Bill Cameron Public Hearing Testimony

"If a franchisee is not prepared to expand or invest what we believe is necessary to secure our market share, they will be run over and discarded."…the outrageous listing fees charged by the wholesalers, which could equal $130,000 per stock-keeping unit…

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Legislative Assembly of Ontario
March 9, 2000

Public Hearing Testimony
London, Ontario, Canada
Mr. Bill Cameron & Mr. Bob Uhrig, grocers

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

CAMERON'S FOOD MARKET

The Vice-Chair (Mr Garfield Dunlop): Ladies and gentlemen, I'm pleased to call the meeting back to order. Our first presenter this afternoon is Cameron's Food Market. Mr Cameron, please feel free to start whenever you wish.

Mr Bill Cameron: Mr Chairman, honourable members of the committee, ladies and gentlemen, I would like to thank you for the opportunity to appear before you today to make this presentation regarding Bill 33, a most important and desperately needed piece of legislation.

With me today is Bob Uhrig, a Knechtel franchise store owner and co-chairman of Western Ontario Grocers Alliance. This presentation is not only about my personal experience but echoes the concerns that Western Ontario Grocers Alliance has with franchisor activity in Ontario today.

My name is Bill Cameron and, with my wife Diane, I own and operate an 18,000-square-foot franchised food market in Kincardine, a town on Lake Huron with a population of 6,000. We have owned and operated a Knechtel franchised food market for the past 16 years. We presently employ 17 full-time and 48 part-time employees. The business is operated as Cameron's Food Market, under the Knechtel banner, which is a franchise of Sobeys Capital Inc.

It is important to mention that today our business is very successful, even though we are competing against a larger National Grocers' Zehrs store, which is corporately owned and operated. Each year over the past four years, Cameron's Food Market has been awarded a Canadian Federation of Independent Grocers, CFIG, award of merit, which recognizes outstanding independent grocers in Canada.

I am also the secretary for Western Ontario Grocers Alliance, which is a registered, non-profit corporation created in July 1999 to represent the interests of 64 Knechtel franchise owners in Ontario. This alliance was formed by the Knechtel franchisees to collectively deal with some very restrictive agreements that were being arbitrarily imposed by Sobeys this past spring.

We believe this provincial government needs to be congratulated on their resolve to implement some form of legislative control over the manner in which franchisors carry on business with franchisees. This type of legislation is long overdue and will address some of the pre-sale abuses, especially in the area of pro formas and disclosure. For this government to recognize, through Bill 33, the right of the franchisee to associate and share information and ideas that are of common interest without fear of retaliation is extremely important to the members of Western Ontario Grocers Alliance.

At this time, I would like to relate to you a personal experience regarding my association with our present franchisor. In the beginning, our store was associated with Knechtel Wholesale, a family-owned business operating out of Kitchener. This association flourished, due largely to the common belief that honesty, integrity good principles and fair play were the rules that would ensure the success of both businesses-the retailer and the wholesaler. Our Knechtel franchise in Kincardine, as well as those is many other communities, operated successfully and harmoniously with Knechtel Wholesale, with nothing more than a handshake to consummate their business relationship. In 1993, Oshawa Foods bought Knechtel Wholesale, and it appeared at that time the expected rules of business that the Knechtel associates were accustomed to would, for the most part, be retained.

On April 1, 1996, we executed a business transaction with Oshawa Foods where we signed a trademark and franchise agreement and a sublease for the premises, with an initial term of 11 years, expiring in the year 2007. Also, in return for a substantial loan of $585,000, we signed a general security agreement and loan agreement: $415,000 was used to buy the remaining 25% ownership of the business, and the remaining $170,000 went to a major renovation of the business. Diane and I also signed personal guarantees for all the obligations of the store to our franchisor and to our bank. The term of our loan is 10 years. It would be retired in the year 2006.

The success of our business, due in part to the trusting relationship we had with our wholesaler, enabled us to purchase full ownership of the business. The total price paid was approximately $1.8 million, which was viewed as fair market value. When we first bought the business in 1988, and when we borrowed the money to finish that process in 1996, there was a well-understood but unwritten commitment by Oshawa Foods, and prior to that, Knechtel Wholesale, that they would not compete against their own retailers, who had invested large sums of money in their markets. As a result of this, the value of the stores was significant.

In December 1998, Sobeys purchased Oshawa Foods and in doing so became our franchisor. Sobeys obviously inherited all the agreements we signed and also our outstanding loan. I would also have thought they inherited Oshawa's business deals and the intent under which they had been agreed. However, this was not the case. In November 1999, we invested a further $100,000 in our business for new refrigeration counters. The installation and setup of these counters involved Sobeys's engineer and store support personnel.

On December l, three weeks after the installation was completed, Sobeys announced to us they had secured property within our community and they would be constructing a 35,000-square-foot supermarket under the IGA banner. They also informed us that this store would be a new entity into our market, and that it would not only compete with the existing Zehrs store but would also be a new competitor for our Knechtel franchise. Sobeys's rationale was that if they didn't do this project, our existing competitor would have done it, and they would have hurt us even worse than Sobeys was going to hurt us.

At a meeting with senior executives of Sobeys, I was assured that fair dealing would be the main ingredient in producing a win-win solution to our situation. Needless to say, their subsequent action of offering to buy our business for less than 50% of our initial purchase price did not demonstrate even an attempt at dealing in a fair manner. In the January-February edition of the Canadian Grocer magazine, it was reported that Sobeys's position on competing directly against their own franchisees is: "Sobeys says, in such an unlikely case, it would pay support to protect the independent business. If the business still suffered, Sobeys would buy the business." Obviously my question is, for what price?

These predatory actions of exploiting the weaker position of the franchisee happen only because there is a lack of legislated controls over the franchisor to respect and protect the franchisee's trading area from acts of encroachment. The potential of this encroachment has severe and direct financial costs to the franchisee by drastically impairing their ability to sell their franchise for fair market value.

In many cases, franchisees are left only with the option of having to consider a fire sale price offered from the franchisor. The value of independent retailer stores has declined significantly because of this current policy of the franchisor of expropriation without compensation. Their ridiculous offer to purchase our business is a testimonial to this policy.

Another alternative is for us to stay and try to compete. In our case, however, even the study performed by Sobeys's marketing department showed that our volume of sales would be so negatively impacted by the entry into the market of the new IGA store that we would be losing money if we continued to operate. Even today I struggle with Sobeys's lack of understanding of why we feel so betrayed.

How do I answer the following questions? How will we deal with our lease and loan obligation to our franchisor when we no longer can service them? What about the fair market value for the equity that we have worked so hard for over the years, and were led to believe by our previous franchisors would be realized when it was time to sell? How and why can a franchisor treat their franchisees in this manner without any outside scrutiny?

There are some who say that civil action is another option. However, not many franchisees enjoy the financial position to venture down this lengthy path. Taking on a large franchisor who has unlimited resources of money and legal ability is viewed by many as foolish. One has to remember that by the time the process of civil action is finalized, the encroachment has already happened and the damage has already been done. At this point, the likelihood that the franchisee is already experiencing financial distress or even bankruptcy, unable to present or continue a challenge, is highly probable.

The franchisor controls the cost of 95% of products purchased by the franchisee, and they control the retail price which the franchisee sells these products for. Ultimately, they control the franchisee's profitability. Independent retailers over the past year have seen a significant decline in their ability to turn a profit, while franchisors have continued to increase the cost of goods sold to them. As a result, the franchisee, with strict expense controls and good store operations, is left to depend only on the franchise program to deliver a marginal but controlled level of success to their business.

When put into a position where the franchisee is losing money under the franchisor's program, what the franchisor says they will do is inconstant with what they really do. They say that they will subsidize the franchisee, but they do this only after the franchisee's equity has been destroyed and they have become totally indebted to the franchisor. This new IGA franchise in Kincardine, according to Sobeys, will be subsidized many hundreds of thousands of dollars per year until the franchise becomes viable. This is done as a matter of policy. However, in our situation of this territory encroachment, no subsidy has been offered to ensure the continued success of our Knechtel franchise. This is a franchisor that is prepared to give preferential treatment and an unfair advantage to one franchisee over another in the same trading area.

When you consider the contents of this presentation, please view it as only the tip of the iceberg. Since Sobeys's acquisition of Oshawa Foods, they have initiated an aggressive corporate expansion policy even against their own retailers. I know of no less than three other Knechtel franchisees that could at this moment be sitting here and giving a similar account of events they are facing in their own communities today.

It is apparent that when a franchisor decides to become aggressive in expansion to maximize their penetration in the marketplace, even if encroachment is a necessary tactic to accomplish their goals and ensure their own success, fair dealing is expendable. As put to me by a senior executive of Sobeys at a recent meeting: "If a franchisee is not prepared to expand or invest what we believe is necessary to secure our market share, they will be run over and discarded." I believe this says it all, and confirms that franchisors have shown an intent on dealing in an unfair manner, and their behaviours are prime examples for the necessity of strengthening Bill 33.

If this process of eliminating the "in" on the word "independent" is allowed to continue, not only the future but the very existence of thousands of small producers across Ontario will be threatened. Because of the outrageous listing fees charged by the wholesalers, which could equal $130,000 per stock-keeping unit, they will be unable to afford to sell their products to the large major supermarket chains. Due to the restrictive agreements to which the franchisors are forcing their franchisees to adhere, the local independent retailers or franchisees will not be allowed to buy from these small producers on a direct basis, even if the costing is better than what is available through the franchisor. In the end, we will have an obstacle to fair competition, and when complete control over the retail market is realized by the major franchisors, who, by the way, are also the major corporate players, higher retail prices for the consumer are a certainty.

I am concerned that under the definition for "fair dealing," the tactics we are facing in Kincardine and other communities would qualify as a breach of Bill 33. If not, then the discretionary powers which are heavily weighted in favour of the franchisor through one-sided franchise agreements will continue to be abused. I and the Western Ontario Grocers Alliance prefer to see a clearer definition of what "fair dealing" really means, with the hope that a clearer definition would include a reference to scrutinize "trade area encroachment."

"Fair dealing" should impose within the act an enforceable legal obligation on wholesalers and franchisors, who are also competitors of independent retailers or franchisees, to act in a "commercially reasonable manner" where they exercise discretion that could affect franchisees adversely. The franchisors say they already do this and that it is only good business to treat the franchisee fairly; therefore, to amend this bill to define "fair dealing" to reflect the franchisors already admitted good treatment of the franchisee is only a modest request.

The Vice-Chair: You've just got a couple of minutes left.

Mr Cameron: If the existence of this law was in place today and addressed meaningful penalties for its breach, I would not be sitting here in front of you on the verge of losing my investment or, even worse, my business.

In conclusion, the franchisee or independent retailer has had no legislative protection; however, Bill 33 provides some and is a basis to build on in the future. We strongly believe it will send a clear message to the franchisor that fair dealing will be a major component in their business relationship with their franchisees. The passage of this legislation with a defined and enforceable "fair dealing" provision is long overdue, and we strongly recommend that this government of Ontario pass Bill 33 into law as quickly as possible.

Mr Chairman, honourable members of the committee, ladies and gentlemen, again we thank you for the opportunity of appearing before you and we look forward to answering any questions.

The Vice-Chair: We've got time for about one quick one. Has anybody got a fast question? Tony?

Mr Tony Martin: Yes. I don't want to in any way diminish the seriousness of your presentation. We've heard this story now several times over the last three or four days. I'm into this piece of work because of similar stories in my own community of Sault Ste Marie. There are three grocers no longer doing business in my community-wonderful corporate citizens, did the whole nine yard and they're out of business now. I believe there's a fuller inquiry called for here into this industry. It seems to me that having two entities control 80% of the distribution of product is problematic, at least in the grocery industry. Would you support such an inquiry?

We're dealing with this bill after first reading, so the scope for us is quite large compared to after second reading, where you have to stick to the principle of the bill and follow that through. We can make recommendations to the minister and the ministry on things we hear that will be helpful to us in the end in putting together a piece of legislation, or developing or crafting a piece of legislation, that would go the full distance. It seems to me there's more to be said, more to be found out and more information to be had around the circumstance of the food industry in Ontario at this particular point in time.

Mr Cameron: Yes, I would support it. However, the Competition Bureau ruled to have 80% of our food distribution controlled by two people. My problem is that at the present time I'm still a very viable and very successful retailer, but I'm on the verge of seeing that go away on me, seeing my investment destroyed on me by an aggressive and dominant wholesaler and franchisor. If this law had a definition for fair dealing, I would have something to be able to fight back with. At this point in time I have nothing other than civil action, and civil action is an extremely lengthy and expensive process.

The Vice-Chair: Thank you very much, Mr Cameron.

Mr Bob Uhrig: Could I have 10 seconds?

The Vice-Chair: Yes.

Mr Uhrig: On behalf of the Western Ontario Grocers Alliance, which was forced to become viable some time ago through our situations with Sobeys, I just wanted to quickly define the environment today. The minister has alluded to it here, that 80% of the distribution is in two people's hands. In the last six months we've seen a tremendous need for fair dealing, in today's environment when everything is controlled by the franchisor. In the changes, as an example, that Sobeys wanted to make with us, there was no fair dealing involved there at all. That's my point.

The Vice-Chair: We appreciate your time. Thank you.

Mr O'Toole: Just on a point of order, Mr Chair: Do they have a written submission?

The Vice-Chair: No, they don't.

Mr O'Toole: You read from a script. I would appreciate getting a copy of that script.

Mr Cameron: OK. I have an extra copy.

Mr Tony Martin: On a point of order, Mr Chair: This is the last day that we have together as a committee. We've been sitting and listening for four days now and we've heard some very valuable information shared. We've heard some very compelling stories, and I'm wondering, given that there was some hope that going to committee after first reading there would be some scope for us to recommend or suggest some things that could be done by ourselves or the ministry or others to help us bring forward for second reading a bill that reflected some of the discussion and the recommendations that we heard, at what point today-because I think we need to do it today-would you suggest that those of us who have some recommendations to bring forward and put on the table actually in fact do that?

The Vice-Chair: Let's see how the schedule goes here, because we've got time constraints with some other things here as well. That wasn't part of the agenda today.

Mr Tony Martin: Although we did, I think when we spoke at subcommittee, suggest that there might be some time at the end of today to talk about where we go from here. There was a suggestion, for example, that we might want another day of hearings when the House comes back.

The Vice-Chair: We could take a couple of minutes at the end, though, and look that over.

Mr Tony Martin: Yes. We've heard some very serious concerns raised, and in the interests of time, for us not to deal with that or at least reflect an interest in dealing with that I think would be unfair. For us not to honour the effort that was made by so many of the presenters, some of them at great risk to themselves to come here by taking time to do that, I think would be a shame.

The Vice-Chair: I don't think it necessarily has to be done today, though. If it's something that's going to take two or three hours today, that's probably not in our agenda.

Mr Tony Martin: I don't think it will take two or three hours, with all respect, Mr Chair. But it seems to me if it's not done today, we don't meet again until the House comes back. Right now it's scheduled to come back on April 3. There will be a lot of things happening when we come back, and when we will get to this—

The Vice-Chair: Let's just get on with the meeting, and we'll see what happens as the rest of the meeting goes on.

Mr Tony Martin: So you're telling me that we're going to try to find some time at the end of today to do it?

The Vice-Chair: Depending on how the schedule goes. I'm trying to keep the meeting to a schedule, as the agenda says.

Mr Tony Martin: We've had a number of people not show up today, so we should have some room, it seems to me, to do this. I become very concerned when I feel like—

The Vice-Chair: Yes, we understand your concerns; you've mentioned them all day.

Mr Tony Martin: I'm concerned that you may not be interested in presiding over a process where we might have a chance to, even ever so briefly, put on the table some of our recommendations at this early stage.

The Vice-Chair: Well, jot your recommendations down, and towards the end of the meeting we'll see how much time we have.

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=2000-03-09&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19723#P454_145327

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


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Risks: Ontario Public Hearings, Canada, 2000, Bad faith and unfair dealings, Expropriation without compensation, Encroachment (too many outlets in area), Corporate stores competing with franchisees, Justice only for the rich, Must buy only through franchisor (tied buying), Preferential treatment, False earnings claims, Personal assets pledged to cover business, Franchisor controls retail prices, Debt used to control debtor, Different deals for different dealers, Listing fees and inside money, Competition Bureau, Competition rulings, Tony Martin, Canada, 20000309 Bill Cameron

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