Nick Javor Public Hearing Testimony

..on a personal note, I'm sick and tired of the Pizza Pizza situation. No one can argue that it was a very unfortunate example of the franchise relationship having gone sour and what can happen when industry best practices do not occur.


Legislative Assembly of Ontario
March 7, 2000

Public Hearing Testimony
Sault Ste. Marie, Ontario, Canada
Mr. Nick Javor, franchisor, Tim Hortons

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

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


The Acting Chair (Mr Ted Chudleigh): Our next witness is Mr Javor from Tim Hortons. Welcome to the committee, Mr Javor. We have 20 minutes to spend together.

Mr Nick Javor: Just for the committee's knowledge, I'll be forwarding a copy of my prepared text in the next day or two for everyone to have for your review later on.

Good morning, Chair, and committee members. Thanks for the invitation to speak with you today. My name is Nick Javor. I have been involved in franchising since 1987. For six years I was president of a medium-sized franchisor in the automotive sector, Mr Lube. When I left in 1994 we had 90 outlets, 50% corporate and 50% franchised. We had system sales of $65 million.

I have been with Tim Hortons for some five nears now. My current capacity is regional vice-president of southwestern Ontario operations. I have 375 stores in my region, operated by 160 franchisees. Tim Hortons as a whole had some 1,840 locations at year-end 1999, with chain-wide sales of $1.5 billion.

I also want to point out that I have been an active member of the Canadian Franchise Association since 1987. I served on the board as a director for 10 years and served a term as chairman. I also represented Canada at the first World Summit on Franchising in Mexico City in 1992. I was the first Canadian to receive the certified franchise executive designation from the International Franchise Association, also in 1992.

I have also been very committed to the process of bringing franchise legislation to Ontario, having served on the Franchise Sector Working Team since its inception in December 1994.

I come here today on behalf of my organization to offer our support for the proposed Bill 33. We applaud the efforts of the Franchise Sector Working Team and the ministry in bringing legislation to this province. I echo many of the comments we heard yesterday at the committee meeting in Toronto, namely that disclosure-based regulation is long overdue and is a very important first step and, may I add, a huge first step, for a province that has been unregulated in this area.

This industry team has worked very hard to discuss and debate the issues. Under the leadership of Joseph Hoffman and the ministry staff, we reached consensus on the direction of the proposed legislation. Our team should be very proud of our efforts and the impact we have had to date in helping shape the bill. I am delighted also that the ministry has committed to involving this same working team when the time comes to discuss the regulations.

My remarks today will not be a total repeat of what you have already heard from the other presenters supporting this bill; I have a few additional points to make. The consistent message we heard yesterday from those who supported the bill was that the three key elements are included in the proposed legislation and that they must remain: first, disclosure of those material facts that are pertinent and necessary to allow someone to make a good investment decision in a particular franchise; the right of association for franchisees—I have not heard of any objection to this aspect of the bill to date; and third, duty of fair dealing. I will speak to this in a bit more detail in a few minutes.

My remarks instead will be a commentary on some of the broad-brush statements made yesterday by those who are not fully supportive of the bill in its proposed state. At times we heard strong views that franchising in Canada is some 30 years behind the US and that every franchise agreement should come wrapped with a warning label. We heard franchise lawyers say that franchisors can't be trusted, and one lawyer in particular stated that perhaps Tim Hortons should close some of its units to satisfy a three-mile-radius clause.

I quite frankly take exception to these general and brand-specific points, especially to the often biased portrayal of the franchisor side of the franchise relationship.

I want to deal first with this one-sided portrayal of the franchise relationship, namely that franchisors are to blame for the woes of franchising. There were calls for relationship legislation to be included in the bill so as to protect the investment of the franchisee, because the post-sale relationship is at the heart of the problems in franchising today. We heard that yesterday. We also heard that franchisees do lose their life savings, they cannot afford to hire lawyers, and are terrified to speak and be heard. I also heard that franchise start-ups are not as successful as small business start-ups in general and that there are some 5,000 lawsuits a year in Ontario.

I also heard that the Pizza Pizza affair was the lightning rod that changed the franchise landscape forever in Ontario. Quite frankly, on a personal note, I'm sick and tired of the Pizza Pizza situation. No one can argue that it was a very unfortunate example of the franchise relationship having gone sour and what can happen when industry best practices do not occur. I feel this is an extreme case and that those who are against Bill 33 are using it as the failure standard and barometer against which to try and create legislation that will prevent it from happening again. Legislation cannot prevent fraudulent behaviour. You cannot force, through legislation, the promise of a 100% money-back guarantee and the need to protect totally the unsophisticated investor. There is risk in any business, whether it's franchised or not.

The answer partly lies in the following point: The CFA coined a phrase a few years ago, "Before you invest, investigate." This to me is the single most powerful piece of advice that any person should be given regarding starting their own business, again whether it's franchised or not. The use of a disclosure document absolutely speaks to this point.

Let me comment on the issue of pre-sale disclosure, duty of fair dealing and the post-sale relationship management. First off, mandatory disclosure required by law is a terrific way to ensure that the franchisee prospect gets meaningful information. This is a big step and will have the most impact on improving the quality of franchising in Ontario. Because of Bill 33, there is a civil right of action available by franchisees against franchisors for the misrepresentation of disclosure information. Don't you think this will serve as a disincentive and deterrent to those bad apple franchisors? The bill even has full accountability for those who sign the disclosure document. We heard yesterday from the president of the American Association of Franchisees that US legislation does not even provide such a remedy for violations of a FTC order.

Everyone is also aware that Ontario law now requires mediation prior to going to trial to settle civil disputes. This too is a terrific new development that can only help franchising in this province.

We also heard yesterday in the remarks of the Canadian Federation of Independent Business that their member research in February 1995 noted that 48% of respondents felt that franchise agreements are private business deals and governments should not have the right to interfere. Consultation with legal and other advisers prior to the signing of the franchise contract provides effective protection for the franchisee.

The Canadian Bar Association of Ontario has also confirmed their position against relationship standard legislation. They cite the reason of complexities of types of franchise offers, from the small investments like home services to the large real estate investments made by institutional players. No specific industry standard or definition can apply uniformly to this broad scope of franchise types. They also commented that the level of sophistication of franchisors and franchisees is widespread. What's best for the less sophisticated franchisee's prospects are education programs from franchisors, the government and trade associations such as the CFA and the CFIB. They need to be given financial and legal advice.

My experience in the Tim Hortons system is that our franchisee candidates today are more prepared than they have ever been. They come to interviews demonstrating an incredible amount of due diligence. In this day and age, unlike perhaps during the early 1980s, we do not see folks paying $10,000 on the spot at a trade show to secure a territory or franchise.

With respect to the duty of fair dealing issue, I think a major point has not been emphasized enough in the commentary so far. Bill 33 does address fair dealing. Fair dealing is a statutory requirement for the entire franchise process. Section 3 states clearly, "Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement." It is not limited only to the pre-sale disclosure stage, as some presenters tried to position yesterday.

I do not agree with other commentators that the definition of fair dealing must include the component of commercial reasonableness. This already exists in contract law and is adequately covered there. I too agree with the CBAO in thinking that increased litigation will result because of interpretation difficulties, thus increasing the burden on the judicial system.

Governments everywhere in this day and age are looking at streamlining and reducing red tape and bureaucracy. There must continue to be an incentive for those small, emerging franchisors who are going to generate jobs and create opportunities as they expand.

Back to statistics for a moment. The notion that there are 5,000 civil cases filed every year in Ontario has not been substantiated. The notion that franchising is 85% more successful than independent start-ups has not been substantiated either. I encourage the ministry to carry on with their discussions with the CFA and the sector working team on how best to obtain statistics. No one can, with any degree of confidence, discuss the extent of the franchising woes in Ontario, because data are not available. We cannot continue to rely on anecdotal evidence, and we surely cannot expect those who draft legislation to rely solely on this type of evidence either. It would not be fair to craft legislation to deal with a marketplace perception situation versus marketplace reality.

The Franchise Sector Working Team members are aware that a research methodology was being discussed in the spring of 1999, but was put on hold due to the calling of the summer election. In my opinion, it should be a priority of the ministry to deal with this critical issue of lack of data on the franchising sector.

I would also like to comment on two other areas of franchising that have been cast in a very negative light: the fact that franchise agreements are not written in plain language and are often 80 pages long. Some have said that they have to be this long so as to capture all the one-sided rules that franchisors must have. I agree that the language must be made simpler and more user-friendly. I also agree with the comment made yesterday that franchising should not be the major contributor to the retirement fund for lawyers. However, I take exception to the statement that franchise agreements are all one-sided and intentionally crafted that way.

One of the major, fundamental cornerstones of franchising in my experience has been the need for system-wide standards and consistent application of these standards. When franchisees sign up for the Tim Hortons system, they absolutely expect us, as their franchisor, to have a rule book that requires standards for quality, service, cleanliness and value. If and when a franchisee decides to behave out of the box and does not buy into the QSCV formula, they threaten the other franchisees' investments, they erode the value of the brand and jeopardize the relationship with the customer. Those critics who say that franchisors always put forward this argument to justify their heavy-handedness, quite frankly, in my opinion, do not understand this is a cornerstone of franchising.

Protecting the integrity of the brand is paramount in franchising. Franchisees enter into a long-term relationship with the franchisor for the purpose of accessing the brand and the ongoing support that the owners of the trademark provide. Part of this ongoing support is the national buying power that it can provide. Bulk buying is a positive element of franchising when managed well. In Tim Hortons, our franchisees clearly enjoy this benefit. Bill 33 will obligate franchisors to disclose how they treat their volume discounts and what policy they have in place to handle this area. This will be addressed in regulations. The same goes for ad fund treatment.

Let me conclude that, based on my experience in franchising, the best way to help increase the positive impact that franchising can have on Ontario commerce is to introduce Bill 33. Over the past 10 years, because of the efforts of the CFA, government agencies and educational institutions, the investing public is getting better at making the right franchise decision. Numerous franchise specialists and experts can be turned to for advice. The Internet, as we all know, is becoming an incredibly valuable tool to provide instant access to franchise company information.

At the risk of self-promotion, I wish that all franchisors, regardless of size and maturity, could embrace the same philosophy of franchising and demonstrate the respectful and franchisee-first attitude that Tim Hortons has shown over the years. We have been in business since 1964. Our founder and chairman has been awarded the Order of Canada. He was the 1999 Canadian entrepreneur of the year. He has been inducted into the Canadian Business Hall of Fame. We have four, soon to be five, Children's Foundation camps that send thousands of monetarily underprivileged kids to camp each year. Marketplace success and a family of dedicated franchise owners allows us to do this and be recognized for it.

We have copied other successful franchisors over the years. We have marketing managers in the field, as well as operations managers. They call on our franchisees for the purpose of helping them be more successful, following our national franchise standards. We have a national advisory board and a joint operations committee. They meet three times a year. We have regional chain-wide meetings in the spring and fall across the country. Our ad funds are audited each year by an independent third party. Our founder's philosophy has always been that "the franchisee's success will help make the franchisor successful." He has always said we will turn down a deal if it can't make the franchisee a buck in the long term.

We are not perfect; we do have disputes from time to time. We have asked franchisees to leave our system. But we go to incredible lengths to do everything in our power to deal with those challenging situations and to help operators operate their businesses in a more successful way. As a brand, we treasure the special place we occupy in the hearts of Canadian consumer—consumers who are incredibly loyal, I might add.

In conclusion, Bill 33 in its current form is all that the Ontario franchise community can embrace and implement at this time. Hopefully, we can also get organized to collect statistics to demonstrate that we are headed in the right direction for franchising.

I honestly feel that if we do not move forward with the bill at this time, we will have missed a great opportunity. The people of Ontario have given the government of the day the mandate to enhance the standard of living of its citizens by creating jobs and opportunities. Franchising is a proven vehicle for doing this.

I would be pleased to answer any questions the committee may have.

The Acting Chair: Thank you, Mr Javor. Two minutes each, and we'll start with the Liberal caucus.


Mrs Claudette Boyer (Ottawa-Vanier): I commend you for giving the good things in Bill 33. You say you support it. The disclosure is important as far as you're concerned, and fair dealing. Since you were at the hearings yesterday and heard about it, we were told by this American presenter that she thought it didn't have enough teeth and that it should go further, that it doesn't go far enough. You said when you were resuming your presentation that it was time the government did implement this. Do you think we should try, before implementing Bill 33, to go further? I know you did give a couple of things that we should add, but do you feel it is strong enough as it is now?

Mr Javor: I do. I feel that we have a window of opportunity to move forward with the bill in its current form. Again, I have been involved with this process for five years to get this far. I know how hard the FSWT has worked to try to balance the needs and wishes of all the stakeholders. It was not easy. It was a lot of hard work to get this far. Yes, there's always a better mousetrap somewhere and yes, you can always hold off on key decisions that can impact folks by waiting for the next best answer. I'm always a proponent, and I always have been, in my personal business life that you go with the 80-20 formula, that if you have 80% of what you need, that can perhaps get you down the road to where you want to go long-term. Then you should show leadership and move forward in that regard.

Mr Martin: I don't think there's anybody who's suggesting that there aren't good franchise systems around, and certainly Tim Hortons presents at this time as one of those good systems, for all the reasons you've laid on the table here today. What you have we want for all the systems, because when a system goes sour, as you suggest in the Pizza Pizza case, you're all painted with the same brush. That's unfortunate. It affects a good business relationship and ultimately probably affects the franchisee the most because they're the most exposed and vulnerable.

My concern is when good systems get sold, and that's happening. There's a trend today where the bigger guy eats up the smaller guy and the relationship changes. We had that experience here in Sault Ste Marie where Provigo bought out Loeb and wiped out two of our best corporate citizens overnight. They slept in their stores for two weeks to protect their interests. That's how difficult that was.

We've heard that 241 Pizza has just bought out Robins Donuts. What happens if tomorrow Pizza Pizza buys out Tim Hortons? Do you have anything in your agreement with your franchisees that protects them in that instance?

Mr Javor: That's a very good question, Mr Martin, because this is the day of mergers and acquisitions. This is the business strategy of a lot of folks. I would answer your question with perhaps a description of our franchisee relationship. I think successful franchisors and chains and brands get successful not by accident but because of the hard work and everybody's focused on a mutual goal. The mutual goal in our organization, and other franchisors who have been privileged to be as successful as us, is clear: to deliver customer service and realize that the way we get excellent customer service is by having franchisees who are committed to that. We have a strong culture of excellence and commitment. I think it would be very difficult for a new ownership group to come in and absolutely take away what's taken us 30 years to earn and to grow together with our franchisee ownership.

The fact that we involve our owners a lot in our business at the advisory board level and committee level that I mentioned earlier I guess is a testament to the strength of that commitment we have to ourselves in the marketplace, and that is bigger than the contract. It takes many years to change cultures at corporations. Those of us here who have been in private business over the years understand that. Truly, yes, the top of the house or the CEO and president help set the tone - that's well-documented research - but also when you have a strong commitment at the grassroots level in your community, where your franchisees are absolutely actively involved in supporting your community, because they know where they're bread is buttered. It's not downtown Toronto, it's all the communities where we have stores in our particular chain across the country.

I honestly think that when a merger and acquisition comes along the strength of the brand will come through based on these types of commitments and relationships.

Mr Gill: Thank you very much for your presentation. There has been a lot of discussion about local sourcing. Do you want to shed more light on that, local sourcing in terms of purchasing? I know you touched on that saying that it might not be economical. Can you shed some more light? Let me give you a scenario: Sometimes the distribution chains do build warehouses in different places where they pick up the merchandise locally and then they deliver it locally. Could a similar situation not fit into your systems?

Mr Javor: We have that. We have regional distribution centres across the country that are located strategically to deliver our branded product and items to our operators who have a contractual commitment to sell certain branded Tim Hortons items, obviously. We have proprietary flour mixes and baking mixes, that kind of thing. But we do allow local flexibility for items that, quite frankly - and I heard earlier presentations and I know the agenda today has a strong voice from the dairy group. It's important to our type of business that there be the ability to source that locally, quickly, in case of runouts. You can't wait for the truck to come three days later from Kingston or wherever the plant happens to be.

We have strategically looked at those items and products where it makes sense to have a flexibility locally, like dairies in our particular case, where we have the ability, through good planning, through good logistics management, through correct buying power, to have our key suppliers of record deliver to our distribution centres. Where we can handpick and then deliver the order as per our franchisee's request, we will do that, realizing that this is an economics-driven arena in terms of logistics management. But we also balance that with what will help the store operators run their business, because when you're out of 18% cream in our stores, customers get real upset.

Mr O'Toole: Just a quick one: You're well recognized at Tim Hortons, the branding name, and understand all of the vertical, top-down directions. It works, why not? I'm just wondering, as products change and people decide they like tea better than coffee - heaven forbid - how does Timothy's fit into this new marketing strategy? Is that owned by Tim Hortons?

Mr Javor: No.

Mr O'Toole: It isn't? I hope I'm not—

Mr Javor: If you want to start a rumour that Timothy's is for sale—it's separate ownership. It's a different category in the coffee arena, if you will, in terms of the gourmet players. They are two separate companies. They were clever enough to name themselves after us to a point.

The Acting Chair: Thank you very much, Mr Javor, for satisfying the curiosity of the parliamentary assistant.

Mr Javor: We will improve our decaf, I promise.

This document is a verbatim copy of this witness’ oral testimony. To review the original transcript:

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

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