Kelly Welch Public Hearing Testimony

This legislation allows franchisees to associate with each other and exchange information. It's really funny: around 1991 a group of four IGA dealers attempted to form an association. Within two to three years, none of them was in the business any more.

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Legislative Assembly of Ontario
March 8, 2004

Public Hearing Testimony
Ottawa, Ontario, Canada
Mr. Kelly Welch, IGA franchisee

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

KELLY WELCH

The Vice-Chair: I now call on Mr Kelly Welch for our final presentation of the morning. Mr Welch, the floor is yours for the next 20 minutes if you wish.

Mr Kelly Welch: Mr Chair, honourable members, ladies and gentlemen, my name is Kelly Welch. I and my wife operate a small IGA in Marmora, Ontario. Marmora is a small town of about 1,600 people situated north of Belleville and east of Peterborough on Highway 7. My family has operated this business for 29 years. I'm a second-generation grocer. We are one of the three largest employers in our town. We employ about 40 people. Our business does about $5.5 million a year in sales.

We are currently dealing with Sobeys. Previously we dealt with the Oshawa Group. I don't know how familiar you are with what's going on here, but currently we are renegotiating our franchise agreement, which we signed back in 1980. The gentleman who was before me, who said that he wasn't sure what would happen if he got into that situation, would have his eyes opened very wide if he went through that process now. I'm one of 30 stores out of 140 that have refused to sign the agreement. I feel very strongly that the agreement that has been proposed to us is slanted very heavily in their favour.

As a family business, we're very active in our community. We spend a lot of money and resources supporting our community. If there's a hockey team or a ball team or any kind of sport, we're there supporting it with money. Personally, I coach hockey. My wife is involved on the library board, committees of council, volunteer firemen. We feel very strongly that without this commitment to our community, our business will not grow and it won't be successful.

Over the past number of years, starting probably around 1990, we started to notice a change in the way our franchisor dealt with us. It was very subtle, but it was definitely a change. Our ability to support our business and our community started to deteriorate. The reason was that our franchisor was starting to take advantage of their very powerful position within our marketplace. At that time there were actually three wholesalers or franchisors that we could deal with. There was National, Oshawa Foods, at that time, and Lumsden. Currently there are only two. If we don't like what's going on at Sobeys, as an independent grocer I have absolutely nowhere else to go. They are very aware of that.

In this month's Canadian Grocer there is an article on the franchise agreement and it says that the problem is almost over, there are only 30 stores left, and Doug Stewart, president of the Empire Corporation, states that if you don't want to buy through Sobeys, you shouldn't be in IGA. Well, if I had an option, I'd certainly be considering it. But right now, as an independent grocer in our market, Sobeys and National are controlling a huge portion of the market and aren't really interested in dealing with independent grocers.

Our relationship with our franchisor has deteriorated because they have not honoured their obligations under our current franchise agreement, the old one we're staying with. In addition, currently they're attempting to increase their power over us with new agreements that do not reflect the nature of our ongoing business and ignore some of the basic business etiquette that requires them to deal with us fairly as a business partner.

I'm really pleased, and actually excited, about this legislation that's coming forth. It couldn't be more timely. I've read the bill. I'm a member of the Canadian Independent Grocers Alliance, Sobeys stores that have grouped together. We have talked about this legislation with our lawyers and what's in it today will really help soften some of the imbalances that exist today in our marketplace.

This legislation allows franchisees to associate with each other and exchange information. It's really funny: around 1991 a group of four IGA dealers attempted to form an association. Within two to three years, none of them was in the business any more. So although maybe no store was ever prosecuted or put under the gun, it was handled very subtly and very quickly.

The legislation also requires franchisors to produce information and pro formas that have some meaning and substance. It's a wonderful thing. It's hard to make a decision with information that isn't accurate and substantial, and I really applaud the efforts and I'm quite excited about it.

One thing that I am concerned about is the fair dealings, as some of the speakers I've heard this morning have brought forth. I'm not a lawyer, but through my view of things the current bill doesn't define the term "fair dealings." There's no definition given with regard to its meaning or its intent. Accordingly, there are no consequences stated for those who overstep those bounds or don't honour their obligation. I'm concerned that this statement, without proper definitions or consequences, will have no legal meaning and will not really help deal with the day-to-day problems that you run into that are interpreted within the franchise agreement. I'd like to give you quickly a few examples of some of the things we've run into over the years.

Fidelity programs: Fidelity programs require us to buy a certain percentage of our purchases from the franchise or warehouse, or we will be penalized. Currently, my old agreement requires us to purchase 100% of our products through the house. The proposed new agreement offered to us by Sobeys increases our costs on a sliding scale, depending on what your fidelity is, ranging from about 80% or 85% up to 95%. This is beneficial to the franchisor simply because they can force manufacturers and producers to pay listing fees and other inside monies. It forces everything through the house and gives us very little control outside the house. If you would like some information on that, the standing committee on industry-I think it's Dan McTeague-has produced a report and there are some real insights in that paper on the operations of our business, on inside monies.

This type of system for me, though, a small-town grocer, ignores the obvious benefits of dealing locally. We have a local small dairy and there are people in our community who work at it. I can't support that dairy because I'd get put into a situation where I'm disadvantaged price-wise. The same with eggs. We have a local producer of eggs. There're nothing more I'd like to do than deal with them and we can't. Fidelity programs put my business at a competitive disadvantage if I support my community. It goes as far as equipment-to everything. It covers everything in our agreement.

Disclosure and pricing: A portion of our business comes from what we call direct shipments. Typical products that come direct would be milk, pop and chips, probably the three largest. Sobeys or wholesalers, whatever, restrict manufacturers from dealing directly with us on pricing of these products. We actually order through the manufacturer or producer and they deliver it to us. Our franchisor never touches the product. My cost on a bag of milk is $3.48. Rumours on the street and from talking to my associates-and nobody will ever come forward because of fear of repercussions-are that the Sobeys cost of that same bag of milk which they never touch is somewhere around $3.10. That means that if I'm competing against a corporate store, a YIG or a No Frills, they're making money inside the house. I can't; my cost is that much higher.

Other issues are volume rebates and co-op money. My current franchise agreement requires my franchisor to pass on all volume rebates and co-op monies in the form of reduced product costs. Over time, it's amazing the change in the definitions of what volume rebates and co-op monies are. We've got published co-op. There's just a whole array and what we were getting previously has been slowly chipped away at. The problem with this is that there's no way for me to audit their books to see if the monies that are owed to me are coming. There's no disclosure, yet they can come in and audit my books completely to make sure I'm being true to the program or keeping my fidelity rate current, which to me just doesn't seem fair.

Subsidies: Stores in similar competitive markets are being subsidized at different rates. We have situations where the profits from our programs are used to subsidize some stores but not others. If a traditional dealer, like we are, one that owns your property, business etc, suffers a loss, we suffer a loss. If I lose $100,000, it comes out of our pocket, out of our business. There are situations where non-traditional dealers or the new franchise dealers who make an investment into the business, as we say-and this may be a little terse, but they buy themselves a job-if they run at a loss, it's washed out. It just comes back to zero and we start over again. So it makes it very difficult for us to compete and to keep our money or to compete with other dealers and other franchise sort of dealers.

Those are some of the things that we've run into, conflicts that come up over and over again. That's why I think Bill 33 should make some sort of definition of what is meant by fair dealings, that the disclosure clause should include products and prices and all that kind of thing. It's good for us. It's fair. It's what the franchisors say they're doing anyway, and it would help me in my situation keep more money locally, where it should be spent anyway, because these are my customers, and keep it out of that large corporate bank account.

Thank you very much for letting me have my say. If there are any questions, I'll try to answer them.

The Vice-Chair: Thank you very much. Probably we'll have questions for sure. The Liberal caucus.

Questions

Mr Patten: Could you elaborate on the four stores that slowly went out of business? What really went on, in your view?

Mr Welch: This was when we were with Oshawa Foods. Again, a lot of this is speculation, but it's very interesting. At that time we were not fighting but there were many, many questions about these direct shipments, this inside money that was supposed to be being passed on in the form of volume rebates and that sort of thing. Four stores got together and decided we wanted to form a dealers' association, in which we were all to put in I believe it was $500 and have an association that would deal with some of these issues that were over and above. A lot of different personalities in the stores, blah, blah, and it had a little trouble getting going, but it did start. But over time, about a two- to two-and-a-half year period, these four dealers disappeared. I believe at that time a new president came in and spoke some truth and it kind of settled back down.

What I'm trying to speak to here is the thing of being able to associate. Although they say they allow it, sometimes, in my mind at least, it gets handled in a very subtle way, and it's nice to have this legislation that gives us that right.

Mr Patten: I thought your comment on not being able to support your own community was a very powerful statement.

Mr Welch: We feel, as family and a business, really strongly about that. We go to extra lengths. Our business will only grow with our community. Also, just on the other side, I live in that community, my children grow up in that community, and we need to be there. It's hard, if the monies aren't available for us to invest. If I want to renovate my store or whatever, we use all local, and that type of thing, and that's what that's about.

The Vice-Chair: Tony, from the NDP caucus.

Mr Martin: Thanks for coming. We've all heard stories in the grocery industry. Many of us remember the Loeb situation of the mid-1990s where Provigo came in and between 20 and 30 franchisees-these small business people in my community, just first-class corporate citizens—were gone. We're not going to hear from them because they signed confidentiality clauses, so we don't know the story. So it's good that you're here today telling us your story.

Yesterday, we had in Sault Ste Marie about six local producers, mostly agricultural, such as dairy and beef, and they talked to us about the challenges that they're facing. It's killing our local economy.

Mr Welch: It's certainly hampering the small independent businessperson, that's for sure. No question.

Mr Martin: I hear you asking here for something in the legislation that defines and gives you some protection as far as the ongoing relationship is concerned. We've heard that over and over again, particularly where we've heard individual stories, that there needs to be something in the legislation that speaks to the ongoing relationship and regulating that so it's fair. At least you'd have, if nothing else, a table you could go to, some kind of an arbitration process where it doesn't cost you an arm and a leg for lawyers and doesn't get you into the courts, because that's not where you want to be and you want to work this out.

I sense some resistance to that. I would ask the members of the governments to think about it and consider it, with all due respect. Maybe you could comment?

Mr Welch: My only concern with an arbitrator and mediation is typically what happens—and understand, I don't know a lot about this, but when I perceive it-the arbitrators and the mediators are probably dealing with the large franchisor on a more regular basis than they would be with us. It's very hard for a small-town grocer like myself or like anybody to come and make a presentation in front of an arbitrator who probably has dealt with a lawyer from that company on three or four occasions, and you really have trouble trusting that. Maybe that's not a reality. I don't know.

You asked me-there seems to be a bit of hesitation. When they start talking about mediation and arbitration and whoever the chair happens to be or the arbitrator, I would want to make they were a third person who really had no relationship. That would be my personal concern.

Mr Martin: That's what I'm suggesting, a third party. Thank you very much.

The Vice-Chair: Steve, any questions?

Mr Gilchrist: Thank you for coming in. I hope it's not a conflict of interest that I've actually shopped in your store.

I do appreciate the local perspective you bring to this. Coming from a Canadian Tire background, I share some of your perspective on how things evolved over time because, as good as that franchise was and is, there was certainly a change in the decades that I was there between completely trusting-everything done with a handshake-to something far more disciplined. Maybe that's necessary with the onslaught of American retailers and what have you, but I think something has been lost in the relationship.

With the greatest respect to Tony, I'm a firm believer in giving people all the tools up front before they make a decision, truly believing that that would resolve an awful lot of the problems. You talked about pricing. You talked about access. If all of those details were known to a prospective IGA dealer today, do you think that would solve a lot of the problems, of the kind that are reported in the press, and the kind from that gentleman you may have heard earlier this morning from Country Style Donuts, if you know you have a limited range and if you know the volume rebates are going somewhere else?

Mr Welch: Yes. Any information helps. It also has to be not just at the beginning. In our situation, it's an ongoing thing. If a new merchandising program is introduced-an example we had was signage a few years ago; they wanted us to re-sign our stores and it was a very expensive package, ranging anywhere from $10,000 to $30,000. A year and a half, two years later, "Oh, we've changed packages."

We had the same with our computing system: "This is going to be our platform for the future." I invested in that. Just in hardware, it was over $20,000. I didn't have to change my tills. We actually tested it at our stores. At the time, I wasn't thinking; it was supposed to come already tested and working. I probably spent, with man-hours etc, double that. It never came through on what was promised, and we've got a different system now. Those kinds of things are hard to handle. I think at the time they actually believed they were doing what was in the best interest, but you get a change of regime, and all of a sudden everything changes, and we bear the expense of that.

Sobeys and Oshawa Foods have been very good to us in the past. Don't misunderstand me. We've been very successful. My fear is what's coming and what's happening now. Most of the changes occurred for us around the end of Ray Wolfe's era. He was sort of the beginning of it. That's when you started to get into presidents who weren't family. Now we're into a corporation-style environment and we have no protection from that.

Mr Gilchrist: What sort of volume would it take to justify setting up a third wholesaler again, if those 30 of you who have said no-

Mr Welch: To hit critical mass, you would probably need around $1 billion sales.

Mr Gilchrist: Outside of your 30, looking at all the others that are similarly constrained right now-I'm just curious to know why the marketplace hasn't sorted that out, or even within subcategories.

Mr Welch: The problem is that you have two wholesalers, actually vertically integrated retailers-they're not even wholesalers; there are no wholesalers any more-who control such a huge percentage of our market that even if somebody else came in, and I don't know who that would be, but they'd have to have a ton of capital behind them; they would probably get purchased if they were allowed to, and then to amass that many stores. Although there are 30 stores that haven't signed, there are probably only eight that could give their 30 days' notice and move. We can do that. My biggest fear is that they're going to give me my 30 days' notice. I have nowhere to go. That's why a number of these are probably done in quiet. I can't do that. I have to sign my name to newspaper articles.

Mr Gilchrist: Thanks again, Kelly. I appreciate it.

The Vice-Chair: Thank you very much, Kelly, for your presentation. It's a pleasure to have you here this morning. I'd like to thank the committee for the good work this morning. We'll adjourn now.

Mr Martin: I might suggest this just for some thought for Mr Gilchrist, Mr Gill and all of us. More and more the issue of competition comes in here; right now we've just heard of two big grocery giants who control. This might be worth considering, and I don't know how you do this. This is the first time we've gone to public hearings after first reading of a bill, and I don't know whether this fits or not, but we might want to, at some point, make application to appear before the federal Competition Bureau to ask them questions or to lay on the table some of what we've heard. I would suggest that we think about that and find a way to see if that isn't something that would be helpful to us all in this, because the two things are sort of integrated, it seems, or have some connection.

The Vice-Chair: We can't let the gas-busters look after that for us, can't we?

Mr Gilchrist: Tony has raised an interesting point there. There wouldn't be one consumer in 100,000 who knows that the evolution of the grocery business out there, the concern that's out there right now, because the media has decided it's finally fashionable to talk about it. So all of a sudden it becomes an issue. But we still have four major gasoline refiners and distributors.

If we're down to two food distributors, something that is indispensable-I mean, you don't have to have a car and buy gas, but you do have to eat-why has there been no federal inquiry on that? Why did the Competition Bureau allow that restraint of trade to take place-all very quietly, to be sure? But when Lumsden disappeared, that was the last of the independent, non-vertically integrated wholesales that was gobbled up.

Tony, at the end of all of this, depending on the conclusions we come to, one of the things this committee might very well be advised to do is to make either a formal representation or to seek standing before that committee and compel them to answer some of the questions we come up with. I appreciate your raising it.

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=2000-03-08&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19724#P261_101537

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


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Risks: Ontario Public Hearings, Canada, 2000, Competition Bureau, Must buy only through franchisor (tied buying), Tied contracting, Gouging on rent and equipment, Gouging on supplies, Listing fees and inside money, Oligopoly: operates essentially the same as a monopoly, Local suppliers with no shelf space, Retaliation, Right to associate and right to harass, Arbitration, Tony Martin, Different deals for different dealers, Mediation, Competition Bureau, Big Grocery, Canada, 20000308 Kelly Welch

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