Fight at the food counter

…it set the price at which franchisees bought their groceries from suppliers, and the price at which they sold goods to the end customer…Loeb was in a position to siphon profits out of the stores and into the corporation…stores began to lose money…Loeb could move in, buy out the impoverished franchises at fire-sale prices…

Canadian Business magazine
February 1997

Fight at the food counter
When Loeb Inc. decided to get tough with its franchisees, it touched off a war that split the grocery chain in two. Now a partial victory by the former franchisees may ignite a new era in franchise legislation
Mark Anderson


NO SQUEEZE, PLEASE Loeb franchisee Earl Miks (here with wife Ann), was among 22 franchisees who claimed Loeb's pricing policies were putting them out of business.


STAND AND DELIVER Former Loeb franchisee Bruce Marshall (left) and lawyer Charles Gibson discuss strategy.

The last thing Sault Ste. Marie Ont., grocer Mike Williamson could ever have imagined was that he would one day find himself playing a king of James Bond of the produce section – with his employer, Loeb Inc., in the role of the archvillain.

And yet here it was mid-November 1996, and Williamson, a Loeb franchisee since 1991, was sweeping his home for listening devices, peering through the curtains at a mysterious van parked across the street and chaining himself into his grocery store at night in the event that Loeb agents tried to sneak in and change the locks while he slept. It was, he decided, bizarre.

It was also an all too typical scenario in the final weeks of a bitter, five-month war between Loeb, a 114-store Ontario and Quebec grocery chain owned by Montreal food industry giant Provigo Inc., and 22 of its franchise stores; a war that blew wide open last June, when 21 franchisees launched a $205-million breach-of-contract suit against their franchisor partner. (The other franchisee had filed suit in May.) Loeb, which had $1.8 billion in sales in 1995 and a 10% share of the Ontario grocery market, responded by invoking a 90-day “termination without cause” clause in its contracts with 20 of the 22 franchisees (two of the litigants’ contracts did not include that clause). Hostilities then escalated. The conflict finally ended in the last days of November in at least a partial victory for the franchisees, when the two sides reached an out-of-court settlement and Loeb purchased the embattled business. But even now, the fallout lingers.

At the heart of the dispute was the franchisees’ contention that Loeb was pricing them out of business, as part of a master plan to convert Loeb from a franchise network to a corporate-owned chain. Loeb denied the allegations, maintaining that while it does have a plan to replace some of its franchises with corporate-owned stores, a complete conversion is not its goal. It also argued that it had the contractual right to set prices as it saw fit, and that franchisees unwilling or unable to work within the Loeb framework were free to exercise their own 90-day exit clauses and leave.

Today, with a deal in place, both parties are prohibited from discussing the conflict or the agreement itself. Prior to their settlement, however, neither side shied away from publicly airing its views. Affidavits and other court documents, meanwhile, reveal the extent to which their relationship had become characterized by mistrust and bitterness. But the whole truth may never be known. To some, Loeb’s decision to settle is seen as an admission of wrongdoing. But it could equally be argued that the company made the deal just so it could stop the fight and start patching up relations with thousands of customers who had signed petitions in support of the franchisees.

Either way, the implications could go much further than anyone expected. By underlining the inherent inequities that characterize many franchisor/franchisee relationships, the dispute may end up contributing directly to legislation that, in Ontario at least, will help level the playing field. While prosecuting their civil suit, Loeb franchisees lobbied strenuously for the introduction of such legislation. Ontario’s consumer and commercial relations minister, David Tsubouchi, gave them a sympathetic hearing in October, and ministry officials now say new legislation could be in place by the spring.

The origins of the Loeb dispute go back more than three years, to a time when Loeb was operated more or less independently from its parent. Prior to 1994, Loeb had its own CEO, Bill Kipp, and its own management team. Relations between head office in Ottawa and Loeb’s franchisees across Ontario and Quebec were generally quite good. “Things not only ran well, they ran very well,” says Larry Cairns, a veteran franchisee in Sault Ste. Marie.

But all this was about to change. In the summer of 1993, Pierre Michaud took over as Provigo chairman. In September 1993, he installed Pierre Mignault, former president and CEO of Price Club Canada Inc., as company president and CEO. Mignault’s mandate was simple: cut costs and turn around the money-losing empire. A month earlier Kipp had resigned and one of Mignault’s first actions involving Loeb was to move strategic management of the chain to Montreal. The new top position in Ontario would be senior vice-president of operations, and to fill that position Mignault brought in Jim Robertson-a man with a lengthy history in franchisor/franchisee relations at Provigo.

In the late 1980s Robertson headed up C Corp. Inc., another Provigo operating company with operations that included a chain of more than 100 Red Rooster convenience stores in Western Canada, primarily in Alberta. One of his jobs there was to buy back some the autonomous, freewheeling Red Rooster franchises and open more tightly control Winks franchises. Whenever a Red Rooster lease would come up for renewal, Robertson would offer the owner a stricter franchise agreement. For example, where the former Red Rooster leases were for as long as 10 years with options for additional 5-year periods, the new Winks franchises had maximum terms of three years; and where the Red Rooster franchisees had a great deal of leeway to act independently, Winks franchises were rigidly governed by a set of rules and restrictions that became known simply as “the program.”

“It just devastated the personal initiative and entrepreneurship that built the franchises in the first place,” says a former Red Rooster owner. “Overnight, it destroyed whatever goodwill those stores had built up.”

Back in Ontario, Loeb franchisees were alarmed when Kipp left and when Robertson was subsequently brought in April 1994. And it didn’t take long, they say, for their apprehensions to be justified. While Loeb had started adding corporate-owned stores to the mix in 1993, franchisees say the problems of dwindling franchise profits and increasing store conversions began to accelerate in 1994. According to the disgruntled franchisees, Robertson refused to address their concerns on either of these fronts. Everything would be fine, the franchisees say they were told, as long as they continued to follow Loeb’s franchise “program.”

In the franchisees’ eyes, however, the program was the problem. In addition to establishing lease and advertising rates, it set the price at which franchisees bought their groceries from suppliers, and the price at which they sold goods to the end customer. By squeezing those margins, they argued, Loeb was in a position to siphon profits out of the stores and into the corporation – shifting the profit centre, in other words, from the retail level to the wholesale level. Then, when margins became insupportable and stores began to lose money, the franchisees claimed, Loeb could move in, buy out the impoverished franchises at fire-sale prices and install corporate managers whose success would not hinge on retail profitability.

Loeb vehemently disputes this interpretation of events. Narrow retail margins are simply a sign of the times, Robertson argues, the result of a hypercompetitive grocery industry rather than a Loeb conspiracy. “That loaf of bread you could sell for $1.20, you can now sell for only $1 – that 20Ë is obviously going to come out of the gross profit of the business,” he says. “That is a function of what is going on in the market right now.”

Where there is no dispute, however, is that by June 1996, 49 of Loeb’s 114 stores were either converted franchises or new corporate-owned stores. A month earlier one disgruntled franchisee in Sudbury, Ont., had filed a suit against Loeb, and now the other 21 franchisees decided to join him. Their suit, filed on June 28, accused Loeb of “breaches of contract,” “fraudulent, negligent misrepresentation,” “breaches of fiduciary duty,” “abuses of contractual rights” and “breaches of the duty of good faith.” Loeb considered its options and them responded with a decision on Aug. 2 to trigger the 90-day termination clause embedded in the contracts of 20 of the 22 litigants. “For us it wasn’t a matter of discussion or negotiation,” says Robertson. “The Loeb franchise program exists, and it’s a question of whether you want to work within the program, or file a lawsuit. I guess they decided a lawsuit was the best way to go.”

When it was obvious that Loeb would not be intimidated, the franchisees surmised that the company’s strategy would be to wait until the 90-day period had expired, assume control of the disputed stores and them outlast the franchisees in a protracted court battle. For the franchisees then, success hinged on winning an injunction preventing Loeb from taking control of their stores. To that end, the franchisees’ lawyer, Charles Gibson of the Ottawa firm Vincent Dagenais Gour Gibson, raced to assemble evidence to support an injunction. Loeb, on its own or through its lawyers, McCarthy Tetreault of Toronto, responded with a number of actions: an accounting firm was hired to perform audits on a number of franchises; a letter was sent to Gibson, calling into question the ownership of funds the franchisees were using to pay his retainer; Gibson himself was sued for libel and slander; and franchisees observed private investigators watching their stores whom they believed had been hired by Loeb.

Ominously, a wiretap was also found in a store of Earl Milks, a franchisee in Rockland, Ont., after he and half-dozen other franchisees hired a security firm to sweep their stores for bugs. The discovery rattled franchisees, especially since as similar search in January had come up empty, but the origin of the listening devices was never determined.

Finally, individual buyouts were offered to select stores in an attempt to break the solidarity of the franchisees. Three franchisees eventually accepted, bringing the total number of litigants down to 19.

The turning point in the dispute came on Oct. 30, when Ontario Court Justice Judith Bell granted the franchisees a five-week injunction to come up with hard evidence that Loeb had breached its franchise agreement. Critically, Bell’s ruling also gave Gibson the go-ahead to cross-examine former Loeb executives, people with firsthand knowledge of Loeb’s strategic policies and who could give evidence with respect to a Loeb plan to unjustly convert franchises into corporate stores.

Allowing the cross-examination of Loeb executives was a serious blow to the franchisor, but what was probably even more intolerable was the fact that Loeb would now have to wait an additional 35 days before it could get control of the franchisee’s stores. Even if the executives had nothing damaging to reveal, the further delay meant five more weeks of negative publicity, customer anger, reduced revenues, lost market share and investor unrest. (Provigo’s stock price fell more than $2.50 between June and early November.)

And so, while Loeb’s Toronto lawyers worked to have Bell’s decision overturned, Loeb went back to its principal Ottawa law firm, Scott & Aylen, and asked it to begin negotiations toward a settlement. While Loeb did manage to have Bell’s decision stayed on Nov. 12 (which prompted franchisees to hire security guards and start locking themselves in their stores), subsequent court orders, including one that required Loeb to produce its financial statements, helped to propel the two sides toward a deal. On Nov. 26, a “fair and equitable” settlement was reached. Loeb agreed to pay an undisclosed sum to purchase the businesses from its 19 franchisees; the franchisees dropped their civil suit and handed over the keys to their stores.

As the dust settles, the most important implications that remain may have less to do with Loeb and the former franchisees than they do with the grocery and franchise industry at large. John Scott, president of the Canadian Federation of Independent Grocers, blames Loeb for taking too hard a line with the franchisees. The whole dispute could have been avoided, he says, had Loeb sat down with its franchise partners and exercised “a modicum of trust.” The route it took instead has “given a black eye to the whole industry,” says Scott. “I don’t care if you talk to the head of Oshawa [Group Ltd.] or the head of Loblaw [Cos. Ltd.], everyone is concerned about what the spillover is in terms of the image of franchise programs in the retail food industry.”

Whatever that spillover turns out to be, it will probably include the introduction of franchise legislation, making Ontario only the second province in Canada, after Alberta, to pass such a bill. Ironically, according to Scott, the Alberta legislation has its roots in “the Red Rooster situation, because that’s when the Alberta Securities Commission started to look at it. The latest tension for franchise legislation [in Ontario] came from the same [parent] company.”

For its part, Loeb says it intends to maintain its current strategy of having both corporate and franchise stores. In a speech last fall, Provigo chairman Michaud said the company plans to resell the majority of the stores taken over in the settlement to new franchisees. The only stores that will stay in corporate hands will be those that compete closely with company stores from other chains.

No doubt the former franchisees will be watching closely to see if that happens. In the meantime, they have their deal and the pride of their convictions to see them through the winter. “It was a long, tough struggle for each and every one of us,” says former Ottawa franchisee Bruce Marshall. “I am very proud of myself and all the guys for finally saying we had to stand up.”

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Risks: Ministry of Consumer and Commerical Services, Ministry of Consumer and Business Services, Ministry of Government and Consumer Services, Ministry of Government Services, Ontario, Opportunism (self-interest with deceit), Raining litigation, Secret kickbacks and rebates, Masterpieces of deceptive wording and artful omission, Must buy only through franchisor (tied buying), Franchisor takes franchisee stores, Lawyers sued by franchisor, Renewing contract much tougher, Wiretaps, Lease controlled by franchisor, Franchisor takes franchisee store, resells to new dealer, Gag order (confidentiality agreement) Old-fashioned idea that politicians are relevant, Renewing contract much tougher, Franchisor controls retail prices, Bad faith and unfair dealings, Stock price plummets, 30 different programs of kickbacks, shelf allowances and inside money, National press coverage, Canada, 19970201 Fight at

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