Don Farquhar Public Hearing Testimony

Essentially what is happening here is that there would be a hidden commission, and it goes to the franchisor and not the franchisee. So the consumer, the franchisee and local distributors all lose. FARQUHAR: That's right.

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Legislative Assembly of Ontario
March 7, 2000

Public Hearing Testimony
Sault Ste. Marie, Ontario, Canada
Mr. Don Farquhar, Farquhar Dairies Ltd.

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

FARQUAR DAIRIES LTD.

The Acting Chair (Mr Ted Chudleigh): I'd like to now call Mr Don Farquhar of Farquhar Dairies. Welcome to the committee, sir. We have 20 minutes to spend together.

Mr Don Farquhar: Good morning. I have reviewed Bill 33 and it seems fine as far as it goes. I'm not a franchisee or franchisor, but it does seem to be some useful legislation. However, if you're going to introduce a bill, why not get to the root of a problem that a lot of these franchisees have, which is restrictions that franchisors put on them on where they can source products and services?

We are Farquhar Dairies Ltd, an independently owned fluid milk processor and distributor that was founded in 1935. We employ 40 full-time employees and have processing plants in Espanola and Mindemoya. Our historical trading area has been from Manitoulin Island to the south, Espanola to the east, Blind River and Elliot Lake to the west, and all communities in between.

In June 1997, the provincial government opened competition throughout northern Ontario in the fluid milk business, including our area. This was done "to allow for the licensing of additional fluid milk processors and/or distributors and to enhance consumer choice of products." I'll be getting back to enhancing consumer choice of products. That quote was taken from the Ontario Farm Products Marketing Commission memorandum dated May 29, 1996.

Since June 1997, Farquhar Dairies have expanded our area throughout northern Ontario. We have been fortunate that many independent retailers and consumers have thus far found our products to be of high quality and we have been somewhat successful moving into these new markets. However, we have had almost no success getting our products on to the shelves of any major food stores or franchises outside our historical trading area.

We have had many discussions with various franchisees who wished to purchase our products for a variety of reasons. In some cases our pricing or service was better in their minds. In some cases the franchisees simply wished to purchase products from someone they perceived as local. Whatever the reason for wanting to purchase our products, in almost every case the franchisee or store owner was stopped from doing so by their respective head office because of national agreements between the franchisor and corporate dairies such as Parmalat, Natrel, Dairyworld or what have you—bigger dairies.

A couple of examples of this would be that there are several Country Style Donuts franchisees in our immediate areas. I have relationships with the owners. Because of the volume that we have, we buy some products from other dairies and resell them in our own market. We are able to offer the same product that these Country Style Donuts were presently purchasing from Natrel, 10-litre 18% cream, at a 10% discount, a greater volume of delivery. These franchisees were very interested, only to have the franchise head office stop them from buying from anyone but Natrel. This not only removed potential customers from me, but also made those particular Country Style franchisees less profitable.

Another example would be that recently we made a proposal to an owner of a Loeb grocery store here in northern Ontario. We proceeded to sell various fluid milk products to himbutter, ice creamfor the week of February 10 to 17. That Loeb store's customers seemed to enjoy the choice, as previously there were only Parmalat products available in that store. The store owner expressed that he was very pleased with the turnover that the Farquhar products had on his shelf. It was then relayed to us that a Parmalat representative complained to the Loeb store head office, which is ADL Foods in Rouyn-Noranda, Quebec, which subsequently had us removed from the store. The consumer wants our product, the store owner wants our product, and we're very happy to service that store, and yet we can't. There is something fundamentally wrong with that.

These are only two instances out of hundreds where store owners, managers or franchisees were interested in, in the very least, having us quote on their business, only to be informed by their respective head offices that Farquhar products would not be allowed on their shelves at any price, no matter what the consumer demand.

Our repeated proposals to various head offices are ignored. For the most part, our phone calls and inquiries go unanswered. So while I applaud the Minister of Consumer and Commercial Relations in his attempt to protect some of the rights of franchisees, in my opinion this bill does not go nearly far enough. We cannot continue to allow large conglomerates with deep pockets to pay off all corporate head offices and franchisors, thereby eliminating competition.

Smaller regional companies like mine pay taxes and we employ people in communities where these grocery chains and franchisors operate. All we're asking for is a fair opportunity to bring our goods and services to market.

I recommend that this bill and the fair competition legislation be re-examined in an effort to make it possible for smaller regional companies to compete with larger national companies on an even playing field. We can no longer allow corporate dairies to buy shelf space at head office levels, making it impossible for individual store owners or franchisees to access products that their customers want.

I'm certain that this government, through the Ontario Farm Products Marketing Commission, did not intend to enhance consumer choice of products by allowing corporate dairies to pay head offices to eliminate competition. That is what is happening today. If these anti-competitive policies are allowed to continue, regional suppliers such as ourselves simply will cease to exist. I don't think anyone wants to see the dairy food industry completely dominated by any single supplier. I think politicians must ensure that fair competition exists for the franchisees and owners, for the suppliers, and, most importantly, for the consumer.

That's all I had prepared. But in listening to some of the other discussions this morning, I think it's important to note that when the gentleman was talking about franchisees not being able to make a living, it's been my experience that the real problem franchisees have is when a large dairy—not necessarily dairy; I'm talking dairy because that's the industry I come from, but it could be pop or chips or bread or what have you—goes to the corporate head office and buys shelf space in all the stores across the country. They have to get that money back somehow, so they increase the price going to that individual franchisee. I can go into a franchisee tomorrow and give them a quote that's generally cheaper than what they're getting from their preferred supplier. The franchisees cannot remain competitive when they are losing money in the process. The franchise head offices are doing very well. They've received the cheque already.

The Acting Chair: Thank you very much. That leaves us about three minutes per caucus, and we'll start with the NDP.

Questions

Mr Martin: Thank you very much. Right off the top, I wanted to - I know you said it, but I want you to say it again, if you would. You and others like you, small local producers - we had the agriculture association here and you heard them earlier—are not looking for a special or privileged opportunity. You're just looking for an equal opportunity, a chance to get your product on the shelf so that consumers can have a choice and perhaps buy yours for whatever reason. Is that correct?

Mr Farquhar: That's absolutely correct. When I go and approach a store and quote them a price, I don't want the whole shelf space. I want a portion of the shelf space. Generally, our pricing and our service and our quality are as good as or better than the competition, yet we have absolutely no access to their shelf space.

Mr Martin: Yesterday in Toronto, Kevin Ryan with National Grocers suggested that it was a distribution challenge that was causing this to happen, that in order for them to deliver on-time, quality product to every community that they have a store in across Canada, they need to do this kind of Bay Street dealing that is hurting your particular business. You're suggesting today that it's not, that it's about money.

Mr Farquhar: I would suggest to Mr Ryan that if he would open a channel of communications with my company, I'm sure we could show him that it's easier to deliver product to Kap or Timmins or what have you from Espanola than it is from Quebec or Toronto. I'm sure I could do it as cheaply or cheaper than their present suppliers.

Mr Martin: I just wanted to say quickly, if I might, on your last comment about who actually was making money in these transactions, that it's certainly not the franchisee and it's certainly not you.

Mr Farquhar: That's correct. And, I might add, it's not the consumer.

Mr Gilchrist: Thank you for your presentation. It's kind of interesting. On the one hand, we're hearing the message that all the shelf space is going to these national chains, but then you use terms such as "but they're not competitive." If Beatrice is my only choice and they're giving the same shelf space allowance to Loeb that they're giving to Dominion stores that they're giving to everyone else, presumably they are competitive. It's at a higher price. Perhaps what you meant to say is the consumer is not benefiting from any perceived competition out there.

Mr Farquhar: The pricing at the store level would probably be the same throughout the community, whether it's a chain store or not, but they control all the sales. The consumer has one choice of what product he's going to buy.

Mr Gilchrist: Right. So it's a question of choice.

Let me ask you this. In this bill, we're proposing to make it mandatory that there be far more complete disclosure than there's ever been before. If you were a prospective franchisee and I was required to disclose to you that I'm going to keep all the volume rebates, I am going to effectively have a price to you that's 10% higher than you could supply locally, and marry that with the ability, the absolute guaranteed right to associate. So now all of the Loeb stores can get together. Is it not likely that putting those two things together, the information and the power to negotiate as a more equal partner, without the government coming out with a law to say, "You must have 5% or 10% or 20%," and would it not make sense that the nature of that business relationship would change if we gave these powers to the franchisees?

Mr Farquhar: It could very well change. Why not just give the franchisee the right to purchase product from whomever he pleases?

Mr Gilchrist: I guess because I hearken back to my Canadian Tire days. I don't want to suggest that's the be-all and end-all, but there were many comparable examples, where it didn't make sense to ship a bag of salt for $2 that was going to take $5 in freight from Goderich all the way to Thunder Bay. They would let the dealer in Thunder Bay buy it. If there was somebody packaging salt that was more competitive for northern customers, they could do that. On the other hand, sending a package of screws doesn't really cost an awful lot. So Canadian Tire went to the Orient and bought millions of packages of screws. Sure, I know that somebody could have a clearout on a different brand name for this week and could have come in and offered me a better deal, but it would have made no sense to change your national marketing for something like that. Do you not recognize that it's almost impossible for the government to micromanage which products should have greater local exposure and which shouldn't?

Mr Farquhar: I agree. I think it should be up to the company. Using your example, if they can buy packages of screws in the Orient for a cheap price, if there's a screw company in that community, even if their prices are somewhat higher, should they not be available to the consumer in that location?

Mr Gilchrist: I guess my question comes back to you: Where do you do the trade-off where you lose the ability to send a national message? When you walk into a Canadian Tire store, they want you to know not only that you'll find the same products, but they actually put them in exactly the same spot in every store. They want that common marketing vision to be part and parcel of what you know to be Canadian Tire. So I guess there's a trade-off there. If I went into a Canadian Tire store in one community and I found one brand of drills, and I wanted to buy parts or accessories for it and I couldn't find it in the next store over, that's far more confusion than there is strength.

Mr Farquhar: I suppose you could have both types of drills, if there is some local affinity for that one product that particular store owner wants to have. Shouldn't it be up to the store owner to have a choice to put that product in his store if the consumer demands it?

Mr O'Toole: Would there be any difference dealing with a Loblaws corporate store or a franchise store? In both cases you'd be isolated because of the corporate -

Mr Farquhar: Basically, if it's a corporate store owned by the company, you have absolutely no choice. The managers are very strict. They will follow the guidelines of their head office. I hate to say they're a glorified stock boy, but they do not make a lot of decisions for themselves. If you go into an owned store, a Loeb store, a Tim Hortons store, something like that, the manager will at least talk to you, possibly run it up the ladder to their corporate head office. Nine times out of 10, the head office will call him back, even though his pricing may be better or service may be better, and say: "No, we have corporate contracts in place with other suppliers. You are not allowed to buy off that supplier."

Mr O'Toole: The future ability to associate may improve that, though.

Mr Farquhar: It may. I really don't know.

Mr Brown: Thank you for appearing this morning, Don. For those on the committee who don't know, you should try Farquhar's ice cream. Farquhar is are a major employer in the constituency of Algoma-Manitoulin, particularly in the eastern part of the constituency, and have been an important family business and family in politics in the area.

I'm interested in the payoff for shelf space and other corporate payoffs that may be made. Do you have the opportunity to make those? Can you go into the independent grocer and say, "Listen, Bud, I'll pay you the equivalent for shelf space in your particular store"? Can you do that?

Mr Farquhar: If I had that kind of money I probably wouldn't be in the dairy business; I'd be golfing in Florida right now.

No. In my own area we're dealing with a limited number of stores. A company like Parmalat or Natrel - and I'm certainly not knocking their products or anything like that - simply has the opportunity to go into a head office like National Grocers and say, "We're going to bid on your entire chain of stores throughout Canada, and for the ability to service all those stores, here's the cheque." They have to make that money back somehow. So when they go into that individual store, their prices to that individual store owner are inflated. I can easily go into that store owner and beat their price, very simply, and most of those store owners would like to buy my product. The price is better, generally the service is at least as good, and the consumer knows our productswe're are a local companyand they would like to buy from us. They can't do it. That fundamentally is the problem I am here to talk about today.

Mr Brown: Essentially what is happening here is that there would be a hidden commission, and it goes to the franchisor and not the franchisee. So the consumer, the franchisee and local distributors all lose.

Mr Farquhar: That's right.

Mr Brown: In fluid milk, though, we are in a rather unique situation in northern Ontario. I don't believe there are many, if any, independent dairies left in southern Ontario, are there?

Mr Farquhar: There are not too many in southern Ontario and there are not too many in northern Ontario. We have had a couple close in the last couple of years. It's a very competitive market. We believe that at Farquhar's we run a fairly tight ship. There is a Beatrice plant in Sudbury. If you put us against them, that plant against our plant, we would probably come out very close in cost to put out a litre of milk. We simply don't have the resources to buy shelf space and make national contracts.

If it continues like that, I suppose there will be only one or two national dairies left. When all the dairies go, and there is no processing in northern Ontario, farms will be next. If all the processing is done in southern Ontario, I think it's very likely that they will be shipping milk on a daily basis from northern Ontario to southern Ontario for processing. It's a snowball effect, you see.

Mr Brown: We just learned from the Algoma federation that the number of dairy farms is down dramatically. I have an estimate that the amount of quota is down by about a third in the Algoma district, so your point is well taken.

The Acting Chair: Thank you very much, Mr Farquhar. We appreciate your coming to the committee and sharing your views.

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#P267_93719

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


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