Canadian Council of Grocery Distributors Public Hearing Testimony

MARTIN: It speaks about freeing franchisees up to source product where they can find it at a competitive level as long it's not the trademark issue. Are you favour of that or against that? RYAN: Absolutely, we could not support such a suggestion.

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Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Canadian Council of Grocery Distributors, franchisors

Standing Committee on Regulations and Private Bills
1st session, 37th Parliament

FRANCHISE DISCLOSURE ACT, 1999
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

CANADIAN COUNCIL OF GROCERY DISTRIBUTORS, CCGD

The Acting Chair (Mr. George Smitherman): I'd like to present the next group, the Canadian Council of Grocery Distributors. You have 20 minutes, and I'd ask you to introduce yourselves individually.

Mr David Wilkes: Thank you very much, Mr Chairperson, and members of the committee. I apologize; I have a cold. This is not my regular voice.

My name is Dave Wilkes, and I'm the vice-president of the Ontario region and trade relations with the Canadian Council of Grocery Distributors, or CCGD. I'm joined today by Kevin Ryan, who is an executive vice-president and a representative of one of our member companies, and who has worked with the franchise working committee; as well as Justin Sherwood, who is a director of our association.

The Canadian Council of Grocery Distributors is a not-for-profit national trade association representing the food distribution industry across Canada. Among its members are small and large grocery wholesalers and retail operations. The council's membership represents approximately 85% of the $54 billion of total sales volume of grocery products distributed in Canada. In Ontario, our distributors are responsible for in excess of $19 billion in grocery sales and employment of over 150,000 individuals.

We provided the clerk of the committee with a summary of our members and some of the activities that they undertake. As well, we provided the clerk with a summary of the opening comments that Justin is going to offer that provide our perspective on the bill that we have before us today.

In Ontario, CCGD represents A&P/Dominion, ADL, Canada Safeway, Knob Hill Farms, Lanzarotta Wholesale Grocers, Loblaw Company Ltd, Metro Inc, Sobeys and subsidiaries of all those various companies.

What we'd like to do, if it serves the pleasure of the committee, is ask Mr Sherwood to outline our position and then allow Mr Ryan to provide a member's perspective and his perspective on the bill that we have before us. If that suits your purposes, we'd like to proceed.

Mr Justin Sherwood: The Canadian Council of Grocery Distributors supports Bill 33 as a positive step in protecting the rights of franchisees.

When reviewing the proposed franchise legislation, CCGD would like to impress upon the committee the significant differences that exist within franchise operations. While some franchise operations are small, require small capital investments and employ only two or three people, others are large, employ as many as 200 or 300 employees and require extensive capital investments.

In the case of the grocery industry, the latter is the case, with typical grocery franchise arrangements where a franchisor can investment up to several million dollars in building or renovating a retail location that will employ several hundred people, with the franchisee investing a relatively low percentage to enter into a franchise agreement to operate that location. At present, our members have over 690 franchise locations in Ontario, which employ approximately 50,000 employees in full- and part-time employment. This does not include the secondary employment that is generated by these locations. This represents a considerable capital investment in franchising as a mode of operation for CCGD members and has a significant impact on the Ontario economy.

CCGD and its membership provided input to the franchise sector working group through the participation of Kevin Ryan, who joins us today and will be providing his perspective after my comments.

CCGD believes that Bill 33 will provide much-needed clarity to franchise arrangements and supports the bill for the following reasons:

The Franchise Sector Working Team, composed of large and small franchisors and franchisees, provided detailed industry input into Bill 33. This committee participated in hearings, reviewed legislation and provided consultation to the government during the development of Bill 33. While the result does not reflect all the wishes of every member of the franchise sector working group, the proposed legislation represents a compromise position of all stakeholders. The proposed legislation strikes a balance between protecting prospective franchisees without creating an environment burdened with red tape, which would negatively impact the existing franchise relationships. Should franchise legislation be made too cumbersome and onerous, companies that presently use franchising as a means of operation may shift their priorities to operation of corporate stores, negatively impacting the existing system and its participants.

Since CCGD members operate in more than one provincial jurisdiction, consistency in legislation governing business activities is of utmost importance. Given that Bill 33 and its provisions mirror the Alberta franchise legislation, there will be consistency in application across the two provinces that have franchise legislation.

Finally, CCGD views the provisions outlined in Bill 33 as a positive step in providing a good level of legal protection to franchisees. By ensuring that the franchisee receives comprehensive, accurate and clear disclosure documents, Bill 33 will permit the franchisee to make an informed business decision before entering into a franchise agreement. The right of action for franchisees outlined in the proposed legislation will ensure the accuracy of the disclosure document by providing a course of action against anyone who has knowingly made a false statement. Bill 33 will ensure that franchisees receive the franchise disclosure document 14 days prior to signing any franchise agreement, permitting the franchisee an adequate time period to review the material prior to arriving at a decision.

Finally, the provision of a 60-day cooling period after signing a franchise agreement permits a franchisee to exit a signed franchise agreement, should they have second thoughts.

CCGD and its membership believe that it is impossible through legislation to protect any individual from the inherent risks of business. Factors such as economic conditions, poor choice of location, market saturation, competition and poor business decisions are beyond the control of any legislation to minimize. Bill 33 represents a positive step for the franchise sector by ensuring that the franchisee has the right information to make the proper decision and by placing obligations on the franchisor to provide the information, with penalties for failure to do so.

As we have indicated, Bill 33 strikes a balance between the rights of the franchisee and the franchisor. To go beyond the provisions outlined in the bill will burden the existing franchise system and will impact on the health of the existing system. We urge the committee to support Bill 33 and to ensure speedy passage of the bill.

I will now pass over to Kevin Ryan, who will provide input to the committee from a member's perspective.

Mr Kevin Ryan: In the interests of time, I've chosen to present with CCGD and not burden the committee with a separate presentation. I would like to make mention of the fact that I've spent my entire career of over 25 years in the franchise grocery business and solely in the franchise grocery business. As a member of the Franchise Sector Working Team, I continue to support fully and our company continues to support fully this legislation.

As you are aware, this was a group of franchisees and franchisors, and I can assure you that there was a great deal of input from both groups prior to our arriving at our unanimous recommendation. I believe this provides an informed basis for franchisees to make decisions about their prospective business opportunity. I would also suggest that the liability of officers should provide a great deal of comfort to franchisees, the liability that officers would have if they sign a document which they do not put the proper diligence behind or if they knowingly sign a false document. I think this should be very comforting to franchisees.

We believe it strikes a balance between what a franchisee needs to know to make an informed decision and the need for the franchisor to continue to manage the franchise for the benefit of the entire franchise group. It also allows the franchisor to continue to make significant investment, which in the grocery industry would be in the hundreds of millions of dollars, in their systems and ensure that they have a level of control to allow them to continue to manage that system. For these reasons, we urge the committee to support Bill 33.

The Acting Chair: Thank you, gentlemen. We have about 10 minutes left for questions. We'll start with Mr Gilchrist.

Questions

Mr Gilchrist: I appreciate your presentation and the fact that you speak for so many franchisees and their employees all across this province. There's no doubt that we've come a long way in the work of the franchisors and the franchisees on the working committee. Certainly Mr Martin and previous governments had taken us well down the road we're continuing to travel on here, and we're encouraged when we hear the kind of support we've heard not just from presenters but from Mr Martin and members of the official opposition. But there's no doubt we'll continue to hear suggestions and some other changes.

I wonder if I could get your feedback on a couple that we have heard so far. I certainly sympathize if you don't want to make a decision sitting here on the fly, but one of those would be the ability to permit electronic disclosure, whether this would be something that you would see as a useful addition to the act, given today's technology.

Mr Wilkes: Without consulting our membership fully, obviously I think electronic communications is not unique to this particular thing. With the ability to reserve final judgment on it, I don't think that would be a problem. I think it's just another means of providing information.

Mr Gilchrist: Another perhaps more significant change, and we've heard it here this morning, is that sometimes, after the first term of a franchise agreement has expired, the franchisee will want to renew. Even if it was a 20-year term, they may still have an interest in maintaining that business. But the terms and conditions that would apply to a new franchisee may have changed considerably in that time period. The act, as it's written right now, doesn't speak to the need to have full disclosure if a franchisor wanted to simply renew. Would that be something that you think would bring even greater fairness to the franchising relationship, if you had to go through the whole process again in terms of talking about the franchisor's range of business, whether any material change has taken place in that 10 or 20 years since you'd originally signed?

Mr Ryan: Just to be certain, when a franchise is being renewed by both parties, should the disclosure document be provided to the franchisee? Is that the question?

Mr Gilchrist: Yes, an up-to-date disclosure.

Mr Ryan: I see no reason why any credible franchisor would have any issue with that.

Mr Gilchrist: I appreciate that, because that's certainly something in the original drafting that I don't think is as explicit as it should be.

Mr Ryan: That does assume that it is being renewed, obviously.

Mr Gilchrist: Yes, I appreciate that. Those are my questions.

Mrs Boyer: Thank you for your precision and all the details that you have in your presentation.

Going a bit like Mr Gilchrist, this morning we did have experts. Although they said they were in favour of Bill 33 and that this bill was long overdue, they said they thought that the bill was not going far enough, was not strong enough. Although you're saying the bill represents a positive step for the franchise sector and it's good for the franchisee and the franchisor and that you want to ensure speedy passage of the bill, would there be something you would like to add on since you prepared this?

Mr Wilkes: I think the document that you have in front of you reflects the current thinking of the Canadian Council of Grocery Distributors membership. I also think what Kevin said and what Justin indicated in our opening comments is important, that we strike that balance. You don't want to create a bias in the system that will allow companies that have an option not to support fully franchise operations versus corporate stores. I think the perspective that we bring here is that the legislation does provide a fair balance. It provides a framework in which a responsible business relationship can occur.

But we really want to caution the committee against tipping that balance one way or the other, because it will make decisions for the companies that have options perhaps more difficult to support franchise arrangements. I think that's a real concern that we can't diminish.

I'm not sure, Kevin, if there are additional comments, but that balance is very key.

Mr Ryan: I think as a franchisor and as a franchisee it is absolutely critical that investment continues in that particular program. All stores have a life cycle, all retail companies have life cycle and their units have a life cycle. Changes in demographics and road networks and those types of things make certain sites become obsolete, and it is critical that there be reinvestment in new sites to maintain the health of the total structure.

There is a real concern on the part of franchisors that if we end up in a situation where the legislation is costly and onerous, it will result in a burden that franchisees have to bear that their corporate competitors don't, which is critical. Second, if reinvestment in the system does not occur, while we'll have done a great job of protecting those who are coming into the system, we will have left those who are in the system in a vulnerable position. That's the balance that we are recommending that the committee recognize.

Mr Martin: Some of you will know, Mr Ryan in particular, a rather sorry piece of small business history in Sault Ste Marie that was played out over the last five or six years where we lost three of our best corporate citizens who were grocers, two of them because the parent company changed hands. Provigo bought Loeb and brought in a new plan, so two families who were very good at what they do, very good in the community and known for a tremendous reputation, had to actually camp out in their stores for a couple of weeks just to stop the parent company from coming in and changing the locks. It was not that these people were losing money or doing anything untoward, but simply because the company was sold and the new company had a different plan. We also had, Mr Ryan, in your instance, a Ms Carlucci, who ran a very successful, excellent store in Sault Ste Marie, again another very worthy corporate citizen in our community.

All of these people are no longer in the grocery business and it has nothing to do with disclosure before they entered into their agreement. They brought all due diligence, they had lawyers and accountants advise them. It was relationship problems that cropped up that killed them and their ability to participate in the business that they loved any more.

The bill that's on the table would have done nothing for them and will do nothing for, I suggest, a whole lot of other grocers out there today who are probably anxious because they've seen what happened to others. These others have gag orders on them, ultimately, after the agreements are done, that do not allow them to speak to us or talk to anybody about what happened. Doesn't that call for more in this bill than what we're presently entertaining?

Mr Ryan: I can't speak with any level of expertise to the Loeb situations because at that particular time, you're correct, they were part of the Provigo distribution network. So I don't have any intimate knowledge of that particular situation.

All I can tell you is that with respect to the situation that I'm familiar with, as with any dispute—first of all, the type of person who is most interested in a franchise is usually a very aggressive person. I don't think any legislation will ever prevent some conflict taking place, because by their very nature they're people who are entrepreneurial in nature. So I don't think any type of legislation will prevent conflict from occurring.

I can tell you, though, from my personal knowledge that in the case of Mrs Carlucci, all of the facts are not known.

Mr Martin: I would suggest to you that perhaps all of the facts are not known because gag orders were put on everybody after the deal was done. Mrs Carlucci didn't have a clue. She was brought into a hotel on the premise that there was going to be a marketing meeting, and the locks were changed on her store. Is that a proper and appropriate way to deal with problems in such a reputable business sector?

Mr Ryan: I believe the legislation does provide for dispute resolution. We're talking about some form of dispute resolution. There has been a lot of talk about finding a way to deal with that. Again, Mr Martin, all the facts are not known, and it would be inappropriate in this forum for me to get into that.

Mr Martin: I regret that we're again casting aspersions without allowing the person who is being indirectly bespoken here—

Just to move on, in Sault Ste Marie we also have another issue, which is some local producers who can't get their product onto the shelves. One of them is still struggling along out there, Lock City Dairies. You probably know of them. They've been at your door trying to get their product onto the shelf in a more equitable fashion at Rome's Independent Grocer. They've been shut out of the Food Basics and, if this keeps up, we will lose again another of our very important local corporate citizens.

The Acting Chair: I need you to form a question, Mr Martin. We're almost out of time.

Mr Martin: OK. We've lost a company already. Mighty Fresh Eggs is gone because they couldn't get shelf space. Again, my bill, Bill 35, addresses this. It speaks about freeing franchisees up to source product where they can find it at a competitive level as long it's not the trademark issue. Are you favour of that or against that?

Mr Ryan: Absolutely, we could not support such a suggestion. First of all, it flies in the face of the reason that a franchisor would franchise. Second, I am familiar with the Lock City situation. We carry the Lock City product in our store in Sault Ste Marie. I'm sure you're aware of that. But we also have to be mindful of the supply to all of our other franchisees, and we cannot prejudice the supply to the balance of our franchisees at a competitive price because of a situation in one particular town. This situation is replicated in other towns, and we try to adapt to the local situation as best we can. But we have stores that we have to supply in Hearst, in Kapuskasing, in Cochrane, in many other towns where we are relying on a supplier who can supply the entire north
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Mr Sherwood: If I could add to that.

The Acting Chair: Very briefly, please.

Mr Sherwood: In discussion with our members on this very issue, they have also indicated that sourcing of local product or product mix is done on a one-to-one relationship and there is flexibility for that type of thing to happen in most instances.

The Acting Chair: Thank you very much for your presentation.

Mr Martin: Mr Chair, while they're leaving and the next group comes, I've got some more research that I've done on this issue because I think it's an important piece of this whole discussion the question of the freedom to source product and put it on your shelf and the impact that has on local economies. I'll distribute that while folks are moving back and forth.

This document is a verbatim copy of this witnesses’ oral testimony. To review the original transcript: http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&Date=2000-03-06&ParlCommID=1&BillID=740&Business=&DocumentID=19737#P408_174953

Copyright (c) 2000
Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


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Risks: Ontario Public Hearings, Canada, 2000, Gag order (confidentiality agreement), Intimidation, Oligopoly: operates essentially the same as a monopoly, Local suppliers, no shelf space, Must buy only through franchisor (tied buying), Tied contracting, Secret kickbacks and rebates, Political champions, Franchisor takes franchisee stores, Listing fees and inside money, Franchise Sector Working Team, Canada, 20000306 CCGD

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