Algoma Federation of Agriculture Public Hearing Testimony

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.

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Legislative Assembly of Ontario
March 7, 2000

Public Hearing Testimony
Sault Ste. Marie, Ontario, Canada
Ms. Cathy Bonnett and Mr. Ryan Connolly, Algoma Federation of Agriculture

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

ALGOMA FEDERATION OF AGRICULTURE, AFedAg

The Acting Chair (Mr Ted Chudleigh): 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 with questions.

Ms Cathy 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 agricultural production.

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 diversification initiative.

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 purchasing.

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 processors.

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 recognition.

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 opportunities.

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.

The Acting Chair: Thank you very much. That leaves us with about four minutes per caucus. Mr Gilchrist.
Questions

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?

Mr Ryan 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.

Mr 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.

Mr 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.

Mr Gilchrist: Why is that? Is it price?

Mr 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."

Mr 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?

Mr Connolly: No.

Mr Gilchrist: Because you hadn't approached them?

Mr Connolly: When I approached them, it wasn't possible to do it and that was the end of the deal.

Mr Gilchrist: So they feel constrained by pressure from head office to not side with you.

Mr Connolly: I assume that.

Ms 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.

Mr Gilchrist: That's true. If a chain wanted to make it generic, that is an option.

Ms 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.

Mr 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 produced.

Ms 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.

Mr Gilchrist: I think I've used my time. Thank you.

Mr 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-offs 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.

Ms Bonnett: Actually, they are, in London.

Mr Brown: 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; it's great.

But my real point is that we know that in fresh fruits and vegetables and the horticultural industry, which is starting to blossomsorryand 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.

Ms 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.

Mr Brown: 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.

Mr Martin: 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 here today.

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?

Mr 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.

Mr Martin: 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.

Mr 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.

Mr Martin: So that argument doesn't hold any water.

Mr Connolly: I would say not.

The Acting Chair: Thank you both for coming before the committee. We appreciate it very much.

This document is a verbatim copy of this witness’ oral testimony. To review the original transcript: http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&Date=2000-03-07&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19726#P160_50731

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


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Risks: Ontario Public Hearings, Canada, 2000, Must buy only through franchisor (tied buying), Listing fees and inside, Tony Martin, Local suppliers with no shelf space, Money swears, Canada, 20000307 AFedAg

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