Sault Ste. Marie Economic Development Corporation Public Hearing Testimony

This presentation alleges that a natural element of franchise agreements is to promote exclusivity for products and services. This creates a barrier to marketplace competition, sometimes denying market access to other fully qualified competitors

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Legislative Assembly of Ontario
March 7, 2000

Public Hearing Testimony
Sault Ste. Marie, Ontario, Canada
Mr. Duane Buchanan, Sault Ste. Marie Economic Development Corp.

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

SAULT STE. MARIE ECONOMIC DEVELOPMENT CORP.

The Acting Chair (Mr Ted Chudleigh): The next witness we have is the Sault Ste Marie Economic Development Corp, Duane Buchanan. Mr Buchanan, welcome to the committee. We have 20 minutes together, if you would like to make a presentation, and we will fill the remaining time with questions.

Mr Duane Buchanan: I'll be fairly brief, unlike my usual character.

The Acting Chair: That wouldn't make you a lawyer, would it, just to get that out of the way?

Mr Buchanan: No, it wouldn't make me a lawyer. I'm a director of the Sault Ste Marie Economic Development Corp, commonly referred to as the EDC, and I'm presenting here to this standing committee as a representative of that organization. As you will understand, the EDC has as its main objective the creation of new business and jobs for Sault Ste Marie.

The EDC is concerned that franchise agreements may be an underlying cause preventing locally produced products from having access to local markets through national grocery chains. When any local business is being disadvantaged or excluded from the local marketplace for whatever reason, the EDC is naturally concerned, particularly when these local firms have competitive, equivalent products, produced within the area by local people. This is particularly important where local producers are willing to expand their business locally, to produce value added products and to employ additional people in our community. The EDC is merely seeking equal opportunities or so-called level playing fields for them.

The circumstance of Lock City Dairies is used in this presentation because that story best illustrates the nature of the problem we want to describe. The EDC is not an advocate for any business over another business. Fair and equal access to markets for competitors and eliminating one competitor's ability to banish another from a market, as is occurring here and as you've heard a number of times today, is the objective.

I'm going to refer to the Competition Act in my presentation, recognizing that it is federal legislation and that it's not relevant to your consideration, but I believe it has an implication and I'll show that as I proceed.

The issue: This presentation alleges that a natural element of franchise agreements is to promote exclusivity for products and services. This creates a barrier to marketplace competition, sometimes denying market access to other fully qualified competitors. Bill 33, in dealing only with fairness between franchisor and franchisee and being silent on fairness to the public and to competitors, fails to deal with a systemic problem that these agreements cause.

This presentation uses as an example Lock City Dairies of Sault Ste Marie and its inability to access the market locally through national grocery chains. Its problem is by no means unique, as other presenters have informed and will inform you. What applies for Lock City Dairies applies to many other companies, many of which are not in the dairy business. Lock City Dairies has made a presentation to this standing committee, so many of the details of that situation have been presented.

The implications of franchise agreements are broad-based, extremely diverse in nature, as we've heard, and complex to resolve when one considers the many facets of franchising. However, ensuring that qualified producers have reasonable access to national grocery store supply systems does not seem to be complicated to achieve or unreasonable to expect. Qualified suppliers are those, of course, that would be able to provide required quality and volumes consistently over time at a reasonable price.

Lock City Dairies supports community activities, as does Beatrice Foods. The business is an ever-expanding enterprise, spending capital on buildings and equipment. Through growth, it employs additional local people. Even during recent construction of its plant, it employed local firms and about 200 people for several months. Local people, as in all communities, like to support their own businesses. It works both ways, the community supporting business and business supporting the community.

The EDC appreciates the fact that Beatrice Foods products are widely available and they are good quality, without any doubt. Beatrice has local distributors working as independent contractors to supply its products. It also sponsors local activities and it employs some local people. This presentation would not change that. It only argues for equal access by local producers to local shelf space, and particularly that local producers not be excluded from this space by foreign-owned national firms.

A difference between Beatrice Foods and Lock City Dairies is that Beatrice Foods purchased and closed dairy production in Sault Ste Marie and laid off all of its employees. It now supplies from facilities in other communities where people from those communities are now employed. It distributes its products here through local contractors. That's fair business practice and a choice that Beatrice Foods have made, the best business option for their situation, and it's their choice. Again, Beatrice Foods is an Italian-owned company with national distribution. On the other side, Lock City Dairies, however, is attempting to build a local dairy to process local milk and employ local people in the process. In effect, it is attempting to reverse the process that Beatrice Foods undertook, by building a dairy here. Lock City is owned locally and has strong ties to the community. It pays its taxes locally and spends its money here as well. Sault Ste Marie needs business that employs people and pays taxes.

All milk in Ontario, as you've heard before, is purchased from farmers by a central agency and sold to dairies for processing and packaging, each under its own brand name. Dairies or distributors market their own brand and offer their milk for sale under their own packaging. Each dairy must meet provincial quality, processing and product requirements. Currently in the Sault Ste Marie area, a milk farmers' co-operative collects milk and delivers it to Farquhar Dairies on Manitoulin Island, where it's processed and packaged for Lock City Dairies, which trucks it to the Soo for distribution and sale. This is a temporary situation. They hope to have their own dairy here if they are able to acquire sufficient volume.

In spite of the foregoing, no case should be made that Lock City Dairies should replace Beatrice Foods as the local supplier. That would not be in the spirit of fair competition. But Beatrice Foods should not be allowed to ban local dairy products from local shelves either. It's understood that agreements between Beatrice and national food chains effectively do that. In the interest of consumer choice, there should be a place for competition in this market.

Gaining access: National chain store managers locally are powerless to provide display space for locally produced products. This is a prerogative of their head office or perhaps a function of their franchise agreements, to decide what will be displayed and the amount of access that will be allowed. Mr Fremlin, president of Lock City Dairies, tells us that every attempt at contacting senior executives at A&P and Food Basics has been futile. None will answer letters, none will return phone calls, and none will participate in a meeting to resolve this issue. When he made his presentation, you'll notice in his document-I've reviewed the document, and in it there is his general presentation, but following that there's a letter to Mr James, a vice-president with Food Basics, which provides a chronology of all of the letter-writing and all of the activities and all the attempts at contacting people at Food Basics and A&P. In the end, it states that if there is any argument with the factual nature or this, would you please respond in writing prior to this date, and to my knowledge they have not responded to that. There are copies of letters following that document. That's the reference that I'd like to make.

It's understood also that with some national grocery stores one must pay fees to secure display space, perhaps more money for better space, but there is no known access to make these arrangements. Mr Fremlin has provided this committee with a record of fruitless attempts at making supply arrangements with A&P and Food Basics, as I've just mentioned. He has also supplied the committee with documentation of unanswered correspondence to Food Basics from our federal member of Parliament, members of the provincial Legislature and the mayor of Sault Ste Marie. A&P and Food Basics executives seemingly have no regard for federal and provincial members of Parliament or the mayor and have hereto declined to respond to them or to consider their requests.

Franchise agreements made between the national food distributors and their suppliers are secret and certainly unavailable to anyone outside the companies. I'm not suggesting there is anything wrong with that; it's just a fact of corporate life. So it's not known what the source of the problem experienced by Lock City Dairies really is based on, only that there seems to be no door on which to knock to participate in the game.

Legal aspects: The following excerpts from the Competition Act suggest that franchise agreements have the effect, when carried to a logical conclusion, of violating terms of the Competition Act.

Competition Act: "An act to provide for the general regulation of trade and commerce in respect of conspiracies, trade practices and mergers affecting competition." Sounds familiar.

"The purpose of this act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices."

These two articles strike at the heart of the problem, and it seems that producers should be filing a complaint under this act and they would likely be successful. In fact, MP for Sault Ste Marie, Carmen Provenzano, has filed a complaint on behalf of Lock City Dairies and a plan to undertake an investigation has been announced by the Competition Bureau approximately a week ago.

Again, I'd like to say this presentation alleges that a natural element of franchise agreements is to promote exclusivity for products and services, which creates a barrier to marketplace competition, sometimes denying market access to other fully qualified competitors. Bill 33, in dealing only with fairness between franchisor and franchisee, and being silent on fairness to the public and to competitors, fails to deal with a systemic problem that these agreements cause.

Recommendations:
(1) It follows that the Franchise Disclosure Act, which is intended to control and govern the relationship between franchisor and franchisee, is silent with respect to competitors and interests of the general public which are being harmed by the inevitable outcome of franchise agreements. Bill 33 must be active and consider the interests of customers and qualified competitors in a similar and as important a manner as franchisors and franchisees.

(2) With the creation of new franchise agreements, it's proposed that there be a requirement to file a declaration stating something to this effect: "The parties have read, understand and are in compliance with both the Competition Act and the Franchise Disclosure Act." It should be required that legal personnel drafting the agreement be a signatory as well. This would tend to avoid future systemic contraventions and fix blame for contraventions when they occur.

How they apply the act you can't legislate in this way, but at least this would require that they have a ground zero fair chance.

(3) Through Bill 33, require that franchise agreements which contravene either the Competition Act or the Franchise Disclosure Act be unenforceable in Ontario.

(4) The Competition Act guarantees that customers have the right to be offered alternatives where they are available and be allowed to make choices without interference. It's charged that there is interference in this process and that the Competition Act is likely being violated. Bill 33 is silent on these issues. It should dictate policy with regard to franchise agreements and should provide enforcement options.

That's my presentation.

Questions

The Acting Chair: That leaves us about two and a half minutes per caucus. We are starting this time with the Liberal caucus.

Mr Brown: I'm just looking at your recommendations. I think we are fully agreed on the problem and that it needs to be addressed.

Mr Buchanan: I don't pretend to be any sort of expert on this, but I've done a little research and intuitively that seems to be some sort of solution to the problem, or at least partially. Mr Brown: As a matter of fact, you agree with some of the earlier presentations that we've heard today in terms of how to make sure that the franchisee has an equal footing and is able to make some of these decisions and goes in with his eyes really wide open to the franchise agreement.

We had before us earlier a similar presentation in terms of having lawyers sign off on the agreement. You would be, I take it, in concurrence with what they're saying?

Mr Buchanan: I believe that they should interpret that and determine that it is in fact compliant with the law.

Mr Brown: The problem I have, not with this presentation but with the scope of it, is that we are dealing here with two animals. We are dealing with the franchise part of it. That's our scope and that's what we should be doing. We're also dealing with companies like A&P, which are not franchised operations as I understand it. Am I incorrect in that? They're directly managed by the-

Mr Buchanan: My information is that they keep using their agreement with Beatrice Foods, for example. Whenever Lock City Dairies tries to gain access, they say, "We have an agreement with Beatrice Foods which doesn't allow us to provide access for you." Whether that's formally a
franchise agreement, it certainly sounds like one to me.

The Acting Chair: That wouldn't be a franchise agreement.

Mr Buchanan: It wouldn't?

The Acting Chair: No, it would be a business arrangement. It's quite common in the food business.

Mr Brown: Anyway, that's a second problem. But I guess Food Basics is a franchise operation.

That's one place where we should be focusing. I commend you on your presentation. I think your recommendations are particularly helpful to the committee.

The Acting Chair: Mr Martin, two and a half minutes.

Mr Martin: You raised, again, what has become a bit of a sub-theme here today in terms of franchising and the impact that franchising arrangements can have on the economy in general. We heard just before you that, in fact, this whole piece of activity is rather even more invasive than I had thought when you consider that the folks from Timiskaming were sending their eggs to Iron Bridge to be graded. Once that grading station got closed down, then they had to send them south and back up again. It just gets more ludicrous as you hear the stories, in my view.

I think you make some excellent recommendations here, ones that we can take a look at very seriously. I just want to know: Did you look at section 5 of Bill 35 at all and the piece that I have in there which calls for franchisees to be free to source product where they can get it competitively as long as it doesn't break a trademark?

Mr Buchanan: I only had access to what was on the Internet, which was the basic bill. I didn't have access to anything else.

Mr Martin: In Bill 35, which is the bill that I have tabled three times now, there is, in part V, a piece that says that. Mr Brown perhaps made a statement that this somehow is set apart from the franchise relationship that we're dealing with. It's not. A franchisee's ability to source product where he can get it improves his potential to make a profit, so that everybody in the end is better served.

I'll try and get you a copy of Bill 35 so you can take a look at that provision, because it will do, certainly to some degree, what you're calling for here. You're right. There needs to be a serious look at this at the federal Competition Bureau level. I'm really happy that Carmen is-

Mr Buchanan: There is an investigation underway, I understand.

Mr Martin: Yes.

Mr Gill: Thank you for the presentation. I think that one of the things that came out loud and clear today is the local sourcing of the materials from two points of view. One is from the supplier's point of view-they want to make sure that they have access to the marketplace-as well as from the franchisee's point of view, because they want to have access to lower cost. One thing we should keep in mind-yesterday it came up in our meetings-is that the franchisor has an interest where they take the top portion of the money up front. The franchisee is more concerned about the bottom line. That came out loud and clear yesterday.

We tend to forget sometimes that the franchisor, in buying centrally or whatever methodology they use to buy these things, has some kind of a mechanism built in where they have kickbacks, whatever you want to call it. That is part of their profitability. If they were to lose that, don't forget that they will add into the original cost of the franchise. We might be defeating the purpose thinking that the local franchisee might be benefiting from local supply. Yes, they will be at a local level, but they might end up paying extra for the franchise operation because the franchisor is looking at their bottom line, so-called.

Mr Buchanan: I have heard a number of references to the fact that people buy their space. I don't know whether that's a private deal that individuals make or whether that's a corporate deal. We keep getting reference to that. For most people who want to get access, it's probably the least expensive way to gain access, if they can in fact gain access. Whether it's an above-board approach, I have no way of knowing.

Mr Gill: I was at some other meetings recently that had something to do with the CNE in Toronto. They are going to have only Coke products and are totally excluding Pepsi products. Those kinds of arrangements are being handled every day.

Of course we'll look at Mr Martin's proposal, part V of his Bill 35, and see if we can somehow open up the marketplace. I'm not sure what can be done, but we'll certainly look at that.

Mr O'Toole: I want to be brief here. I warn the Chair that I have two points I want to make.

We've heard about the supply-side issue. We understand that. It isn't exclusive to the agriculture sector. The supply-side issue may be anything from, "You buy your tickets from us," to "You buy your boxes from us," to "You get your stuff from us," that sort of issue. It's not just milk or eggs; it's
a whole Pandora's box.

Mr Buchanan: I understand that.

Mr O'Toole: I would say one thing, though, and I must get this on the record: I do appreciate your four recommendations. It's very important for us to have real information to work with. But if you look specifically at the Competition Act, which you refer to in three of them, there are two or three things that I would encourage those here, as well as Mr Martin, to look at. The Competition Act, of course, is federal and is to ensure there really is competition. There are clauses within that act, which I'm familiar with, that deal with trade practices. It's a legal kind of reference point, but it talks about abuse of dominant position, which is clearly the case here. You've got the big guy that runs the whole thing, called the franchisor-there's obviously an imbalance of power here-imposing certain kinds of what I would call unfair practices, which could get you into the reverse onus case that was talked about earlier.

With respect to those three recommendations, I would like us to take the responsibility of engaging Mr Manley, the federal minister, to look at the Competition Act, because it is up for review. It is no longer providing an appropriate marketplace in many areas for small business, which is important. I just want to acknowledge on the record that you are right on topic here.

The Acting Chair: Thank you very much, Mr Buchanan. We appreciate your coming in.

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#P538_195813

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


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Risks: Can't buy local producers' products, Ontario Public Hearings, Canada, 2000, Local suppliers with no shelf space, Must buy only through franchisor (tied buying), Tied contracting, Secret kickbacks and rebates, Tony Martin, Competition Bureau, Canada, 20000307 SSM Econ Dev

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