Trouble in store for food chain

A franchisor’s power includes the right to protect the system and even set prices, Mr. Laniel says. “But if the power to renew is used as a club, that’s another issue.”

The Globe and Mail
February 26, 1996

Trouble in store for food chain
Many entrepreneurs are in open revolt, accusing giant Loeb Inc. of taking too big a piece of the action and forcing them out of business.
John Southerst

RichardLanier.jpg

Franchisee spokesman Richard Lanier acknowledges that a franchisor's power includes the right to protect the system. 'But if the power to renew is used as a club, that's another issue.'

It was a sad day for Tim LaPlante last year when he signed the papers to sell his grocery business. For 14 years, he had successfully run three franchise stores in the Loeb Inc. chain, winning six corporate awards and high visibility in the suburban Ottawa communities where they were located.

But when he moved on to the fourth store, it was another story. After three years of heavy losses, he was out of business, having sold his franchise back to Loeb.

Mr. LaPlante blames Loeb’s policies, which he says are squeezing franchisees. He cites extravagant spending on promotions and store décor, which was supposed to come out of Loeb’s pocket, but, he says, was passed back to him in the form of high store rent.

“It was a classic case of abuse of the environment in which retailers operate,” says Mr. LaPlante, who now runs a bed and breakfast in Maine. “There was no respect for sound financial decisions.”

There’s trouble in the land of Loeb supermarkets, the small towns and suburbs of Ontario and west Quebec. The stores have been a mainstay of community life, under their former name, IGA, and today under the Loeb banner. Their owner-managers, some of them franchisees for more than 20 years, rack up sales as high as $20-million a year.

But a large number of these entrepreneurs are in open revolt against Loeb, a subsidiary of Montreal-based Provigo Inc. The franchisor, they say, is taking an excessive piece of the action, forcing many of them out of business. The ill-will is a measure of how franchise disputes are not confined to new or fast-growing chains with inexperienced franchisees and small investments.

Distressed franchisees, in the midst of negotiating buyouts with Loeb, do not discuss the dispute for attribution. But the Loeb Franchise Association, which speaks for about 50 of 83 Loeb franchisees in Ontario and western Quebec, says about a third of outlets are losing money largely because of costly renovations, high markups on groceries and controlled prices that allow store owners little or not profit.

Some franchisees also take issue with the terms offered when renewing their franchise agreements. They claim Loeb is trying to take advantage of their weakened financial position to buy back their businesses and turn them into corporate-owned stores.

“They won’t come out and say so, but it looks like that is their objective,” says Richard Laniel, a former Loeb senior vice-president who is the franchisee association’s president and spokesman.

The association says Loeb has repurchased about a fifth of the 50 stores in the Ottawa region and 22 of the 28 stores in Southwestern Ontario in the past two years.

But Jim Robertson, senior vice-president of operations at Loeb, denies there is any blanket strategy to buy out franchisees, except in Southwestern Ontario, where Loeb is waging a battle for market share.

He says every franchisee Loeb has bought out has recouped his or her entire investment and nearly all have remained as corporate store managers. (Mr. LaPlante, the former owner, says his eventual sale to Loeb was under satisfactory terms.)

Mr. Robertson says 20 per cent of stores are unprofitable – not 33 per cent, as the association claims. But he maintains that owners pay themselves salaries of $70,000 to $140,000 a year, as well as the cost of a van or car and other benefits such as hockey tickets.

“In the last two years, profitability has increased for the retailers,” he says.

While owners pay no franchise fees per se, Loeb has been taking about 10 per cent of store sales in advertising and warehouse fees and grocery markups, plus 25 per cent or more of store profit. Usually franchisees sublet their building from Loeb.

But Mr. Laniel says when franchise agreements expire, Loeb typically is demanding dramatic changes – and, in some cases, has tried to secure 50 per cent of the stores’ profits. He says some store owners have been asked to sign three-to five-year agreements (compared with seven to as many as 20 years in the past) and commit to loans for renovations costing between $200,000 and $500,000.

A franchisor’s power includes the right to protect the system and even set prices, Mr. Laniel says. “But if the power to renew is used as a club, that’s another issue.”

Forming an association hasn’t done much good, however. The franchisor refused to recognize it.

“My agreements are all individual agreements with each franchisee,” Loeb’s Mr. Robertson argues. “If you’re having a problem with your wife, you don’t ask your mother-in-law to mediate.”

He says the company collects a portion of franchise profits – between 25 and 50 per cent – because “Loeb has by far and away the greatest exposure” to risk in the supermarkets.

Mr. Robertson says the fast-changing retail sector demands short-term agreements of three or five years. “Five years ago Wal-Mart was not here and Canadian Tire hadn’t re-engineered itself. We can’t say we’re going to always be franchising because it may not fit the competitive environment.”

According to franchisees trouble at Loeb began as early as 1988, when it began transforming itself to a retailer from a wholesaler. One franchisee with more than 15 years experience says Loeb previously charged stores its cost of goods plus a warehouse fee of 5 per cent. In 1988, markups of 12 to 18 per cent came into effect, plus a 6-per-cent warehouse fee.

Even the franchise name has been a source of contention. Provigo sold its regional rights to the IGA name to Oshawa Group Ltd. in 1992, which dismayed older franchisees who had to rebuild brand loyalty in a tough retail market.

“The morale among Loeb retailers is absolutely, unbelievably horrible,” says Mr. LaPlante, who served as the franchisee association’s president for nine months last year until he completed the sale of his franchise. “The franchisees see these stores going down one by one and wonder who’s next.”

Mr. Robertson, however, sees the uprising as a symptom of market pressures in the grocery business. “The insecurity results from changes going on within the company. There’s a lot of re-engineering and integration, because the shareholders demand we serve customers better.”


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