opportunity to make those? Can you go into
the independent grocer and say, "Listen, Bud, I'll pay you the
equivalent for shelf space in your particular store"? Can you do
Farquhar: If I had that kind of money I probably
wouldn't be in the dairy business; I'd be golfing in Florida
No. In my own area we're
dealing with a limited number of stores. A company like Parmalat
or Natrel-and I'm certainly not knocking their products or
anything like that-simply has the opportunity to go into a head
office like National Grocers and say, "We're going to bid on your
entire chain of stores throughout Canada, and for the ability to
service all those stores, here's the cheque." They have to make
that money back somehow. So when they go into that individual
store, their prices to that individual store owner are inflated.
I can easily go into that store owner and beat their price, very
simply, and most of those store owners would like to buy my
product. The price is
better, generally the service is at least as good, and the
consumer knows our products-we're are a local company-and they
would like to buy from us. They can't do it. That fundamentally
is the problem I am here to talk about today.
Essentially what is happening here is that there would be a
hidden commission, and it goes to the franchisor and not the
franchisee. So the consumer, the franchisee and local
distributors all lose.
Farquhar: That's right.
In fluid milk, though, we are in a rather unique situation in
northern Ontario. I don't believe there are many, if any,
independent dairies left in southern Ontario, are there?
Farquhar: There are not too many in southern Ontario and
there are not too many in northern Ontario. We have had a couple
close in the last couple of years. It's a very competitive
market. We believe that at Farquhar's we run a fairly tight ship.
There is a Beatrice plant in Sudbury. If you put us against them,
that plant against our plant, we would probably come out very
close in cost to put out a litre of milk. We simply don't have
the resources to buy shelf space and make national contracts.
If it continues like that,
I suppose there will be only one or two national dairies left.
When all the dairies go, and there is no processing in northern
Ontario, farms will be next. If all the processing is done in
southern Ontario, I think it's very likely that they will be
shipping milk on a daily basis from northern Ontario to southern
Ontario for processing. It's a snowball effect, you see.
We just learned from the Algoma federation that the number of
dairy farms is down dramatically. I have an estimate that the
amount of quota is down by about a third in the Algoma district,
so your point is well taken.
Chair: Thank you very much, Mr Farquhar. We appreciate
your coming to the committee and sharing your views.
The committee stands
recessed until 1:30 pm.
The committee recessed
from 1208 to 1333.
Chair: I'll bring the committee back to order. I trust
we all had a chance to take part in that beautiful day out there.
There was some suggestion we should move the entire hearing out
Interjection: So moved.
Chair: We won't put that to a vote.
WISHART AND PARTNERS
Chair: Our next participant is Wishart and Partners, Mr
Gerald Nori. Gerald, welcome to the committee. We have 20 minutes
to spend together.
Nori: Thank you very much, Mr Chairman. The reason for
my appearance before the committee is I guess partly nostalgic in
the sense that you may have recognized the name of the firm,
which is Wishart and Partners. Arthur Wishart was a member of the
Legislature from this city for many years and also became
Attorney General and was Minister of Commercial and Financial
Affairs at the time the Grange report was introduced. So we felt
it was appropriate that we should appear, in his memory at least,
to make some comments in connection with something that Arthur
held very dear in terms of wanting to bring in some legislation
to correct what he saw were very definite requirements for
legislation in this field.
I am appearing basically in
support of both Bills 33 and 35 and, as I unfold my comments, I
think you'll see where I do deviate from 33 in support of 35.
It's a little bit difficult
to understand how this very important segment of commercial
endeavour that has the potential of touching and affecting so
many people has escaped any type of control over the years.
We recently acted on behalf
of a franchisee in a matter that happened in the city of Sault
Ste Marie that brought home to us the necessity for some type of
action in this field. The nature of the relationship was such
that the franchisee was kept primarily in a state of indebtedness
throughout the relationship by virtue of the fact that the
franchisor was able to control the wholesale price at which goods
As a result of that, of
course, the franchisee never made any money and was constantly
indebted to the franchisor and at one point, for reasons that
still aren't very clear to us, the franchisor decided it was time
to maybe end the relationship, at which time the franchisee was
called to a meeting at which the franchisee thought they were
going to be talking about a marketing plan for the future. The
meeting was held at a local hotel. During the course of the
meeting, which was off premises, the franchisor moved a crew of
people into the franchise premises and locked the doors and took
over the cash receipts etc, so that the franchisee within about
an hour found that they were dispossessed. That resulted in a
fairly significant lawsuit, which quite frankly the franchisee
could ill afford under the circumstance, because there is a huge
inequality that takes place in these circumstances.
Normally, what you have is
a relatively unsophisticated, underfinanced and probably
marginally educated franchisee, in terms of management, fighting
against a very large corporation, well financed, well managed,
and it's not exactly an equal playing field-unless that
franchisee can find the means to fight, and that's difficult
because going to court these days, even though I'm a lawyer I
don't mind telling you, is an extremely expensive and frustrating
experience and should be avoided if at all possible.
In any event, that
certainly brought home to us the fact that there was nothing out
there to protect this particular person under these circumstances
and quite frankly made us a bit of an ally, although I personally
espouse being a free enterpriser. I don't think I'm totally
laissez-faire, and I do believe that there are circumstances in
our economy when an interjection of some kind is warranted.
You've probably heard
everything that there is to say on this subject and I don't
intend to bore you, and I will leave with you a printed version of my remarks,
but there are a few things that I'd like to really emphasize and
feel that if you are going to bring in some legislation, which I
hope you will, you should at least take these things into
The upfront disclosure is
extremely important for the prospective franchisee to know what
they're getting into. It's interesting to look at that
comparative that I think the employees of the committee prepared,
which I thought was very helpful. It was interesting to note that
the most extensive disclosure statement is enforced in the United
States, that great bastion of free enterprise to the south, and
it's a very comprehensive document that I felt sets out at least
the minimum of what should be disclosed. Disclosure up front is
extremely important, because there is a lot of information that
comes to the franchisee, but I don't think it's the kind of
information that they're necessarily responsible for. A
disclosure statement made within the framework of legislation
would be a totally different animal.
There has to be investor
protection. It's quite evident from the material that I saw in
connection with the committee's work. I think I saw a figure of
something like $45 billion to $50 billion in annual sales in this
industry and something like 500 franchisors and 40,000
franchisees. If we stop and think about this a little bit, we've
set up the Ontario Securities Commission for the purpose of
protecting investors in this province. There is protection in the
marketplace from the point of view of forcing prospective vendors
of shares to make a complete disclosure and to have their
prospectuses vetted by the Ontario Securities Commission.
I don't see any difference
between a franchisor out hustling and selling franchises and
somebody out in the marketplace selling shares in some marginal
mining or manufacturing adventure. I don't see the difference.
We've already got the infrastructure there. I don't know why we
can't force a franchisor, who intends to sell to the public, to
file a prospectus and have it approved by the securities
commission under similar circumstances to the guy who wants to go
and develop some moose pasture.
It's interesting that in
the Grange report there was a recommendation that they set up an
entirely new infrastructure. I forget what they were going to
call it, but I think it was the bureau of franchise or something.
I don't believe that's necessary, under the circumstances. You've
already got the infrastructure. You've got the securities
commission and you've got staff. It might mean a bit of
additional workload, but basically the infrastructure is there,
the expertise is there, the know-how is there, and it would just
add another layer for them to become involved in. I think that's
an extremely important protection for investors in our province,
and I believe that all of you believe, probably strongly, that
the reputation of Ontario as a place to do business and a place
where investors will be protected, is an important feature. It's
interesting to note that Bill 35, which I believe is being
sponsored by Tony Martin, our local member, contains a provision
for upfront vetting of the sale of franchises.
Another item I would
emphasize is fairness in dealing. This is pretty big stuff. As I
said to you a little earlier, you really have a very uneven
playing field here, and I think that fairness in dealings is
extremely important. In our experience, we've found that what
happens is that the franchisee comes into our office and he or
she has stars in their eyes. They've been out there, they've been
sold on the concept or have seen it operate elsewhere. Trying to
get them to concentrate on the documentation-because when the
documentation arrives, it's usually a stack about eight inches
thick with lots of legalese and totally loaded in favour of the
franchisor. To get that franchisee to sit down and talk about
those documents is very difficult, almost impossible. They just
want to get on with business as soon as possible, and they don't
want to pay the legal fees inherent in getting to the bottom of
I think it's interesting
that in that circumstance the Grange report does a reverse of
onus. It says there has to be fair dealing, and if there isn't
fair dealing, then it's up to the franchisor to show, and I
quote, "that the contract between the parties was fair." In other
words, the onus shifts, not from the franchisee to prove they
were treated unfairly but to the franchisor to prove that
franchisor dealt with this individual fairly. I think that's an
extremely important concept. It goes on to say that the
franchisor's conduct was "equitable in the circumstance." So you
have this onus on the franchisor, at that point, to prove they
dealt with this person fairly.
I think that would lead to
this: If there was a provision in the statute that called for an
ILA-anybody who is a lawyer will understand what an ILA is; it's
a certificate of independent legal advice. That would mean the
franchisor would get a certain protection as well, because the
franchisee would have to go a lawyer and would have to have that
lawyer read those documents and would have to sit down and
understand what those documents meant, because that lawyer would
then have to sign a certificate that that person in fact read the
documents and understood them. So there is some protection as
well for the franchisor. I think the reversal of onus plus an ILA
might go a long way to getting to the point where the franchisee
actually understands what they're doing. I'm convinced that most
of them really don't, because of the fact that they've got stars
in their eyes.
I think a method of dispute
resolution is extremely important. I'm going to say this, and I'm
probably going to be taken to task for it, but it's very
difficult and expensive to find justice in the courts these days.
You've probably all experienced the fact that unless you're in
small claims court, going to court is a very tiring,
time-consuming and expensive proposition, which frankly should be
taken into consideration in these circumstances. I think you
would be well advised-Tony has put what I think he calls
mediation in his bill, and I believe that that's an extremely
important factor. There should be mediation. There should be the
ability to call in a
mediator to try to resolve a difficulty that has arisen. If
mediation doesn't work, then it should be arbitration rather than
court proceedings, because court proceedings in the uneven
playing field you are involved in here are going to murder the
franchisee. He or she is never going to make it, because they
will outlast them and out-sophisticate them. If we can get
dispute resolutions out of the courts, I think it will help the
The other area that I think
is extremely important is to provide an exit strategy. What I
mean by that is that under certain circumstances there should be
the ability for a franchisee to get out of the relationship.
Whether it's as a result of the arbitrary termination of the
franchise by the franchisor-the example I just gave you-whether
it's arbitrary refusal of assignment or renewal of the franchisee
by the franchisor, or the death or incompetency of the
franchisee, under those circumstances it wouldn't be difficult to
provide that the exit and the terms of the exit have to be
determined by arbitration rather than in the courts. I think that
would give the franchisee some modicum of protection from being
overwhelmed in this relationship.
The other thing you should
really give some thought to is that there's a problem with
control of pricing. I know of franchises where it's not only a
question of controlling the product that is going out the
door-the coffee or the doughnuts or the hamburgers-it's
everything that goes into that franchise. The meat counters, the
ovens, the refrigerators-everything has to be bought. Even though
the franchisee might be able to source those goods within his or
her own community at prices that are superior to what the
franchisor is selling them for, they are prevented from doing
that. What that does is put the franchisor in a superior
position, relative to the pricing, at the cost of the
Those are really my only
comments. I hope I've been of some help. I think you have heard
all these things before, but I thought it might be worthwhile, at
least for the memory of Arthur, that I come forward and let them
be known. I'm frankly very appreciative of the effort Tony has
put into this. He's been an important factor, and I'd definitely
like to support his position. I see Bill 35 as going a bit
further than Bill 33, and I think that's important.
Chair: Thank you very much. We appreciate the historical
context of your visit as well. Certainly the Grange report was
one of the first times this came forward. That was an excellent
report on the subject.
Actually, I was surprised.
Chair: We have about one minute left for each caucus, if
O'Toole: Thank you, Mr Nori. I really do commend the
history and significance, and we did have a familiarization with
the Grange report and with the background of what I would
classify as sort of party indecision. Nobody has had the courage
to really find the balance. I don't mean that critically.
No, no. It's true. I think that is what has happened.
O'Toole: We're in the same boat, trying to find a
balance that protects the consumer, be it the consumer of
hamburger or the franchisee. They're actually both consumers.
One suggestion I recall is
the abuse of power position. You call it the reverse onus
position. Does that not just exacerbate the civil litigant issue?
To establish the reverse onus issue, then you have a corporate,
perhaps American, senior in this thing-
Mr Nori: I
would see it as just the opposite. I would see it as the big guy
now having to come into court with all the resources and proving
that the treatment was fair under the circumstances. That's a
tremendous onus for the little guy to prove. The other thing is
that the documentation is never there. The documentation is
always in head office, and you never know whether you're getting
the whole story. So I think that's an extremely important
When I spotted that in the
Grange report, I thought, "Boy, there's something that really
would have some meaning in this legislation to equalize the
playing field," because it is tremendously unequal.
O'Toole: I just wonder, if I may, Chair-
Chair: No, you may not. Mr Brown.
O'Toole: Very abusive.
You should file a complaint.
Thank you for appearing. The other side of this, of course, is
the entrepreneurship of actually becoming the franchisor. I guess
we sit here and think about McDonald's and some of the huge
franchisors, but certainly business people in northern Ontario
have gone on to franchise their products. Usually that's not
where they started at in their heads. They started a business and
it worked and they found that the franchisor might be the way to
go through the franchise system.
With what you've just told
me, do you think that would inhibit the Vic Fremlins of the world
over here to franchise his Lock City Dairy throughout
Vic Fremlin? That wouldn't even slow him down to a walk, Mike. If
you look at the number of mining ventures that have started in
northern Ontario, I don't really believe that would be a big
inhibitor. I think we have to keep our eye on the ball and make
sure there's a balance between protecting the public and leaving
the marketplace open for the entrepreneur.
Thank you very much, Gerry. That was an excellent presentation
and, having worked on the bill, I couldn't have done the defence
of it any better.
But I just wanted some
comment from you on an issue that you didn't mention, and I think
it's important that we deal with it at this time. It's the whole
issue of gag orders. You know and I know that the person you
referred to in your opening comments was gagged. I asked the-
Mr Nori: I
would appreciate it if you didn't take that implication from
OK, sorry. Anyway, we know that gag orders exist and they are out
there. Maybe I shouldn't go there, but-
Mr Nori: I'd prefer that you
OK. You can refuse to answer, but I'm going to lay it on the
Chair: The questioner is immune from it, but I'm afraid
your position may not be just quite as clear as that.
May not be as immune-they're very sensitive to that, Mr
Chair: But I think you've made your point.
You can refuse to answer, but the question actually is your view
on gag orders.
Mr Nori: I
guess I wouldn't have a view because gag orders are used not only
in these circumstances but in many other circumstances as well.
They're a very valid legal tool and they do lead to settlement,
Tony, in circumstances where there might not be otherwise the
opportunity to settle. So I would not attack gag orders as such
as a settlement tool in a court case.
The circumstances in the
story, I'm told-it sometimes does lead to a favourable settlement
for the litigant or the claimant, and I don't think I would
attack the gag orders as such. I don't think it would be a good
idea, quite frankly, to include it in the legislation.
Chair: Thank you very much for appearing. We certainly
appreciate your presence.
You're quite welcome. It was a pleasure.
Chair: I liked your suggestion on the SAC. That was
SAULT STE MARIE CHAMBER OF COMMERCE
Chair: We now have the Sault Ste Marie Chamber of
Commerce, Mr Pascuzzi. Welcome to the committee. We have 20
Pascuzzi: Thank you. I would also like to thank the
committee in advance for allowing us to appear before you
My name is Ben Pascuzzi.
For the record, I am also a lawyer at Wishart and Partners law
firm. However, I am not speaking today on behalf of any
particular client or my involvement as a lawyer. I think my
colleague Gerry Nori, with his vast years of experience compared
to my youth, canvassed that far more completely than I ever could
hope to do. However, I do sit on the board of directors of the
Sault Ste Marie Chamber of Commerce and act as their legal
adviser, and it's in that capacity that I'm speaking to you
The Sault Ste Marie Chamber
of Commerce considers itself the recognized voice of business
here in Sault Ste Marie and considers any proposed legislation or
regulations that govern franchises to be of keen importance and
interest to the members of our chamber.
The relationship, however,
is more complex than simply that between the franchisor and the
franchisee, and that is especially so in a small city like Sault
Ste Marie, which is relatively isolated in the north. I'm sure
you'll find this if you travel to other places in the north.
There is a real interdependence and interrelationship between the
businesses. In other words, when the local franchisee uses local
products and local companies for services and goods, it's those
same people and their employees who turn around and go to the
franchisee to buy the hamburgers and doughnuts and whatever else
might be involved. Certainly we see here in the Soo an economic
impact on the community by the franchisees through direct
employment and direct involvement in the community, as well as
through their spending of dollars in the city.
Some of the things I'm
going to be outlining to you are based on my discussions and
consultations with the various members of our local chamber of
commerce. We have over 850 members currently in our chamber. Some
of the things I'm going to say you probably have already heard
from past speakers. In fact, I would imagine some of your past
speakers are probably members of our chamber. Some of the issues
my colleague has already touched on as well. I don't think it
hurts for points of emphasis to touch on some of them again.
Basically, in talking to
the various franchisees, it's interesting that no matter what
type of industry I was talking to and what type of product or
service they were involved with, you start to see common themes
or problems come up with the various franchisees, both those that
are still currently in business and those that are unfortunately
no longer in business.
The first issue of concern
that was raised with me was the issue of full disclosure and
material misrepresentation. What I mean by that, as my colleague
and the last speaker touched on earlier, is that it's very
important to have full disclosure up front. As lawyers, one of
our jobs is to sit down with a client and review all of the
documentation and financial statements, to be in contact with the
accountant and any other person who can provide assistance so
that the franchisee can understand exactly what they're buying
into. This is true any time someone is looking to purchase a
However, the feeling I got
from speaking to various people is that it goes beyond the
written documentation. The impact I got from various people I
spoke to is that often what is said verbally or what is implied
is different from what turns out to be in the written agreement.
Granted, as Gerry Nori already outlined to you, it is the
franchisee's responsibility to sit there and go through the
documents. However, let's face it: We have to be practical. As
was outlined to you already, people are getting into a new
business; they're excited, everything smells like roses at the
beginning. There's a tremendous amount of detail to do with a
countless array of issues. So what the franchisor says to the
franchisee in a verbal sense and leads him to believe is very
important. The message I got from our local businesses that are
franchisees is that often what they thought would happen in the
event of a particular situation arising isn't necessarily the
Another issue that came up
that I think it probably serves to just touch on again is the
complexity of the franchise agreement. As a lawyer, we like
legalese because it gives us a chance to explain it to our
clients and it's
partly what keeps us working. But putting aside my lawyer's hat
and looking at it from an individual's perspective, certainly
there are times when I don't understand what the agreement is
saying. With my skill and training, quite frankly, if I can't
understand what the agreement says, there's probably a serious
concern whether the people signing the contract can understand
The next issue that came up
again was the issue of fair dealings and standards of conduct. I
think the previous speaker outlined to you a situation that arose
with a particular franchisee. I made some notes here of different
situations that have arisen. One example-and of course again I
can't use any names or places-there was a franchisee who was
basically taking over the franchise from another franchisee and
ran into serious problems with regard to the lease. It turned out
that the franchisor had always indicated to them, "We'll step in;
we will lead you through the way." That didn't happen. The lease
situation was rectified, but at the end of the day the franchisee
was left with quite a large legal bill and really felt let down
by the franchisor, not necessarily in terms of saying, "We're
going to fly up our lawyers from Toronto," or Vancouver or
wherever, but just in the fact of moral support and financial
support at the front end, the idea that this is a team effort
between the franchisee and the franchisor. However, it seems that
sometimes when things start to go sour, the team only has one
player on it, and that's the franchisee.
Another major issue, and
one that I know you'll hear about from future speakers or have
heard already from past speakers, is the ability to source local
product. That's not only goods; that also includes services.
Again, looking at the two bills, I believe that Bill 35, Tony
Martin's bill, strikes a reasonable compromise. That is, unless
there's an issue of trademark or patent involved, if the
particular product does the job and the franchisee wishes to
carry that product or use that local product, whether it's for
direct resale or if there's a question of supplies-ie, cleaning
supplies, food supplies-they should be allowed to do that. Any
restriction, even in a written contract that has been agreed to
between the franchisee and the franchisor, really is a restraint
on trade and a restraint that the courts have in the past struck
The issue of services as
well is important. Everybody can understand that from the
franchisor's perspective, there are certain specifications that
have to be met when you're designing, for instance, a store.
However, let's take a very simple example. If a local franchisee
requires a plumber to come in and do some plumbing in the store,
as long as that work meets the specifications of the franchisor,
and of course the general standards of any regulatory body, ie, a
municipality, there doesn't seem any reason to me, from the
chamber's perspective, why local services can't be used, for two
reasons: the reason I already touched on at the beginning, that
it's that local plumber and his or her employees who are the
people who, if they're working, support the local franchisees and
the businesses, and number two, from the franchisee's
perspective, that often what I've been told by franchisees is
that the cost of the franchisor bringing in someone from out of
town is inhibitive. In other words, the franchisee really gets a
double whammy. One, they're told they can't use a local
contractor in a particular situation, and two, "You're going to
have to use the contractor we send up," from, say, Toronto, "and
you pay for all of it." In one example I was told a local quote
was in the neighbourhood of $5,000 to $10,000 and the bill from
the contractor in Toronto was $30,000. I know the cost of living
in Toronto is significantly higher than in Sault Ste Marie, but
that's awfully hard to justify to the local franchisee.
The next issue that came up
and that again was touched on by the previous speaker is the
whole issue of dispute resolution. Looking at Bill 35, Tony
Martin's bill, there is a provision in there for mandatory
mediation. I would reiterate the comments made earlier that the
committee should at least look at the issue of mandatory
arbitration as opposed to the courts as an ultimate remedy, for
the obvious reasons already stated-they are less costly, they are
less time-consuming-and, quite frankly, I think if you spoke to
both corporations and unions in the labour relations setting,
even corporations would admit that in many cases they'd probably
get better decisions than they might get in the courts, because
the arbitrator or the arbitration panel over a number of years
develops a certain level of expertise in that area. There's
certainly at least some argument to be made that you would get
better decisions in the long run.
Looking at the labour
relations model, I think it's a good comparison to make.
Generally in contract law, two parties enter into a contract. If
there's a dispute, you turn to the civil courts. However, we have
recognized, as in the case of a unionized setting, that there are
unique circumstances where the general or fallback way of
resolving disputes doesn't fit the circumstances and may require
a different way of settling a dispute.
I really think it ties into
what we see happening in society generally. Certainly, when we as
corporate lawyers draft a shareholders' agreement, we now put in
mandatory arbitration clauses almost all the time, that the
shareholders to the agreement agree to be bound by the rules of
arbitration as set out by the Arbitrations Act etc. The reason we
do that is we know, despite all the good intentions, that
sometimes shareholders in small companies have fights. If there
is a dispute, we're really doing them a favour up front by
calling for mandatory arbitration as opposed to looking to the
courts if that clause were not there.
Some solutions were
presented to me from various franchisees I spoke to, to address
some of the issues and concerns I have highlighted. The first
solution is the reason we are all here today. Clearly, some sort
of legislation is required. Again, I too consider myself a
free-market person who likes to leave business people to their
own dealings. We've seen many times that when the government gets
involved, it can make a bad situation worse. However, the
chamber, and people generally, recognize that there are unique situations in
contract law where the positions of bargaining power are so
unequal that some sort of legislative framework is required to
set out the rules of the game.
I think an obvious
comparison in the provincial setting would be landlord-tenant
legislation. We don't say: "You're an individual. If you want to
rent a premises from a landlord, you make a contract and the
terms of that contract govern and that's it." No, we have
legislation in place because we recognize, especially in the case
of residential tenancies, that the bargaining position and the
level of sophistication between the tenant and the landlord are
so great and the gap is so wide that some sort of legislative
framework is needed.
Again, governments have
tried to strike a balance between the two sides. However, there
probably aren't too many people who would argue we could do away
with that type of legislation altogether. I would say that in the
case of franchises a similar situation applies, where the
differences between the positions of bargaining power and the
level of sophistication and access to resources are so great that
some sort of legislative framework is required.
The things, which I call
front-end solutions, are some of the things I have already
touched on, that is, full disclosure up front, as I outlined
before. Also, something came up about a cooling-off period. Quite
frankly, based on my experience, which is limited compared to
Gerry Nori's, I don't know how often a cooling-off period is
built into an agreement. By that I mean something built into the
legislation where after the contract is signed and everything is
done, there is some sort of period, whether it be 60 days or 90
days, when a party can sit back and decide, "I've given this a
second thought, I've looked into it further and I've changed my
Normally, when you enter
into a contract and sign it, you're bound by it. If you want out,
you're probably going to get sued if you break that contract,
unless there is some reason or cause. So a cooling-off period
would probably seem appropriate, considering the circumstances in
which we know these agreements are often entered into.
Third, what is important to
the franchisees I spoke to is a right to associate. The fact of
the matter is that some franchisees I spoke to aren't here today
because they're afraid. They're afraid of repercussions from the
franchisor if they were to come and speak publicly. Along those
lines, they have similar fears about entering into any type of
association with other franchisees, whether it be a general
association or an association of franchisees within one
On the exit strategy, we
have already touched on some of the things that should be looked
at; that is, mandatory mediation and the possibility of mandatory
There is one other point I
want to make here-and like a typical lawyer I have papers all
over the place, but I was looking for one sheet.
Earlier I mentioned the
restraint on trade. I know there are probably members of the
committee who are hesitant in this age when we are trying to roll
back government to some degree and eliminate bureaucracy and red
tape which, when unnecessary and unwarranted, I don't think
serves anybody's interests: franchisor, franchisee or
agreements, even when entered into with minimal standards of
voluntariness-that is, someone has to be mentally competent and
be of the age of majority etc. To say, "Well, they signed the
contract, that's sufficient," that if it's a really bad deal and
a one-sided deal, "Too bad, you signed it"-the courts, in general
contract law, not specifically dealing with franchises, have
said, "No, that isn't necessarily the case." In fact, there are
cases striking down agreements in restraint of trade that
generally give the reason for intervention the public interest
and protecting free trade. The criterion of validity is that an
agreement should be reasonable as between the parties, and there
is little doubt that the courts mean by this that they will
exercise control over unconscionable agreements.
What I'm referring to here
in restraint to trade is the idea of sourcing local goods and
services, of being able to buy local products. The franchise
agreements, for the most part, restrict that. However, the fact
that they agreed to it doesn't necessarily mean this shouldn't be
covered off in legislation, that there shouldn't be some sort of
legislative protection. Even if you take a free-market view of it
and say, "We're looking at this from the point of view of letting
the parties negotiate as they want," you could argue that if you
are truly in favour of a free market, then anything that's a
restraint on trade goes against that. I think you will find that
in the United States, in the legislation at the state level and
in the proposed federal legislation, they look at this issue as
In conclusion, I would sum
up by saying that on behalf of the Sault Ste Marie Chamber of
Commerce, I'd like to thank our local member, Tony Martin, for
pushing and sticking with this issue over the years he has served
as a member. It's an important issue to our members. A great deal
of new small business in Sault Ste Marie, as elsewhere, is in the
form of franchises. It is a situation that simply is not like any
other contract relationship and requires some sort of legislative
framework to be in place.
The chamber of commerce, in
consulting its members, has been given a loud and clear message
that they want something in place, that they have concerns, that
they need solutions, and that too often, even when the franchisee
has a legitimate complaint or concern, they simply can't get it
sufficiently addressed due to expense and time and all the other
things that have been talked about.
Those are my comments.
Thank you again for allowing me to speak to you today.
Chair: Thank you very much. Your time has been used up,
so we won't have time for questions. But we do appreciate your
LOCK CITY DAIRIES
Chair: Next is Lock City Dairies, Mr Vic Fremlin.
Welcome to the committee, sir. We have 20 minutes together.
Fremlin: I'd like to thank everybody for letting me
speak today. I'm here to represent Lock City Dairies. I'm going
to talk a little about our company. We are a grassroots company.
We produce the raw product from our farms. We started as a
third-generation dairy farmer in 1991, when the company that was
selling our milk here in town left. We decided we'd try to build
ourselves a dairy. We never did that before, so it was quite an
attempt. We started from nothing and worked our way up the
I have no problem starting
businesses. This is the third business I've started, but with
this one, trying to access chain stores becomes a nightmare. You
can get right in the community, be part of the community and
spend your money in the community, but that doesn't necessarily
mean you're going to get your product on the shelf. What happens
is you have a store owner, a franchisee. If he wants to buy the
product he's not authorized; he doesn't buy the product. From
that standpoint, you have a lot of problems with being able to
create more jobs, build, go on and on from there, and make your
whole picture turn out right, because at the time, when it goes
to go in there, you think you're going to end up going in
there-like, say, the Loeb stores. They got bought out by another
franchise. I'd say I was in there at 70% shelf space. It ends up
it goes back to, say, 10% shelf space. There are a lot of problem
with the franchises and the franchisor when they have a lot of
customer demand for that product.
In our area in Sault Ste
Marie-I don't know if you people know about the Soo-it ends up
that there's a lot of unemployment here. We need jobs here, and
building local businesses in this area helps us quite a bit.
Basically, my biggest
complaint is you never know from one day to the next whether
you're in or out. It's kind of a situation of whoever makes the
best deal down there, and it's not the small guy. The small guy
never gets into the picture at all. You can phone down and try to
get a meeting going with them, and the first thing that will
happen is, "Well, the contract's already signed," and maybe "Good
luck next time." So you wait, say, a year and a half and you
phone again, "Well, you phoned too early."
"OK. When should I phone?"
"Well, you've got to phone in another six months." You phone in
six months and they'll tell you, "Well, you're too late." Then
you say, "OK, I'll get you next time." You phone next time, say
in another two years when the contract comes up, and they'll say,
"That guy you were dealing with is no longer here." They change
You'll say: "OK, I better
change my tactic. I'll come down there." So you end up going down
there and when you're down there they don't see you. You think:
"That's no good, so I'll try something different. I'll try and
arrange for somebody else to make an appointment with you." That
Then all of a sudden, say,
the company is sold out to another company, "That contract's no
longer valid so you're not eligible to get in there." And then
when you do get in there and you're doing very well, all of a
sudden that company sells out and another guy takes it over. Then
another big corporation comes along and they sign another
contract, and you're out of there again.
It's an ongoing problem
here. If you want to talk about investing in northern Ontario,
this business is a very tough business and we can compete at it.
We've proven that. We started with not one bag of milk and now
we're close to half the volume. That didn't come easily. It came
by local support. In these franchise agreements, the store
owners, or supposedly store franchisors, whatever they are,
cannot make a decision. They want to make a decision, but they
can't make it. The consumer wants to have a choice. In Sault Ste
Marie, say it's 30-some years we've been able to buy one product
in an A&P store up here. Thirty years is a long time to eat
corn flakes, if you think about it. If you ate corn flakes for 30
years, you'd like to have choice, you know?
The book that I brought out
today breaks it down in detail. A store that I dealt with, one
store individually-I detailed it all so you can see exactly what
you've got to go through to penetrate these stores.
There are letters down and
there are reply letters. Some of the replies are quite amusing.
It ends up that my product is still not on that shelf. It was in
there twice and it was taken out twice. The first time it was
taken out because of a breach of contract after three months. The
second time it was brought in and was taken back out, but it's
supposed to go back in again.
That type of thing goes on
in these franchise agreements. It hurts a local business like
Lock City Dairies, and it goes down the ladder. It hurts not only
my business but anybody who's dealing with me locally. I feel
that I've provided enough information. If you go through all that
I've given you, there's nine years worth of public involvement,
support from the community, recognition for winning awards for
business in northern Ontario. I find that these agreements with
the franchisees and the franchisor are only one-sided. They've
got to look more into fairness and respect.
I also have a franchise.
It's a John Deere dealership, a Kubota dealership. I know what
these guys are up against. I'm in support of making Bill 35 add
in there so we can have a fair ballgame for the guys who are out
there trying to make a living, for the community. I feel for
Chair: That leaves us about three minutes per caucus for
questions. We'll start with the Liberal caucus.
Obviously it is a problem. We heard from Farquhar's this morning.
We've known about this issue in terms of sourcing and providing
consumer choice to the residents not just of Sault Ste Marie but
all of Algoma and all
of northern Ontario. I think in some ways this is a more
particular issue to northern Ontario because of the distances
between the major communities.
What you're telling me is
that the franchisee, ie, the store operator, doesn't have the
opportunity to buy your product even though your price quite
often is at least competitive and probably lower.
Fremlin: It's competitive.
That's likely because, at the senior levels of the corporation,
they have made deals with the major dairy companies for shelf
space and other considerations that go beyond just the actual
delivery price to the door.
Fremlin: These decisions are all made in Toronto. The
guys who make the decisions aren't in our community. They don't
know the demand for their product. Put it this way: I really
don't care who puts their dairy products on the shelf as long as
I can have mine on there for my company to be able to have a
choice. Just make it fair, that's all. I don't want 90% or 80%.
If I had a store offering me 90%, I'd say that 50% is fine.
You just want the ability to compete on an even footing with the
other corporations, and that doesn't happen because corporate
headquarters deals are cut that you are frozen out of?
Fremlin: Yes. If I do get on the shelf, it's in the
corner at the bottom. I wouldn't do that to anybody. It's not
Thanks for coming today, Mr Fremlin. This is an issue that should
concern all of us because it's about how we do business in
northern Ontario. Your situation is an excellent example of how
decisions that are made other places, how relationships that are
sort of above and beyond us and out of our control, affect
directly our ability to have a healthy economy going. There was a
suggestion made this morning that local farmers and producers
could put their product into the non-franchise stores. I know
you've been doing that. You got your product into some of the gas
stations locally, and it wasn't long after that that the
franchisee discovered that people would actually buy milk at a
gas station because you opened it up for people, and before you
know it a deal is cut at the top level and you're out of there
too. If this keeps up, there won't be very many venues left for
you to go into. If we don't do something by way of this bill to
give you some relief, how long can you hang in?
Fremlin: Well, I like to fight a little bit too. This
type of stuff gets on your nerves after a while. I think this
committee that's sitting here today-I couldn't believe that I
made it this far to talk about it. It needs to be addressed or
eventually the big guy will always win. He'll do something. If he
gets away with this, he'll win, but it depends on the committee
here, what you're going to do. They'll always win, the big guy.
He'll just keep at it until he's worn you out or he's done
something. We're talking about gas stations; I put my milk in the
gas station and everybody thought it was a big joke. All of a
sudden the other company comes along and they took it out of the
gas stations and put their milk in. Holy Jeez, I develop a market
and then they figure it out so they go and get it in the gas
station, and all of a sudden a guy from Toronto tells the gas
station owner, "Put in such-and-such a product." "I want to keep
the local product in here." "Oh no, you can't do that. You're out
of a job." Basically that's what he's saying. Most of these guys
that run these franchises won't come and sit up here because
they're scared for their jobs, they're scared for their houses,
they're scared of all this stuff. I don't care, I'll say it.
That's what happens.
Can you briefly give us the My-T-Fresh Eggs story?
Fremlin: My-T-Fresh Eggs was in this area for, say, a
total of 30 to 35 years. They were the only egg supplier here and
up until the last five years he and I used to travel to a few
stores and state our case because I had milk and he had eggs.
Matter of fact, he trucked milk for me for a while. All of a
sudden he ended up selling his business. I couldn't believe it.
He was telling me the problems he was having: He had 90% of the
shelf space and then he had 50% of the shelf space and then he
was down to 25% of the shelf space, and at the time he was at 25%
he was telling me he had to truck his eggs in a 300-mile radius
because he had to get rid of them. He said, "It's costing me too
much," and finally it came down right to the end, he had only 25%
of the total take of the shelf. He ended up selling out to a
larger company and taking the hens and all the cages out. He's
out of business. Now you've only got one choice of eggs in Sault
Ste Marie and everybody knows what that is.
O'Toole: Thank you very much, Mr Fremlin. I first want
to extend my congratulations, along with the Premier and Minister
Hodgson, for being the 1998 entrepreneur of the year. Looking at
the CV here, you've really done a remarkable job of marketing.
Mine is really more of a comment and I'll share my time with Mr
Gilchrist. I mean it quite sincerely that you're quite
entrepreneurial; that's evident. You're in competition with
Farquhar, I guess?
O'Toole: Not to be smart, are you in the same kind of
Fremlin: I produce the raw product, OK? It is controlled
by the Ontario Milk Marketing Board, but I have my milk picked up
by the trucks that I own, along with other farmers, and we truck
it down to Farquhar's and they process it. But at the present
time I have built a dairy in Sault Ste Marie minus my processing
equipment. The main reason for that is, if you look, you'll see
the building going up there-
O'Toole: Yes, I see that here.
Fremlin: -but I do not have the processing equipment. I
have everything but-
O'Toole: But you're going there.
Fremlin: -what happened was when these chain stores
flipped around, I ended up going from 90% shelf space down to 10%
shelf space, and in some cases none. At that time that hurt my
project, so now I've had to go and fight for my market back. It
ends up that I'm only short like my processing equipment. I've
already spent millions
of dollars. You're talking maybe $300,000 to $400,000, depending
on how I do it.
Gilchrist: I do applaud you for the thoroughness with
which you're applying yourself to this project. The one thing
missing from this brochure-I certainly agree with the
destinations you've suggested people should be addressing their
concerns to, except there's nothing on there listing the head
offices of the various food companies. If I might offer a
suggestion, one of the most powerful things you could have done
is if all of these letters had in fact been received not just by
the local manager-who hopefully forwarded those, but I don't
think we should make that assumption, to the head offices of
Loblaws and A&P down in Toronto. At the end of the day I've
got to believe if they thought it was compromising their ability
to sell more product in Sault Ste Marie they would have to
seriously consider this. If they're bound in a certain contract,
that's fine; maybe at the end of that contract things will
change. But in the meantime, they were creative enough to get
themselves into their current situation; presumably they could be
creative enough to find a way around their Beatrice or Parmalat
contracts. I strongly encourage you to make sure that the people
who hear your message loudest are those who stand to lose the
dollars from the customers who move elsewhere. But otherwise I
congratulate you on what you're doing.
Fremlin: Thank you. The book has some letters sent to
head offices. That brochure you have there is old and I've
created something else. There have been a lot of letters sent.
One thing is, you'll never get a reply to what's going on.
Gilchrist: Buy five shares and go to the shareholder
Gilchrist: Seriously. Go to the shareholder meeting,
stand up as a shareholder and ask why the sales in their stores
in Sault Ste Marie are suffering because they have made a
decision that may very well be profiting a buyer-I mean, we
haven't mentioned around this table in the first two days that
one of the other things suppliers do is golf trips for the
purchasing buyers to exotic locations at this time of year, all
sorts of incentives to do business with them. If that is truly
prejudicing their ability to sell more product in Sault Ste
Marie, I think the other shareholders deserve to hear that.
Chair: Thank you very much, Mr Fremlin, for coming and
presenting to the committee. We appreciate it very much.
Chair: Our next witness is Country Style Donuts, Mr Jim
Fitzpatrick. Mr Fitzpatrick, welcome to the committee. I was
wondering if it was the Jim Fitzpatrick I used to work with, and
Fitzpatrick: Not the same guy. There are a few around
Chair: Yes, it's not an uncommon name. Please
Fitzpatrick: I've been a Country Style franchisee since
1984, for the past 16 years. One of the things that I was
interested in presenting is from that perspective as it applies
to what I perceive to be the fairness or the unfairness of
relationships within the franchise system, specifically in terms
of Country Style, its limiting in terms of what you can do. The
entrepreneurial component of a business is not the franchisee's
responsibility but the franchisor's responsibility. So I've
always been a problem to them because I'm just on the other side
of the coin; I'm more of an entrepreneur than I am a franchisee
per se. I operate another business completely in the
manufacturing sector, so I don't have a day-to-day activity
within the store component.
The limitation is that your
supply side is controlled. At the outset it wasn't because they
didn't have a commissary and central distribution system, but as
those elements were brought into play that became a mandated
requirement over and above the language within the documents of
the contract. From an unfair point of view, I think the fact that
they can add to the agreement as they deem appropriate, without
any recourse to the franchisee-the franchisee must conform to
whatever the franchisor projects as being in the interests of the
global franchise and everyone involved.
There is not a poll or
survey taken among the franchisees. It's something that's
determined by the franchisor, and that's the long and the short
of it. Those changes or requirements are not tested to identify
that they are profitable or appropriate or market-driven
vis-à-vis the cross section of Ontario, where you have very
different market circumstances from the north, from the metro
areas, from the Ottawa area and the Thunder Bay area and so on.
Those are all quite distinct markets, yet the franchisor applies
his regulations on a broad-based set of rules that they develop.
That to me seems to be the most onerous of responsibilities,
because whether you can afford it, whether it's profitable for
you or not, they just apply that.
I also think it's not
reasonable that a franchisor should be able to give you a set of
figures that are representative of what you can expect to do in a
store without that having been proven. They can develop a set of
figures that don't necessarily have to do with reality. It's
their hypothetical assessment of what will happen that is the
basis on which they develop the numbers. You have really no
recourse after you've gotten involved in the project and find
that those figures are not accurate and don't represent what your
circumstances are. You're hung out to dry, because there isn't a
120-day guarantee once you find out what the problems are, and
even though they are represented, you can't do anything about it.
You really can't do anything about it because of the financial
commitment you would have to make in order to legally try and
disrupt the issue, and, if you did, the kinds of consequences you
would have in the ongoing dealings with the franchisor. Once you
get in, your hands are tied. You have no room to manoeuvre in there whatsoever.
Whatever the document says is what it's going to be.
There are the supplementary
issues of the document vis-à-vis inspections or new elements
that are introduced into the system that you must incorporate
into your operation at your cost, and whether it's appropriate
and works or not doesn't have anything to do with the reality of
what you must do under the guise of it all being the same, that
if someone walks into a facility in Toronto or North Bay or Sault
Ste Marie or wherever, they're always going to be the same. I can
appreciate and I buy into that idea as it would apply in terms of
the décor and those kinds of things, but there are certainly
definite issues around menu offerings and things of that sort
that although you're mandated to do and you're inspected upon
that-and the issue comes up where if you aren't doing what
they've specified, you have 15 days to correct it or you're in
violation of your franchise. So you can be on the outside looking
in pretty fast if you decide it's not appropriate or you can't do
it. It isn't very often that they bring the hammer down on the
basis of a 15-day turnaround time, but they are certainly
evaluating you on that premise.
For example, there's a
system within the organization that establishes the levels of
stores and the proficiencies and so forth, and if you don't
conform to all of the mandated offerings, for example, you're
going to be de-rated without a doubt. Again, you have the
responsibility to make it up right away and correct whatever the
It's certainly a "buyer
beware" circumstance. I don't think government or anybody else
can hold our hand unreasonably or give us the kinds of safeguards
that one would like to have in a perfect world. But by the same
token, I think there should be certain disclosure elements that
are absolute: that you cannot represent yourself to be providing
a service in terms of a franchise agreement without having case
study history of your situation under these circumstances and
being required to present those facts to a prospective purchaser
so that they really have the correct story and not, "Well, this
would be nice." You look at these numbers and say, "This would be
great," and many times people are overenthusiastic about those
numbers and what they can do.
As a little sidebar, in
terms of a typical person wanting to get into business for
themselves, you can point out a whole series of deficiencies and
problems they are going to encounter, but they'll believe they
can change that, that it's not going to happen to them. It
happened to somebody else but it won't happen to them because
they're going to do it differently. It doesn't get to be
different; it gets to be the same.
But that would be my
concern: that information that is presented is factual, from
actual experience. That's my pitch today. Thank you.
Chair: Thank you very much. That leaves us about three
minutes per caucus, and we will start with the NDP.
Thanks for taking time today. I know your schedule is busy. I've
tried to find you a few times. As Vic often says, it tires me
out. Watching you tires me out.
Most of what I hear you
speaking of today is, it seems to me, in the area of
relationship. Bill 33 calls for disclosure. It doesn't require,
though, what Gerry Nori suggested, some kind of a securities
commission that would vet that to make sure it's true. That's not
called for here. There is disclosure, and if you misrepresent
yourself, you can go to court; you can be charged. The bill also
has a piece in it about-and I think it's an important piece; I'm
not diminishing it for a second-the right to associate. But would
simple disclosure, without it being vetted, and the right to
associate resolve some of the issues you've raised here today, or
would we need to go further?
Fitzpatrick: Very definitely, I think the franchisor
would behave differently under the knowledge that the likelihood
of somebody taking him to task in today's environment is much
higher than it would have been 10 or 20 years ago. Therefore, if
they're misrepresenting something and you find out that it's a
misrepresentation after you're in-because that's when it's going
to develop-if you have some recourse under the law, then you
should be able to get satisfaction. The fact that you can do
that, it seems to me, would inhibit an inappropriate behaviour in
the first place, but with the fact that there isn't any, there's
no consequence. The little guy doesn't have pockets deep enough
to take them on. Not only do you have a bad relationship as you
go down the road, but you're going to have to take a pot of money
along with you to go and do battle. But if there is law that you
can turn to in terms of, "It's wrong," and therefore you can
initiate an action that is much more likely to succeed at a cost
that you can deal with, that would remedy the problem.
Would you support the contention of the two previous speakers
that some office needs to vet the disclosure document and that
there needs to be in place some kind of dispute resolution
Fitzpatrick: I'd like to see a dispute resolution
mechanism, but I don't think there is any public body that could
be constructed that would have the expertise and the speciality
to be able to vet the cross-section of things that a franchisor
might develop, or the broad cross-section of franchises. I don't
think it would be reasonable to expect a board to be able to
review that in any kind of a timely fashion or with the necessary
expertise to really say, "No, this is wrong." If it's there, and
once the franchisee is in place, knowing that is available to
him, that the representations that are being made need to be
fulfilled, then if they aren't fulfilled, he in turn can go to
his counsel and determine: "Do we have a case? Do we have a
situation here or don't we? If we do, there's a vehicle or an
avenue to do it with." But to require the franchisor to present
it to an independent board, which is going to determine the
reality and the truth of what they're saying, I don't think they
have that kind of expertise.
Mr O'Toole: Thank you very
much, Mr Fitzpatrick. I think I have a Fitzpatrick in my riding
who has a doughnut franchise as well. I'll put you in touch.
Fitzpatrick: I hope he's doing well also.
O'Toole: It's Fitzpatrick's Donuts.
Mr Nori, a previous
presenter, touched on a very important consideration, and that's
the Ontario Securities Commission looking at vetting the document
or the prospectus. What's your view on that? That is some kind of
existing authority that would look at a disclosure document and
see if it was somewhat reasonable. I'm sure would be; it would be
written by a lawyer. Probably that's not true, either. It would
meet the existing laws. Quite seriously, what do you think of
having an independent body that looks at it like a prospectus? As
you say, it is "buyer beware." There's a due diligence
requirement on the part of the franchisee.
O'Toole: You can't just, like you say, hold them from
cradle to grave, that kind of thing.
O'Toole: And charge a fee, but require that as part of
it, having an independent opinion and also some accounting
assessment. Like you said, they give you a prospectus saying,
"This is your market, this is how many doughnuts and coffees
you're going to sell," and it turns out that it's about 30%
right. What do you do then?
Fitzpatrick: From a prospectus point of view, it seems
to me that it would be difficult. I think that if the corporation
is going to sell the shares of that corporation on the public
market, obviously the securities commission would have a
responsibility to review and identify the appropriateness and the
truthfulness and so on of that information. But when it comes
down to a store situation and a site selection, there are so many
variables that can come into the picture that the due diligence,
I'm afraid, falls more heavily on the part of the prospective
franchisee. Rather than assuming that reputation does it for you,
ie, assuming that the franchisor has vetted the site, assessed
it, done all the proper studies to determine that site is a good
site for that product's distribution-you have to rely on them,
without a question. But I don't know who could tell you that
they've made the right decision or that they haven't made the
O'Toole: It's difficult. I understand.
Fitzpatrick: It is really difficult to be subjective to
the point where you would approve or disapprove. From a
corporation point of view, in terms of if they do it according to
some rules divulging information that it be accurate, I think if
those two issues are made mandatory before they can negotiate
anything, then the person has an opportunity and is made aware,
"Be careful here because there's some information that you'd
better rely on yourself to determine."
Thank you for your concerns. I gather by what you were saying
that you are in favour of Bill 33-
-and you are mostly interested in disclosure. You've mentioned
that you would want more factual information, I guess, from the
Could you elaborate on that? I know you've answered Mr O'Toole on
some points, but would you-
Fitzpatrick: For example, if they were required to give
you a cross-section of historic data pertaining to the stores
they operate-not necessarily corporate operations; that is to
say, it's not the corporation running the store but it's the
franchisee running the store-if they can give you a cross-section
of that, they could give you the corporate store and franchisee
stores so that you have some factual information to rely upon,
that this has been an actual experience. It's not somebody
sitting back at head office trying to put a package of
information together that looks good in terms of where your costs
are, the percentages and all of those kinds of things as you look
down the financial statement that they present to you and you
say, "This looks very good."
In my case, when I was
going in and was presented with the information, I subsequently
discovered that the payroll couldn't be met if I was paying the
baker. You can't run a doughnut store without having a baker, but
the presumption is that you're the baker. Your money doesn't come
out of the payroll; your money comes out of the bottom line,
really. Under that circumstance, the projection of what your
costs are is not realistic, because you yourself should be paid
for the work you do. You don't get $50,000 to bake doughnuts, but
you certainly get $10 an hour to bake doughnuts. You know what I
mean? Under those circumstances, the effort and work that you are
expected to put in ought to be part of what the program
demonstrates in terms of its cost factors.
You would want to see much more easily the facts so that you
could compare them before you go ahead with that type of
Fitzpatrick: Yes, exactly.
Chair: Thank you, Mr Fitzpatrick, for taking the time to
come in and see us today. We appreciate it very much.
FERME AVICOLE ROBERT LTÉE
Chair: Next we have Mr Robert and Mr Brownlee. Welcome
to the standing committee, gentlemen.
Brownlee: Thank you, Mr Chairman and members. I'm Brian
Brownlee and this is Mr Robert. He's an egg producer in
Timiskaming. I was at a TFA meeting. He was there with some
concerns about what was going on with his production and he told
me about it. I learned about these hearings and I thought this
was a really specific example of what is happening to the
producers in the north. I had him draft up a letter and got him
out here today. I'll read you the letter of his concerns and what
has happened in his situation, and he'll be here to answer
As others have stated, the bill is there, and
what we're looking for is going further to preventing large
companies from disabling local producers from getting on the
We would like to introduce
ourselves as Ferme Avicole Robert Ltée. On October 1, 1997,
we acquired a poultry business producing fresh eggs. We had a
grading station and were delivering the eggs to the local market
every week around our area in Timiskaming. People were very happy
that we were supplying our nearby stores for two reasons: The
first one is that they were able to buy locally. Our customers
appreciated the fact that they were helping out the local
agricultural community. The second and more important reason is
the freshness of the eggs. These eggs were made available to the
customer the same week they were produced by the chickens.
Personally, we think it
makes a lot of sense to us and also to the customers we were
supplying. Each week was going by and we were constantly fighting
and working hard to keep our customers happy. This turned into a
big problem as time went on because bigger companies, for
example, Gray Ridge and Son Ltd, kept moving into our territories
and cutting our necks in the store and making deals with
franchisors to keep us off the shelves. These companies wanted to
supply all of northern Ontario, which we think should not be
happening. In some cases, they were dropping their price when it
came to selling the eggs on the market and it forced us to get
out of the grading business.
We went to another store,
My-T-Fresh, out of Iron Bridge. We were able to get them to grade
our eggs. We were still able to compete. So we decided we would
buy graded eggs from Iron Bridge. The deal was working well. We
would send our eggs down one week, they would be graded and we
would receive them back the following week in our containers,
with our name on them, and therefore we would be able to keep our
customers happy. However, then Gray Ridge came along and bought
up My-T-Fresh, as we heard earlier tonight, closing that grading
station down. We were then forced to send our eggs to Gray's
grading station in St Mary's. There was no way he could guarantee
it would be our eggs that would be returned. To make matters
worse, it was only a matter of a couple of months and we were
receiving rotten eggs in our containers, which were delivered to
the store and sold to our customers. This caused the stores to no
longer accept eggs with our label on them.
We are now forced to sell
all of our eggs to Gray Ridge at quota price and can no longer
approach grocery stores. We find we can no longer make a living
off a business on which we once could. We feel we should be able
to. What is happening now is not only unfair to us, but also the
customers are getting cheated as well. They are forced into
purchasing older eggs and, even though they know that, they have
no choice. This is why we're writing this letter and getting
involved, to make you realize what people are going through in
For solutions to our
problems, we need regions in which a producer may be able to sell
their eggs. An egg producer would be applied a zone or have a
certain area. They would have to fill up the demand in that area
and perhaps get more eggs, if needed, or vice versa. This way
everyone would be helping each other and everyone would be happy
creating a few jobs in the north as well as in the south.
Thank you for being
comprehensive and taking the time to listen to these
Chair: Thank you very much. That leaves us about four
minutes for each caucus for questions.
Mr Gill: I
don't have too many questions. This seems to be a basic rule
that's happening in the marketplace right now. I'm not trying to
see it as a franchisee-franchisor problem. It's more of a big
guy-small guy problem. To be honest, I'm not sure how we can try
and help you. Perhaps you can lead us on that. We are trying to
address Bill 33 in today's agenda. Some of the other members of
the committee can perhaps shed more light on it. I think it's a
situation which is happening in every business. I know it's
terrible from the standpoint of small business being gobbled up
by larger business, but to be honest, I'm not sure what we can do
in terms of Bill 33. I don't want to hold out hope falsely. I
just wanted to make that comment.
O'Toole: If I may pick up from Mr Gill's point, we have
heard the concerns with respect to the supply side of this issue.
For me, specifically in the agricultural sector, it's very
important because my riding has the same issues really: size and
also access. You've got the federation of agriculture plus you're
a supply-managed business, as were the dairy people. You have
some issues internally to look at with respect to the board, the
quota, the numbers within the region.
I suspect it's more than
appropriate to listen to your producer group, commodity group,
and their solution to this. I've heard what you've said here, the
regional aspect of it, that it's an appropriate type of activity
to regulate. I think there is some motive for the government to
consider that; that is, looking at the economic development of
Ontario and indeed regions of Ontario is a responsibility, I
suspect, to some extent, of the government to facilitate. Mining,
pulp and agriculture come into that whole resource sector kind of
I'd be very happy to
entertain how it could be done, because the moment you cap a
market you sort of say: "You're the big guy. You've got all the
business. So there's two egg producers. Blow away all the little
egg producers." Do you understand? It's a very complicated
monopoly kind of regulation. You're suggesting that a government
that's supposed to facilitate competition is going to end up
being responsible. You're going to get everybody coming to you
saying, "Give me a little piece of the northern market," or the
eastern, whatever. Do you understand? It would be nice to sit
down and write a rule and say it's going to keep everybody-it
would keep you happy, and the other 19 egg farmers are going,
"Well, where's-" you
know? Do you understand? I'm prepared to listen, for sure.
Brownlee: You see, what's happening more is that they
are going to the store and they are going to the franchisor, and
there are lots of stores where you couldn't put eggs.
Robert: They wouldn't take the eggs.
O'Toole: Poor quality too?
At one point, but at one time it was fresh eggs from the
O'Toole: I understand completely. Thank you.
But all of a sudden what's going to happen is, they are going to
go up the other way. There's another one quitting up there. He's
got a grading station, so he's going to service that right up to
the north there. The quota from there is going to go to Ottawa,
and he is going to service the grading right up to there. One guy
is going to service all the north, so suddenly we're going to be
out too; I'm going to be out someday. It's going to happen. He's
going to throw me out; I'm only a drop in the water. He's got
300,000 birds; I've only got 12,000, so I'm a drop in the
Brownlee: And you're saying you can't have individual
areas where there are groups, because you're kind of supporting
that guy. You're supporting a local farmer here, you're
supporting a local farmer in the next area and the next area, and
if you don't do that, this is what's happening. One big guy comes
and takes the whole area, and then who's to say down the road?
Right now he's selling eggs at whatever, but when there's no
O'Toole: I believe I'd be prepared to listen to the
marketing board's solution to this, looking at regions and
regionalized outcomes, because it is more than just that the
government can't tell the marketing boards, who have made these
decisions. I really do appreciate more than ever before the
supply-side issues on this particular disclosure requirement.
Let's put it that way.
Someone once said, I think wisely, that the purpose of
competition is to eliminate competition. I think in many ways
that's what is happening all across this province and perhaps the
world. The mechanisms that the government has to deal with that
are perhaps becoming more limited. That does not mean we should
not be trying.
I think in many ways-I was
reflecting on this a while ago-the turn of this century is much
like the turn of the last century, in that the turn of last
century in North America was focused on anti-trust, breaking up
large companies, providing that there was true competition in the
marketplace. What we are seeing, unfortunately, with dairy
products being frozen out of certain retailers, eggs being frozen
out, is that the real competition within the marketplace is gone,
which means consumers don't have the choice of price, quality
etc, or supporting their local industry, if that is what they
choose to do.
I'm perplexed, though, at
trying to come to the solution to the questions you've posed.
They are real problems.
Brownlee: If I could just say this: There were certain
stores he couldn't put his eggs in, but there were stores where
he still could. But then in terms of the big guy getting bigger
and pushing out more and more-
And the marketing power of the big guy to promote his particular
product, where you are more limited in your ability.
The other thing, and I've
had this conversation with some people, is that it may very well
be worse before it's better. I'm familiar, and I think most
people are, that the major auto companies are now going to
Internet auctions to buy the parts for their vehicles. If that is
happening in the automobile industry, you can almost guarantee
that it will happen in every other industry as it comes along,
and for a small guy to compete in that kind of situation is
something I think government is going to have to address.
I just had one or two points. I sympathize with your problem, and
I can see, like everybody, that it doesn't really pertain to Bill
33, but there's only one question I want to ask. When you talk
about Gray Ridge and Son and the other company, My-T-Fresh, were
They were two grading stations.
Yes, but they were privately owned?
Yes. But you see, being that I-
Boyer : Vous pouvez parler français, si vous
: Moi, j'envoyais mes oeufs à My-T-Fresh. En
envoyant mes oeufs à My-T-Fresh, si lui passe puis
achète la grading station à My-T-Fresh-il est sûr
qu'ils vendent mes oeufs à My-T-Fresh. En effet, là il
y a deux poulailleries. Ils ramassent les deux poulailleries en
Boyer: Ils se mettent ensemble.
Oui, ils entrent ensemble. Là, il s'en va sur l'autre bord,
là-bas, et il y a un autre qui lâche au mois de juin.
Lui, il va s'en aller là-bas et le quota s'en va dans le
bout d'Ottawa. C'est certain qu'il va avoir encore d'autres
marchés là. En fait, c'est le gros qui grossit et le
petit qui crève. Les autres ont crevé.
Quand on s'en va à des
magasins, on n'a pas de chance. Il y en a des magasins qui ne
veulent même pas nous donner la chance de seulement mettre
notre produit là. Ça fait que, qu'est-ce que tu
Boyer : Vous auriez peut-être-on vous suggère
d'aller à un palier du gouvernement, à un autre
comité. Thank you.
I'm a little bit disappointed that the members of the committee
still haven't heard that in part V of Bill 35 there is a
provision that calls for allowing franchisees to source product
wherever they can get it at a competitive price as long as it's
not a trademark issue. That would give these folks what they're
So I'm going to be tabling,
Raminder, an amendment-you can bet on this-at some point in this
proceeding that will
call for us to move beyond Bill 33 to resolve the issue that we
are hearing. We've heard over and over again here today of local
producers not being able to get their product onto the shelf of
some of the bigger stores in their areas so they can be in the
market and customers have some choice. That's all they are asking
for. They are not asking for preferential treatment or to enter
into an anti-trust legal debate or whatever. Simply put, they
want the franchisee to have the freedom, if he or she chooses, to
go to you and say: "I want your eggs in my store. I'll buy them
from you at a good price and I'll sell them, and we'll both make
money," and the economy of the north will be better served when
I'm hoping that the rest of
you, having heard today so intimately and in such an articulate
way from the folks who are directly affected, will recognize that
we need to do that, because if we don't, there will be a few
more-as a matter of fact, I suspect that even before we get to
considering the amendment, which will be in April or May
sometime, there will be a few more small producers in northern
Ontario put out of business. That will be really unfortunate.
What I'm saying to you here today is that that is my intention,
to table that section as an amendment to Bill 33.
You know that there is
discussion about to begin at the federal level regarding the
Competition Act which will hopefully have some impact on this,
but it's a way down the road. That's going to take a year or two
or three to unfold, and who knows what's going to happen at the
end? There will be an election in between, and if they elect
Reform-that's political, and we won't get into that; this isn't a
political forum here-we're done like dinner. But we have an
opportunity here at this time to go a distance to resolve your
issue if the committee will accept as part of this bill part V of
my bill, which says that franchisees, where it's not a trademark
issue, should be allowed to purchase product where they can get
it at a competitive price.
Chair: Thank you very much. We appreciate your coming
and bringing this issue to the table.
SAULT STE MARIE ECONOMIC DEVELOPMENT CORP
Chair: The next witness we have is the Sault Ste Marie
Economic Development Corp, Duane Buchanan. Mr Buchanan, welcome
to the committee. We have 20 minutes together, if you would like
to make a presentation, and we will fill the remaining time with
Buchanan: I'll be fairly brief, unlike my usual
Chair: That wouldn't make you a lawyer, would it, just
to get that out of the way?
Buchanan: No, it wouldn't make me a lawyer. I'm a
director of the Sault Ste Marie Economic Development Corp,
commonly referred to as the EDC, and I'm presenting here to this
standing committee as a representative of that organization. As
you will understand, the EDC has as its main objective the
creation of new business and jobs for Sault Ste Marie.
The EDC is concerned that
franchise agreements may be an underlying cause preventing
locally produced products from having access to local markets
through national grocery chains. When any local business is being
disadvantaged or excluded from the local marketplace for whatever
reason, the EDC is naturally concerned, particularly when these
local firms have competitive, equivalent products, produced
within the area by local people. This is particularly important
where local producers are willing to expand their business
locally, to produce value added products and to employ additional
people in our community. The EDC is merely seeking equal
opportunities or so-called level playing fields for them.
The circumstance of Lock
City Dairies is used in this presentation because that story best
illustrates the nature of the problem we want to describe. The
EDC is not an advocate for any business over another business.
Fair and equal access to markets for competitors and eliminating
one competitor's ability to banish another from a market, as is
occurring here and as you've heard a number of times today, is
I'm going to refer to the
Competition Act in my presentation, recognizing that it is
federal legislation and that it's not relevant to your
consideration, but I believe it has an implication and I'll show
that as I proceed.
The issue: This
presentation alleges that a natural element of franchise
agreements is to promote exclusivity for products and services.
This creates a barrier to marketplace competition, sometimes
denying market access to other fully qualified competitors. Bill
33, in dealing only with fairness between franchisor and
franchisee and being silent on fairness to the public and to
competitors, fails to deal with a systemic problem that these
This presentation uses as
an example Lock City Dairies of Sault Ste Marie and its inability
to access the market locally through national grocery chains. Its
problem is by no means unique, as other presenters have informed
and will inform you. What applies for Lock City Dairies applies
to many other companies, many of which are not in the dairy
business. Lock City Dairies has made a presentation to this
standing committee, so many of the details of that situation have
The implications of
franchise agreements are broad-based, extremely diverse in
nature, as we've heard, and complex to resolve when one considers
the many facets of franchising. However, ensuring that qualified
producers have reasonable access to national grocery store supply
systems does not seem to be complicated to achieve or
unreasonable to expect. Qualified suppliers are those, of course,
that would be able to provide required quality and volumes
consistently over time at a reasonable price.
Lock City Dairies supports community activities,
as does Beatrice Foods. The business is an ever-expanding
enterprise, spending capital on buildings and equipment. Through
growth, it employs additional local people. Even during recent
construction of its plant, it employed local firms and about 200
people for several months. Local people, as in all communities,
like to support their own businesses. It works both ways, the
community supporting business and business supporting the
The EDC appreciates the
fact that Beatrice Foods products are widely available and they
are good quality, without any doubt. Beatrice has local
distributors working as independent contractors to supply its
products. It also sponsors local activities and it employs some
local people. This presentation would not change that. It only
argues for equal access by local producers to local shelf space,
and particularly that local producers not be excluded from this
space by foreign-owned national firms.
A difference between
Beatrice Foods and Lock City Dairies is that Beatrice Foods
purchased and closed dairy production in Sault Ste Marie and laid
off all of its employees. It now supplies from facilities in
other communities where people from those communities are now
employed. It distributes its products here through local
contractors. That's fair business practice and a choice that
Beatrice Foods have made, the best business option for their
situation, and it's their choice. Again, Beatrice Foods is an
Italian-owned company with national distribution. On the other
side, Lock City Dairies, however, is attempting to build a local
dairy to process local milk and employ local people in the
process. In effect, it is attempting to reverse the process that
Beatrice Foods undertook, by building a dairy here. Lock City is
owned locally and has strong ties to the community. It pays its
taxes locally and spends its money here as well. Sault Ste Marie
needs business that employs people and pays taxes.
All milk in Ontario, as
you've heard before, is purchased from farmers by a central
agency and sold to dairies for processing and packaging, each
under its own brand name. Dairies or distributors market their
own brand and offer their milk for sale under their own
packaging. Each dairy must meet provincial quality, processing
and product requirements. Currently in the Sault Ste Marie area,
a milk farmers' co-operative collects milk and delivers it to
Farquhar Dairies on Manitoulin Island, where it's processed and
packaged for Lock City Dairies, which trucks it to the Soo for
distribution and sale. This is a temporary situation. They hope
to have their own dairy here if they are able to acquire
In spite of the foregoing,
no case should be made that Lock City Dairies should replace
Beatrice Foods as the local supplier. That would not be in the
spirit of fair competition. But Beatrice Foods should not be
allowed to ban local dairy products from local shelves either.
It's understood that agreements between Beatrice and national
food chains effectively do that. In the interest of consumer
choice, there should be a place for competition in this
Gaining access: National
chain store managers locally are powerless to provide display
space for locally produced products. This is a prerogative of
their head office or perhaps a function of their franchise
agreements, to decide what will be displayed and the amount of
access that will be allowed. Mr Fremlin, president of Lock City
Dairies, tells us that every attempt at contacting senior
executives at A&P and Food Basics has been futile. None will
answer letters, none will return phone calls, and none will
participate in a meeting to resolve this issue.
When he made his
presentation, you'll notice in his document-I've reviewed the
document, and in it there is his general presentation, but
following that there's a letter to Mr James, a vice-president
with Food Basics, which provides a chronology of all of the
letter-writing and all of the activities and all the attempts at
contacting people at Food Basics and A&P. In the end, it
states that if there is any argument with the factual nature or
this, would you please respond in writing prior to this date, and
to my knowledge they have not responded to that. There are copies
of letters following that document. That's the reference that I'd
like to make.
It's understood also that
with some national grocery stores one must pay fees to secure
display space, perhaps more money for better space, but there is
no known access to make these arrangements. Mr Fremlin has
provided this committee with a record of fruitless attempts at
making supply arrangements with A&P and Food Basics, as I've
just mentioned. He has also supplied the committee with
documentation of unanswered correspondence to Food Basics from
our federal member of Parliament, members of the provincial
Legislature and the mayor of Sault Ste Marie. A&P and Food
Basics executives seemingly have no regard for federal and
provincial members of Parliament or the mayor and have hereto
declined to respond to them or to consider their requests.
Franchise agreements made
between the national food distributors and their suppliers are
secret and certainly unavailable to anyone outside the companies.
I'm not suggesting there is anything wrong with that; it's just a
fact of corporate life. So it's not known what the source of the
problem experienced by Lock City Dairies really is based on, only
that there seems to be no door on which to knock to participate
in the game.
Legal aspects: The
following excerpts from the Competition Act suggest that
franchise agreements have the effect, when carried to a logical
conclusion, of violating terms of the Competition Act.
Competition Act: "An act to
provide for the general regulation of trade and commerce in
respect of conspiracies, trade practices and mergers affecting
competition." Sounds familiar.
"The purpose of this act is
to maintain and encourage competition in Canada in order to
promote the efficiency and adaptability of the Canadian economy,
in order to expand opportunities for Canadian participation in
world markets while at the same time recognizing the role of
foreign competition in Canada, in order to ensure that small and
medium-sized enterprises have an equitable opportunity to participate in the Canadian
economy and in order to provide consumers with competitive prices
and product choices."
These two articles strike
at the heart of the problem, and it seems that producers should
be filing a complaint under this act and they would likely be
successful. In fact, MP for Sault Ste Marie, Carmen Provenzano,
has filed a complaint on behalf of Lock City Dairies and a plan
to undertake an investigation has been announced by the
Competition Bureau approximately a week ago.
Again, I'd like to say this
presentation alleges that a natural element of franchise
agreements is to promote exclusivity for products and services,
which creates a barrier to marketplace competition, sometimes
denying market access to other fully qualified competitors. Bill
33, in dealing only with fairness between franchisor and
franchisee, and being silent on fairness to the public and to
competitors, fails to deal with a systemic problem that these
(1) It follows that the
Franchise Disclosure Act, which is intended to control and govern
the relationship between franchisor and franchisee, is silent
with respect to competitors and interests of the general public
which are being harmed by the inevitable outcome of franchise
agreements. Bill 33 must be active and consider the interests of
customers and qualified competitors in a similar and as important
a manner as franchisors and franchisees.
(2) With the creation of
new franchise agreements, it's proposed that there be a
requirement to file a declaration stating something to this
effect: "The parties have read, understand and are in compliance
with both the Competition Act and the Franchise Disclosure Act."
It should be required that legal personnel drafting the agreement
be a signatory as well. This would tend to avoid future systemic
contraventions and fix blame for contraventions when they
How they apply the act you
can't legislate in this way, but at least this would require that
they have a ground zero fair chance.
(3) Through Bill 33,
require that franchise agreements which contravene either the
Competition Act or the Franchise Disclosure Act be unenforceable
(4) The Competition Act
guarantees that customers have the right to be offered
alternatives where they are available and be allowed to make
choices without interference. It's charged that there is
interference in this process and that the Competition Act is
likely being violated. Bill 33 is silent on these issues. It
should dictate policy with regard to franchise agreements and
should provide enforcement options.
That's my presentation.
Chair: That leaves us about two and a half minutes per
caucus. We are starting this time with the Liberal caucus.
I'm just looking at your recommendations. I think we are fully
agreed on the problem and that it needs to be addressed.
Buchanan: I don't pretend to be any sort of expert on
this, but I've done a little research and intuitively that seems
to be some sort of solution to the problem, or at least
As a matter of fact, you agree with some of the earlier
presentations that we've heard today in terms of how to make sure
that the franchisee has an equal footing and is able to make some
of these decisions and goes in with his eyes really wide open to
the franchise agreement.
We had before us earlier a
similar presentation in terms of having lawyers sign off on the
agreement. You would be, I take it, in concurrence with what
Buchanan: I believe that they should interpret that and
determine that it is in fact compliant with the law.
The problem I have, not with this presentation but with the scope
of it, is that we are dealing here with two animals. We are
dealing with the franchise part of it. That's our scope and
that's what we should be doing. We're also dealing with companies
like A&P, which are not franchised operations as I understand
it. Am I incorrect in that? They're directly managed by the-
Buchanan: My information is that they keep using their
agreement with Beatrice Foods, for example. Whenever Lock City
Dairies tries to gain access, they say, "We have an agreement
with Beatrice Foods which doesn't allow us to provide access for
you." Whether that's formally a franchise agreement, it certainly
sounds like one to me.
Chair: That wouldn't be a franchise agreement.
Buchanan: It wouldn't?
Chair: No, it would be a business arrangement. It's
quite common in the food business.
Anyway, that's a second problem. But I guess Food Basics is a
franchise operation. That's one place where we should be
focusing. I commend you on your presentation. I think your
recommendations are particularly helpful to the committee.
Chair: Mr Martin, two and a half minutes.
You raised, again, what has become a bit of a sub-theme here
today in terms of franchising and the impact that franchising
arrangements can have on the economy in general. We heard just
before you that, in fact, this whole piece of activity is rather
even more invasive than I had thought when you consider that the
folks from Timiskaming were sending their eggs to Iron Bridge to
be graded. Once that grading station got closed down, then they
had to send them south and back up again. It just gets more
ludicrous as you hear the stories, in my view.
I think you make some excellent recommendations
here, ones that we can take a look at very seriously. I just want
to know: Did you look at section 5 of Bill 35 at all and the
piece that I have in there which calls for franchisees to be free
to source product where they can get it competitively as long as
it doesn't break a trademark?
Buchanan: I only had access to what was on the Internet,
which was the basic bill. I didn't have access to anything
In Bill 35, which is the bill that I have tabled three times now,
there is, in part V, a piece that says that. Mr Brown perhaps
made a statement that this somehow is set apart from the
franchise relationship that we're dealing with. It's not. A
franchisee's ability to source product where he can get it
improves his potential to make a profit, so that everybody in the
end is better served.
I'll try and get you a copy
of Bill 35 so you can take a look at that provision, because it
will do, certainly to some degree, what you're calling for here.
You're right. There needs to be a serious look at this at the
federal Competition Bureau level. I'm really happy that Carmen
Buchanan: There is an investigation underway, I
Thank you for the presentation. I think that one of the things
that came out loud and clear today is the local sourcing of the
materials from two points of view. One is from the supplier's
point of view-they want to make sure that they have access to the
marketplace-as well as from the franchisee's point of view,
because they want to have access to lower cost. One thing we
should keep in mind-yesterday it came up in our meetings-is that
the franchisor has an interest where they take the top portion of
the money up front. The franchisee is more concerned about the
bottom line. That came out loud and clear yesterday.
We tend to forget sometimes
that the franchisor, in buying centrally or whatever methodology
they use to buy these things, has some kind of a mechanism built
in where they have kickbacks, whatever you want to call it. That
is part of their profitability. If they were to lose that, don't
forget that they will add into the original cost of the
franchise. We might be defeating the purpose thinking that the
local franchisee might be benefiting from local supply. Yes, they
will be at a local level, but they might end up paying extra for
the franchise operation because the franchisor is looking at
their bottom line, so-called.
Buchanan: I have heard a number of references to the
fact that people buy their space. I don't know whether that's a
private deal that individuals make or whether that's a corporate
deal. We keep getting reference to that. For most people who want
to get access, it's probably the least expensive way to gain
access, if they can in fact gain access. Whether it's an
above-board approach, I have no way of knowing.
Mr Gill: I
was at some other meetings recently that had something to do with
the CNE in Toronto. They are going to have only Coke products and
are totally excluding Pepsi products. Those kinds of arrangements
are being handled every day.
Of course we'll look at Mr
Martin's proposal, part V of his Bill 35, and see if we can
somehow open up the marketplace. I'm not sure what can be done,
but we'll certainly look at that.
O'Toole: I want to be brief here. I warn the Chair that
I have two points I want to make.
We've heard about the
supply-side issue. We understand that. It isn't exclusive to the
agriculture sector. The supply-side issue may be anything from,
"You buy your tickets from us," to "You buy your boxes from us,"
to "You get your stuff from us," that sort of issue. It's not
just milk or eggs; it's a whole Pandora's box.
Buchanan: I understand that.
O'Toole: I would say one thing, though, and I must get
this on the record: I do appreciate your four recommendations.
It's very important for us to have real information to work with.
But if you look specifically at the Competition Act, which you
refer to in three of them, there are two or three things that I
would encourage those here, as well as Mr Martin, to look at. The
Competition Act, of course, is federal and is to ensure there
really is competition. There are clauses within that act, which
I'm familiar with, that deal with trade practices. It's a legal
kind of reference point, but it talks about abuse of dominant
position, which is clearly the case here. You've got the big guy
that runs the whole thing, called the franchisor-there's
obviously an imbalance of power here-imposing certain kinds of
what I would call unfair practices, which could get you into the
reverse onus case that was talked about earlier.
With respect to those three
recommendations, I would like us to take the responsibility of
engaging Mr Manley, the federal minister, to look at the
Competition Act, because it is up for review. It is no longer
providing an appropriate marketplace in many areas for small
business, which is important. I just want to acknowledge on the
record that you are right on topic here.
Chair: Thank you very much, Mr Buchanan. We appreciate
your coming in.
MRS JERSEY'S DAIRY
Chair: Our final witness is Peter Gass, from Mrs
Jersey's Dairy. Welcome to the committee.
Gass: Mr Chairman, ladies and gentlemen, thank you for
taking this first step in addressing some of the problems that
exist in the food-processing sector here in northern Ontario.
We're a sort of unique
situation. We are probably the smallest dairy in Ontario. Before
we opened our doors about a year and a half ago, we realized that
it was going to be very difficult to even hope to gain any access
to supermarkets. What we did with our dairy is that we have
an attached retail
section in the front of it. We have a full line of products we
make as well as other products, usually from smaller, unknown
dairies or from other suppliers that have difficulty getting
their products into the supermarkets. We really try hard to have
locally produced food in our store.
Mrs Jersey's Dairy, located
in North Bay, Ontario, has been in operation since August 1998.
We receive cow's milk and a small amount of goat's milk from
local area dairy farms, and process both types of milk separately
at our plant. We have an adjoining retail store. We are a very
small operation, less than a million litres of milk per year, as
opposed to some of our larger multinational competitors such as
Parmalat, processing 100 million litres or more per year.
Like our competitors, we
recognize that our profits are in milk by-products such as
yogourt, sour cream and ice cream. Our slogan is, "Taste the
local freshness." It reflects our belief that the milk produced
on dairy farms in the near north, with the availability of the
fresh air, grass and water of our region, and processed locally
by qualified dairy plant personnel, provides both a top-quality
dairy product for the consumer and employment for the people of
We market 80% of our fluid
milk, yogourt, sour cream, butter, buttermilk, whipping cream,
coffee cream, ice cream and novelties to the public through our
own retail outlet. The remaining 20% is distributed through
wholesale outlets in and around the immediate area. These small
stores come to us directly and pick up their milk themselves. We
don't even own a milk delivery truck.
While this arrangement
suits us at the present time, we wish to voice our concerns
regarding the legislation under review with the Franchise
Disclosure Act, since it has been referred to a standing
committee. After visiting with the management of each of the
eight supermarkets in the city of North Bay, with our population
of 57,000, we have a clear understanding of how corporations pay
big money in exchange for exclusive rights to supply their
products to grocery shelves. Management of these individual
franchises told us that these exclusive contracts result in money
back on large orders which then can be passed on to the consumer.
With consumer demand for lower prices, these large contracts make
sense for all concerned.
We do not support increased
government regulation of supermarkets. In our opinion, franchises
should grant franchisees more flexibility in purchasing
agreements so that each franchisee could be sensitive to local
consumer demands. If pricing and quality prove to be competitive,
it is reasonable to assume that consumers would prefer to support
their local employment base by welcoming these products into
their area supermarkets. In the North Bay area, all eight
supermarkets carry fluid milk and a range of other dairy products
that have been shipped in from hundreds and hundreds of
kilometres away. Our processing plant receives milk from 30
kilometres away and can have it processed and on the shelves the
next day. It just makes common sense that for both health and
employment reasons, this is a great deal for the local consumer.
It is our hope that marketing locally produced goods will be an
option made available to supermarket franchisees in the near
One of the nice things
about owning a small business is that you get to do all of the
jobs. Yesterday I was in the plant processing milk and two weeks
ago I was able to go out and visit all of the supermarkets. I
would like to just briefly review each of the comments that was
made to us as we visited the various supermarkets. I won't
mention any names-we weren't thrown out of any supermarkets-but
I'd just like to summarize some of the comments.
The first supermarket: If
his competitors carried our products, perhaps his head office
would consider allowing some space on the shelf for us.
Corporations pay big money to have exclusive rights and this is
how this particular supermarket operates. I won't mention the
brands that they carry. These were comments that were made to us
and we recorded them, hopefully in an unbiased fashion.
We visited another
supermarket. He called head office right away concerning carrying
our yogourt and sour cream, and was told first of all to get a
price list from us. Then we asked him what he thought our chances
were of getting into their shelves, and his reply was "fair." You
don't know until you go through the procedure. We haven't got
back yet with the price list; we just wanted to get an idea of
what the climate is out there.
We have a particular
franchisee who, in his first year of operations, was bound with
his contract. He said he'd have more freedom in August 2000. He's
happy with the franchise arrangement. Exclusive contracts result
in money back on large orders which he can pass on to the
Another store here: locked
into a franchise agreement and no chance of even getting into the
door. For this store, controlled by a large supermarket chain in
Ontario, the sale of milk is a particularly sensitive issue.
There is little if any profit in fluid milk. The profit is in
other dairy products. They sell a large volume of yoghurt. Most
of their ice cream sales come from an independent ice cream
manufacturer. If they had great customer demand for our products,
they would approach head office but it would require a great deal
of local demand. He felt it was highly unlikely that one of their
dairy products suppliers in the store family would agree to
giving up any part of its market share to a small, locally owned
This particular supermarket
mentioned that the two suppliers give financial favours in
exchange for exclusive carrying privileges. These corporations
make their dollars in products other than fluid milk. He doubts
that these players would be open to the idea that this store
would carry another brand of yoghurt or sour cream. We could make
a presentation, submit it to him and he would present it to head
office. He did not want to get our hopes up high; he thought our chances were very
slim because of deals done in high places.
supermarket, a quick response: "I can't. I'm locked into a
franchise agreement, a purchasing agreement with our
Those are some of the
comments just directly talking to managers or assistant managers.
This is what the climate is like out there. As you can see from
these comments, price or quality have very little do with whether
you can get your products into the supermarkets. Deep pockets and
connections to supermarket corporate head offices have everything
to do with getting your products on to the supermarket
In conclusion, I would like
to address these closing comments to any supermarket
representatives who might be here today. If you're not from
northern Ontario, you're probably quite amazed at the tremendous
space that we have between our communities. You also should be
aware that most northern Ontario communities are struggling just
to maintain current population levels. Our jobless rate is high.
Each day, our brightest and youngest people are leaving for
better opportunities in the south.
If you look ahead just five
years down the road, I ask you, where will your future customers
be coming from? Our small dairy in North Bay has been able to
create seven jobs since we opened our doors. Seven families now
have income and purchasing power and are remaining in the city of
North Bay. They all buy their non-dairy products from our local
supermarkets. If we could just get into one supermarket, we
probably would hire two more full-time people and there would be
two more families shopping at our local supermarkets. I believe
without a doubt that it just makes good business sense for our
local supermarkets to try to support northern Ontario food
processors and allow their products on our supermarket shelves.
Chair: Thank you very much, Mr Gass. That leaves us
about three minutes per caucus and we start with the NDP this
I want to thank you for coming. I know from your presentation how
difficult it must be for you to get away for a full day like
this, given all the jobs that you have to do and the effort that
you are obviously putting into making a success of your business.
We appreciate that.
You're one of the people
who is going to make the economy of northern Ontario work. In my
view, if we can help you as a government by creating level
playing fields so that you can get into the market, consumers can
have a choice and you can make some money and hire some people
and do all those things that you've described in the ending of
The economy of northern
Ontario is quite self-contained and interconnected. Each of us
depends on the other. We almost exchange services with each
other. Where some outside entity changes that or takes too much
of the money out, we're affected in a very serious way. I've
suggested already today that this issue is key to any economy
we're going to have in northern Ontario. The member from
Algoma-Manitoulin correctly says that it's not just franchise
stores; it's big corporate stores too, because the same policies
are in place. So even though the provision that I'm suggesting in
Bill 35, which I have tabled, will be tabled as an amendment to
this bill or some variation thereof so that we can solve this
problem and will go a ways, there's a lot more that needs to be
I commend my colleague
Carmen Provenzano at the federal level for taking this to the
federal Competition Bureau, because he's absolutely right there.
We need to do that.
Have you had a chance to
look at all at section 5 of Bill 35 and to consider it?
You'll have to forgive me. I haven't really had a lot of time to
review that. I'm sort of an anti-government-type person.
So are we.
O'Toole: A lot of us are.
Mr Gass: I
believe that if you were to bring the corporate heads of the
supermarkets here with our northern food processors, within a day
or two we could have this problem corrected. We could do it much
more quickly than this committee, probably much more
inexpensively. I don't think they're really aware of the
problems. I don't think they are aware of the geography that we
have up here. We're not their enemies. I sometimes think that
food processors are considered to be an enemy of the supermarket,
and I don't know why. But we can work together with the
supermarket. Instead of saying, "Let me see you undercut
Beatrice," why don't they say: "This is what we're paying now.
Can you meet this price or can you do better?" Let's work our way
backwards, because we can create 10 or 12 jobs in our community.
That's what's going to solve the problem, and they don't seem to
understand that; I'm not quite sure. But I believe if they were
here and aware of the situation, that would be the way of getting
Chair: I spent 35 years in the food business and,
believe me, they understand.
You might need a large stick.
I'd like to go on the record here this afternoon as being a
person who believes in government and believes that government
has a role to play, and a very important role to play, in
regulating markets and making sure that fairness exists in a
marketplace and in communities.
We're here today because
the big guys have been beating up on the little guys in the
franchising sector of business. We have a couple of books here of
stories that have shown up over the last five years in major news
outlets across this province, some 4,600 families who have been
damaged because the big guys will not play fair ball with the
I suggest to you, and I say
this with all respect, it might be naive to think that you could
bring the big guys to the table and convince them they should be
doing something different. We're trying that right now in the
gasoline industry and it's not working. Even Mr Harris can't get them to the table,
and I think he's their friend. So that's an issue.
This is an opportunity now
for us to do something, to do the right thing. With your
encouragement, having had your presentation, and Mr Gill has
suggested he's willing to look at it, we might look at that
section of Bill 35 or the recommendation that was made by Mr
Buchanan earlier that maybe there's something else we might do.
But we need to do something on this issue, or else the economy of
northern Ontario is going to be hurt and families who are now
doing business will find themselves not able to do it any
Chair: For the government, Mr O'Toole.
O'Toole: I can hardly hold myself back from responding
to your being sort of anti-government. I suspect we would all
have some response to that, although it's not particularly on
But I do think the
agricultural sector, which in my riding of Durham is an important
sector as well, are gifted with being entrepreneurial and
inventive. We've seen that with many of the presenters here
today, much like yourself, from the dairy and egg industries. So
I understand that. You don't want government; you want government
to get out of the way. I think if you were talking to the
Premier, he'd say: "We're not government. We're here to change
There's more to it than
just that, and that's why this bill, after three successive
governments, is actually here being discussed. You will not have
it all one way or the other, and we all collectively, including
Mr Martin, are trying to find a balance. Many presenters would
say that balance is there. I know as a member of this government
we will entertain improvements. That's why we're here. So your
input is very important. It is a slow process to change the rules
of the marketplace.
That's more of a statement
in respect to your taking the time today to come and put a face
to small business. We've heard a couple of things where I would
encourage you, through the Ontario Milk Marketing Board and
others, collectively, with the weight of your organization, to
engage the supermarkets in dialogues within the regions of this
province. The government can't do it on its own.
We've struck out to achieve
three things: disclosure, which is bigger than you think. There
again, there's due diligence required in that piece, on both
parts. I think the right to associate and disclosure
together-that is, all of you together, talking to the
associations that now have a legal ability to exist, the IGAs or
whatever it is, and talk about their common problems of
supply-together with the fair dealing provisions which will be
strengthened over time is a framework to improve something that
we heard from a previous presenter has been around historically
from the time of the former member here, who was the founder of
the Grange report. It really goes back to the 1970s, talking
about reforming the Franchise Act. So here we are. We're going to
do it. It's Bill 33. We're listening. We are prepared to make
amendments, and your input and that of the others who appeared
here today could be germane to dealing with the one issue of the
supply aspects of franchise operations.
Thank you. If you want to
respond, feel free.
Mr Gass: I
believe this is certainly the first step. As I said, I believe we
could accomplish a lot with having all parties here today. We
could move this along more quickly, I believe. At the end of the
day, you have to have a very practical, workable solution to the
problem. If you legislate supermarkets to do something, how is it
going to work? Is it going to work, or are they going to follow
the letter right to the T? At the end of the day, are we going to
create a mass of bureaucracy that might take six months to solve
a little problem? I'm afraid of that part of it.
How long ago did you found this business?
About two years.
You've made remarkable progress. We're talking about milk
distribution, but if we were dealing with breweries, you would
probably be able to get your product onto the shelves of the
local Brewers Retail, I would guess, even though that's owned by
the large beer corporations. You would be, I guess, a brew pub or
something in that sort of scheme of things. What you need is, and
we've heard it from the other dairies, the assistance of just
having a level playing field. I can't help but in my own mind
come to the conclusion that the other commercial considerations
that are being put forward here, buying shelf space etc, can't be
quantified in terms of price per litre, and that you have every
opportunity to be just as competitive as the others. I'm not
going to make a speech, unlike my other two colleagues.
That was my own people applauding.
I thank everybody for your comments. I think you sort of wrapped
up what I've heard today from about everybody who came in to
talk. I can see the northern region is different because of the
geography and everything. I think we'll have to look into putting
something in this bill that gives the ability and the possibility
for buying local products from the people.
Another thing that was
common to all presentations was the guarantee of shelf space.
That seems to be fair, and that came out of everything. So you're
wrapping up with your comments what we've heard today. I'm really
anxious to see if you're going to get answers from those head
offices of the supermarkets that you've visited. So good
Chair: We appreciate, Mr Gass, your coming in to make
your presentation. It's a very appropriate one.
The committee will now
stand adjourned until Wednesday, March 8, when we will reconvene
at 9:35 in the morning in the Delta Inn. I trust that you will
all be there on time.