Loss Leader

“It’s one thing for the franchisor to say ‘I’m losing money on this store’ but if the franchisor is also the producer and the distributor, the mill that makes the sugar and maybe even the farm that grows it, then is the franchisor, in all its business forms, really losing money? Or has there been a decision made about where to lose money?”

High Grader magazine
January/February 1999

Loss Leader
Franchise wars at the check-out counter
Charlie Angus

LossLeader.jpg

On January 8, 1997 staff from National Grocers entered Carlucci’s Your Independent Grocers in Sault Ste. Marie, changed the locks, took down the photograph of owner Mary Carlucci and posted their security people around the store. Carlucci says it was a synchronized operation – timed for the moment when she would be out of the store, called away to what she understood was a routine marketing meeting with National Grocers’ representatives.

Across town, LOEB franchisee Larry Williamson was searching his house for listening devices and locking himself in his store every night. He was afraid that if he didn’t, his store would be seized by representatives of parent company, Provigo. At the Golden Mile LOEB over on Pim Street, franchisee Larry Cairns was gathering petitions to take to Queen’s Park as part of an attempt to forestall losing his store.

The battle being waged by Williamson and Cairns was echoed all across Ontario as 21 LOEB franchisees locked horns with Provigo. It was a high-stakes game. The franchisees were demanding $206 million in damages, alleging that LOEB’s pricing system was forcing them out of business. Provigo, in turn, initiated a “no cause” termination clause which, in their eyes, gave them the green light to seize the stores of the recalcitrant franchisees.

But it was the seizure of Carlucci’s store by National Grocers that caught people in Sault Ste. Marie by surprise. Mary Carlucci was seen as a crackerjack in the grocery business. She had been in the business since she was 18. Over the next 22 years she worked her way up to project manager at LOEB, being involved in opening 13 LOEB stores.

In 1991 Carlucci went over to National Grocers (NG), opening her own store – Carlucci’s Your Independent Grocer. The store was popular, even being voted the top grocery store in the Sault by a local newspaper.

“I grew up two blocks from that store,” explains Carlucci. “Half the city shopped there because they knew me. They knew my family.”

Over six years Carlucci brought the business up from $9 million a year in sales to $22 million.

“People used to come into the store and see me working at the check-out and they’d say, ‘Gee, Mary you must be making lots of money this week.’ The only thing, I wasn’t. My husband and I were working 100 hours a week and we were still losing money. We were laying off staff to save money and trying to do all the work ourselves. There wasn’t a retailer I knew who was making money in the business.”

GET WITH THE PROGRAM
How does a store doing $22 million in annual sales lose money? Carlucci says its really quite straightforward.

“We had to buy everything from their (NG) warehouse. I would have to buy bananas at, say, $29 a case but then they would tell me I had to turn around and sell it at $10 a case. Because I had to follow the pricing program I was carrying 1500 items that were costing me money.”

In the highly competitive grocery business, this selling at a loss is considered sometimes necessary to maintain market share.

John Scott, President of the Canadian Federation of Independent Grocers (CFIG), says he doesn’t think that the troubles in these Sault stores represents a general trend in the industry. Still, Scott admits, the grocery business is no picnic.

“We’re looking at a very tight market. The margins are tight; the pricing is tight. Whether you are a corporation or a franchisee you have to work extremely hard just to maintain your position in the market.”

The supposed advantage to a franchisee is to be part of the buying power of a major distributor. National Grocers was (at the time) a subsidiary of food giant Weston’s ($13.9 billion in sales). National Grocers supplied Weston’s “independent” franchisees as well as stores in the Loblaw’s chain – another Weston subsidiary.

Carlucci maintains that the buying power of Weston’s wasn’t being passed on to the retailer. For instance, she claims she had to purchase milk from the supplier chosen by National Grocers even though a local dairy could supply milk cheaper.

“When you go into the grocery business,” explains Carlucci, “the debt load is in your name but the franchisor controls everything else. They set up the program. They tell you how to run your store; what your price programs are.”

Although Carlucci’s fight differed in many ways from the situation at LOEB, her basic argument about the pricing program was echoed among the LOEB franchisees.

Canadian Business (February 1997) summed up the retailers’ point of view: “In the franchisees eyes, however, the program was the problem. In addition to establishing lease and advertising rates, it set the price at which the franchisees bought their groceries from suppliers and the price at which they sold the goods to the end customer. By squeezing those margins, 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.”

And like the LOEB franchisees, Carlucci found herself going to court against a food giant. But in Carlucci’s case, she was on her own.

“When you’re in that position nobody in the business will speak to you. With the kind of debt load that these retailers carry over their head, they’re afraid. Nobody wants to be seen with you.”

Two days after being locked out, Mary Carlucci, armed with a court order, took possession of her store once again. Over the next year she was in and out of court a number of times.

Gord Acton is the lawyer who represented Carlucci. “I don’t think the Carlucci case was at all isolated… The fight at the retail level between the retailer and the distributor is only part of an entire system. You can’t look at it in isolation.”

Acton says this fight has to be seen in context of the growing vertical integration of the grocery business.

“Very often the goods sold in the grocery store are loss leaders and there is no profit for the retailer…but there is profit I believe being taken at different levels in the chain which are still potentially owned and controlled by the large companies who control the food industry.”

From National Grocer’s point of view, the issue was simply one of a businesswoman who signed a contract and was now, after the fact, complaining about the terms.

But Carlucci wanted her argument settled on a broader issue – not whether National Grocers was losing money on the Carlucci store, but whether Weston’s, the larger parent company, was losing.

Acton explains, “It’s one thing for the franchisor to say ‘I’m losing money on this store’ but if the franchisor is also the producer and the distributor, the mill that makes the sugar and maybe even the farm that grows it, then is the franchisor, in all its business forms, really losing money? Or has there been a decision made about where to lose money?”

Acton says its not an easy question to have answered. “The difficulty is being able to investigate the whole length of the chain to see where the profit is being taken. But one doesn’t get into those citadel of numbers without a huge, huge legal effort. I don’t think anyone has ever been given the full story.”

The LOEB franchisees certainly didn’t get it. After the franchisees’ lawyers won the right to cross examine LOEB executives and examine LOEB financial statements, LOEB moved to settle the matter out of court. The 19 claimants (two others had already settled) gave up their stores in exchange for an undisclosed settlement and a promise not to discuss the case.

Carlucci’s case was also settled before her lawyers were given the chance to examine National Grocers’ books.

John Scott of the CFIB feels that in the wake of the fall-out over the LOEB, lessons have been learned on both sides.

“I think that people in our industry are realizing that a sense of fair play is required to operated a successful franchise system.”

However, Mary Carlucci, now running a small corner store in the Sault, says she still gets calls on a steady basis from grocers going through similar struggles.

Weston’s Corporate Assets ($13.9 billion)
Weston Food Processing:Weston Bakeries (Wonder Bread, D’Italiano, Country Harvest), Ready Bake Foods, Neilson Dairy, Conners Seafoods, Nelbro Packing, British Columbia Pakers, Heritage Aquaculture, Arnie’s Bagelicious, Petrofsky’s. Food Distribution:Loblaw’s, Your Independent Grocer, no frills, Fortinos, value-mart, The Real Canadian Superstore, Zehrs, Atlantic Superstore, Dominion (in Newfoundland), Real Canadian Wholesale Club, SuperValue, Shop Easy, Lucky Dollar.


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