Alan MacPhee, PEI Public Hearing Testimony

The gentlemen from the Canadian Franchise Association would lead you to believe that disclosure is a franchisee’s salvation, that a dissatisfied franchisee is a dim and poor negotiator…We read them. We get a lawyer. We may get a lawyer to review it. We think we understand it and we sign it. But I ask you, do you really understand the fine print?

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Legislative Assembly of Prince Edward Island
October 25, 2001

Public Hearings on draft franchise legislation
Charlottetown, PEI, Canada
Alan MacPhee, franchisee

Standing Committee on Community Affairs & Economic Development
Session 2/61

ALAN MacPHEE

BETH MacKENZIE (PC) CHAIR: We’ll call on Alan MacPhee. Good morning. I’d like to welcome you here this morning, and 45 minutes has been allotted. Following your presentation, I hope you would entertain questions. Please proceed.

ALAN MacPHEE: I most certainly will. Thank you, Madam Chairman, Honourable Minister Murphy, Honour Minister MacAleer, Wilfred Arsenault. I’m a little more nervous than I thought I would be.

BETH MacKENZIE (PC) CHAIR: Were a tough bunch.

ALAN MacPHEE: The tough bunch is behind me, I’m afraid. Thank you for the opportunity and the honour of presenting to you today. I’m truly delighted to be here. We’ve been working on this for three years. Just as an exercise in democracy. Father Moses Coady, who was famous with the Coady Institute at St. F.X. where I graduated, was famous for his quote of saying that “democracy is not a spectator sport, you have to get in the field of play.” That’s what this exercise is all about today, and I must say it’s an honour to be part of that process.

My name is Alan MacPhee. I’m a grocer’s son from Souris. Currently, our family operates three franchises, three franchise operations, an IGA store, a Home Hardware store and a Pharmasave store. We are currently; we currently employ over 90 full time people, which makes us the largest year-round employer in Eastern Kings. We’ve been successful due to our hard work, our diligence and great staff. But recently, our very existence has been threatened by the predatory unbridled aggression of our grocery franchisor.

A look at the Canadian franchise landscape leads us to conclude that without passage of this draft legislation before you, and without its passage by year’s end, our company could join the rank of PEI companies in their last phase. This is our situation. It is real. Our existence as a business is not threatened by market conditions, our business ability, our infrastructure, work ethic or financial management. Our existence is threatened by our franchisor’s cannibalization of its franchisees for purpose of corporate control and greed. Today in this Island, we must decide if we’d lead the way in Canada with the recommendation for the passage of a law based on fairness, reason and equality or shall we decide that it is acceptable for an Islander, a company or a community to knowingly fall for the want of such a law.

My story really starts in 1944. My grandparents opened their own grocery store in a rented shop. They had earned their apprenticeship. My grandmother was a graduate of Business College that was here in Charlottetown for women at the time. My grandfather grew up in the north side, in Big Pond. He only spoke Gaelic until the age of six. There was no English at that part of the Island at those times and he moved to Souris where he learned English at that part of the Island at those times and he moved to Souris where he learned English as a boy. My grandmother moved from St. Mary’s Road to Souris to work in her uncle’s store, JJ Hughes & Co. My grandfather was employed there.

Eventually, I guess, they found some agreement behind the service counter and were married, and worked there for about 20 years until the company was sold. And it was upon the sale of this company in the final years of the Second World War that JP MacPhee Co. was started. They opened a grocery store and a lunch counter. At that time, the groceries were served from behind the counter in bulk and they would wrap them. I brought a ledger here today to show you that our customers paid for their groceries with salt fish and cod and potatoes and labour. Our light bill in 1944, which was the utility run by the town of Souris, Maritime Electric wasn’t in place, was $1.74 for the month of November.

Certainly, this sleigh I’ve brought today which was resurrected by my brother and he had this painting done as a gift for my father, this sleigh was used by my father to go to the train station that delivered to the wholesale community that existed in Charlottetown, taken to the store, and from there if they did deliveries in Souris. We’re only one generation removed from this. After 56 years, it’s still the only job my father’s ever had. He continues to work in the store, 60 hours a week and he loves what he does.

We worked in this rented store until about 1960. My father, at the age of 29, after the death of his own father and with four of his seven children born, opened a modern at that time, a 2,000 square foot store. The big difference was it was self-serve. You could take a basket and pick up your own goods, and in that store, they had the first refrigerated case for groceries in Souris. My grandmother worked in the store until the age of 87 when she retired in 1977. But times have changed. There used to be locks and blocks of wholesalers on Water Street in Charlottetown here. With the amalgamation and consolidation of industry, the wholesalers were gobbled up or closed up by the effect of national chains entering our market. And this era ended with the Clover Farm/DeBlois sale to Sobeys in the 80’s. We were a Clover Farm store served by DeBlois for over 20 years.

In 1979, we built a new commercial development that today has grown to become the Main Street mall in Souris. In 1979, at this point, with a 10,000 square foot store, we signed our first franchise agreement. This was with the Oshawa group from Ontario. They operated the IGA franchise in Canada and that’s the Independent Grocers Association. As you all remember, the IGA store that was at the Towers Mall here, they had a huge advertising campaign. I didn’t bring the ads today but I have saved them, independent, independent, independent and what independent meant to this marketplace and they had the IGA independent sign on the side of the store. And where is it two years later? It’s a Superstore. So it wasn’t as independent. That’s the same dynamic we’re caught in with this organization.

You will hear some of these gentlemen behind me ask us why we signed a franchise agreement. They’ll say, you know, you’re quite capable of sitting down and making a decision. Why sign it? And if you don’t like it, don’t sign it. Well as you can see, it was an evolution. We were in the business before franchising existed. The store was, and continues to be, the family farm. It’s how three generations of our family has earned our living. We were not two Toronto businessmen sitting down for lunch, discussing the niceties of an agreement.

The gentlemen from the Canadian Franchise Association would lead you to believe that disclosure is a franchisee’s salvation, that a dissatisfied franchisee is a dim and poor negotiator. Please keep in mind, that a franchise agreement by law is standard form, as a franchisor cannot have different agreements within his own system. It’s not negotiable. It’s the bank for a mortgage for our house. We read them. We get a lawyer. We may get a lawyer to review it. We think we understand it and we sign it. But I ask you; do you really understand the fine print? Do you really understand the back page in the mortgage you’ve done for your house? But in most cases, you don’t. But you know, you sign it anyway because it looks pretty good for the most part and you have to enter business in life with a little bit of trust and goodwill. And that’s what happens in the franchising world.

We, in Souris, were subject to the greater developments of the mainland, and keep in mind, that at the time we signed this franchise agreement, there was no bridge to the mainland. There was no fixed link. There was barely a computer around in business. So I mean, these are huge forces and dynamics that affected Prince Edward Island. We almost had our own world here for a number of years, but those times have changed and changed fast and you can see it in the scale and the scope and the speed of development that’s happening in Prince Edward Island.

We are not afraid of progress. My father always has been one to say, push forward and stay modern. He doesn’t like the old days. In our agreement, we were protected by a 30-day termination notice. If we didn’t like the agreement or things weren’t right, the franchisor could leave us in 30 days or we could leave them in 30 days. We were successful and satisfied IGA franchisees for 20 years, then our world changed in a hurry. In the 90’s business and industry was marked by incredible growth, amalgamation and consolidation, and this occurred in all sectors in all industries and business in North America. In order to keep up with the time, the Oshawa group and the Wolfe family who controlled the shares made a verbal commitment to modernize stores and compete in the long term. With this in mind, many IGA dealers built new stores and signed long term buying agreements.

We signed a two-year, we signed a long term buying agreement, a letter of intent and agreed to build a new store. In mid-construction of our new 16,000 square foot grocery store, and two weeks after we signed the letter of intent, the Wolfe family sold their dealers down the river. They sold their company to Sobeys nationally, and the Atlantic division with the trademark rights for IGA to Loblaws in Atlantic Canada.

So in response to these gentlemen from Toronto who asked me, why sign? I didn’t. My agreement was sold down the river like an event that would happen in the Dark Ages. We find ourselves in the market with two giants, neither friendly to franchisees as is evidence by the report I’m submitting called, Why Franchise Law?

This includes testimony from the Ontario franchise hearings of grocers who experienced Sobeys and Loblaws and Provigo franchise experience. Our franchise was sold and there’s no third wholesaler in the market for whom we can rely on for supply.

Incidentally, the sale of the IGA in the Maritimes to Loblaws was opposed by the Canadian Federation of Independent Grocers and it was opposed by ourselves to the Competition Bureau of Canada, the Federal Competition Bureau on the basis that it limits competition. In my view, conspiracy to limit competition did occur. It is a contravention of the laws of Canada, but not enforced by the ineptness of the Competition Bureau of Canada.

When I say inept, I tabled the following information for you. It’s included in my report. An article detailing the recent report from the organization of export development countries which has over 70 member nations, this report recommends the Competition Bureau be completely re-examined as it is plagued by inconsistent policy, hampered by national monopolies and having a reputation for no independence.

The Competition Bureau is the organization that ruled in the Irving Propane purchase that 100 per cent of a market is not too much of a market to limit competition. I’ve included that article as well. I also table a business card with the phone number for Dan McTeague, he’s a liberal MP from Ontario and Mr. McTeague headed an effort by the federal government to reform the Competition Bureau and that effort ran into the last election and kind of went into a stall afterwards. I also include a source reference from the United States Senate Committee on small business detailing corruption in the grocery industry.

My point is, I’m not a whine bag from Souris. This stuff is well documented right across the country and it’s real. I find ourselves and our company unwillingly in a situation that federal legislation, in my view, does not permit what was allowed. The relationship we had with our new franchisor has been very stormy. They have a reputation for being the best in the grocery industry in this country and they are. They are excellent at what they do. They are a true Canadian growth story. They are a true Canadian success story in terms of how they’ve tackled the market and modernized the industry and nobody does it better than these guys. My hat’s off to them and we’d love to be part of their organization from that standpoint.

But they also have a reputation for being the toughest in the business, and they are. We have been offered $6 per square foot as rent for our building when such a rate wouldn’t cover our mortgage payments. We have been offered one loonie in goodwill value for our business. This loonie wouldn’t buy my father a cup of coffee after working 50 years for Saturdays. Over 50 years. At the same time, they pay eight times cash flow in the United States for an acquisition. We’ve been told there’s no profit to be had in the grocery business while their own profits is reported on their financial statements made available fro the TSE is a stock company, shows their profit as five per cent of the bottom line which is over twice the grocery industry norm.

Our operational support has been sparse despite us paying over $200,000 per year in franchise fees. I’ll take you back to this spring when we moved from our old store to our new store, we were promised a merchandise team to move our inventory from our old store to our new store. Three weeks before we opened, they cancelled those merchandisers coming over unless I signed a long-term agreement that I wasn’t satisfied with. Needless to say, we did not sign. We hired 60 people from the Souris community, and we moved the store overnight on a weekend without their help and without their knowing about it and the store is beautiful.

There has been an outright failure for us to negotiate any terms for renewal, transfer or exit in the long term agreement, and the implication of this is they want us to a ten-year agreement that doesn’t deal with how to get out of it. Yet they only have the rights to IGA franchise for six more years. So their intention for us, I’m not very confident, is going to last for ten years. Recently, they have proposed a 20 per cent increase in our franchise fees. In short, if we do not have this law in place by Christmas of this year, my own business and several other Island businesses are in grave jeopardy for their very existence. Again, not because of our business reality, but due to the predatory, unreasonable, unfair and dishonourable franchisor practices.

A franchisee/franchisor relationship can result in a powerful effort. We operate two other very good franchises. In drafting proposed legislation, we asked ourselves what should be in every franchise agreement? What should be in every franchise agreement that is fair and reasonable for all parties, not slanted towards franchisees. This is not a beat-up your franchisor piece of legislation. It has to be fair and reasonable throughout for all parties involved. A law that is good and honourable would be supported without reservation by franchisees and honourable franchisors. Our test was why would anyone object to the provisions outlined in this agreement? Can anyone object fairly to a legitimately complain about this law’s content?

For example, if we talk about the right to associate, dealers being able to talk to each other. And that’s the law because it’s a constitutional right in this country, but there are franchise agreements that prohibit dealers from talking to dealers. Proper invoicing, why would you put proper invoicing in place? Obviously, if you buy something, you get a bill. When you get the bill, you pay it. Well with computer systems today, these guys will deliver goods without a packing slip. It’s strictly an invoice. It comes in electronically and automatic withdrawal comes from you bank account and there’s onus for process in place to verify that the amount of money taken out of your account equals the amount of goods that were delivered. And these systems weren’t necessarily in place when you signed your franchise agreement. So that’s why we say proper invoicing is a requirement.

Proximity protection, the veil of threat has been delivered to me that if I don’t get in line, they will build across the street from me. Is that fair from my own franchisor to conduct such an action? Absolutely not. We’re not looking for competitive protection. We’re not looking for protection from our competitors to enter our market and do business. But our franchisor, our own parent company should not be able to eat us alive when we’re honouring our side of the franchise agreement by running a good company consistent with the policies that make a good operation.

Renewal offer which is what will happen is if they have a fixed term, they will use renewal to renegotiate the agreement in its entirety. In those cases, I’ll get into that or issues on renewal, transfer and termination, I’ll leave later in my presentation. I have some supplementary information regarding those items. The above noted things are referred to as elements of a relationship law, and that’s what makes our law different from Alberta and Ontario. In Alberta and Ontario, they want disclosure. They’ll say, this is what we’re going to do to you, but there’s no onus or the onus isn’t clear in terms of good faith dealing in terms of relationship elements particular with renewal, transfer and termination which is not strong or adequate in the Ontario legislation.

The abuse occurring in these areas and the appropriateness of our proposal is documented in the attachment which was submitted as part of my proposal which is the testimony at the Ontario hearings of the American Franchisee Association. This organization has over 16,000 members and is recognized as international experts in franchising. It is a delight for me to tell you today that the American Franchisee Association currently has this draft legislation from Prince Edward Island in their possession. They’ve asked me to tell you today that they are reviewing it and that their legal counsel and the board of directors are preparing a written analysis and discussion on it. And this is the premier of franchise organization in the world. We’re confident, based on what we’ve read of the organization that there support would be forthcoming for this proposal. It will be forwarded directly to you from them within the next several weeks.

I also include here documentation from Les Stewart. He’s the president of the Canadian Alliance of Franchise Operators. At the Ontario hearings, he did a presentation which I’ve included. He was recognized by the Ontario government as an expert in Canada on franchising. As well as his testimony, we’re absolutely delighted to tell you that we’ve received a letter of support from the Canadian Alliance of Franchise Operators for our proposed legislation and as well, there’s other articles in there that are informative in terms of franchising. I won’t bother to list them here. I will tell you though that if there’s one piece of paper that you read, the American Franchisee Association, Susan Kezios, she’s just a dynamite firecracker. Her testimony is fascinating to read and it’s well, well done and I would recommend it.

Essentially, there are two questions for us to deal with today. The first question is, should there be franchise legislation on Prince Edward Island? And the second, if so, what should it be? Bush referred to, in his testimony, the issue about should there be franchise legislation in Prince Edward Island. I’ll tell you this, that most franchisors in their franchise agreements ruled that in order to settle a dispute, you must go to court in the province or state of their residence. So within the domain of Prince Edward Island, the Government of Prince Edward Island has no jurisdiction over matters here. It is the absentee landlord in its modern form. Islanders must travel to a far off land to be subject to laws of that land, suffer all the costs, time involved including trying to hire a lawyer. In short, most of us can’t afford it, so there’s no justice due to the practical inaccessibility which is a big theme with the Supreme Court of Canada now. This may have been okay in the Dark Ages, but clearly it is not sufficient in an enlightened modern society of the western world in the year 2001.

I think that today you will almost universally hear their support for legislation to take place. Our supporters will tell you that it is the appropriate one. Our detractors…excuse me, there’s one piece I don’t see written here, I want to tell you this in terms of going to another province for a legal dispute. We really ran up about two years ago in December, just after the time IGA was sold and we had a dark, dark December personally. My mother had to go to the hospital and my…anyway that’s irrelevant. We had to, we had served termination on our agreement because we weren’t satisfied with these new partners that were thrust upon us so we were threatened with legal action. We went to three of the largest law firms on Prince Edward Island. One represented Sobeys; one represented IGA; one represented Loblaws. This was during the Christmas holidays and just before.

We went to five, four other independent lawyers on Prince Edward Island, smaller guys and they were kind and helpful and got us through the first couple of months but each one of them passed me on to the next. We were threatened with going to legal action and we couldn’t get a lawyer on Prince Edward Island. Eventually, we had to go to Toronto to get a franchise expert who was very, very competent, very, very expensive but that’s not the kind of Island that we want to live on.

Now today, there’ll be a lot of discussion about what type of legislation should be here and I’m sure you’ll this afternoon, lots of discussion that the Ontario and Alberta legislation’s appropriate and we, our position is that the Ontario and Alberta legislation is merely a cover of legitimacy for the franchisor. This allegation is supported by the documents I’ve just tabled from the American and Canadian franchise organizations that call this legislation from Ontario as being 30 years behind the times. Our detractors will say that they want one model for the country. I agree, but I think it should be the Prince Edward Island model that is modern, fair and reasonable.

I submit in here a newsletter that came for the Canadian Franchise Association who are here today, and in it they say, the Prince Edward Island government, a representative of the CFA has contacted Deputy Attorney General to establish dialogue between the Island government and associations in the matter of franchise legislation. The CFA will continue to monitor the situation; however, at this time the association feels there is a low probability that the PEI government will move forward on adopting legislation.

These guys, if they were supportive of national legislation, I would ask them, what have they done to advance national legislation in Prince Edward Island, in Nova Scotia and Newfoundland? And why, and the answer to that would be, nothing, in my view. Furthermore, they are advocating the Ontario model because it’s good for their membership. They represent 20 per cent of all franchisors in Canada. They have no gasoline, grocery or auto dealers in their organization. And if they truly advocate a national model, then I would agree. I would say it should be the PEI model. We don’t need to have Ontario issues shoved down our throats here on Prince Edward Island. Ontario has the benefit of franchisor headquarters, the employment at those headquarters and the richness of those headquarters bring to that province. Prince Edward Island only has the problems of franchisor headquarters and the solution, our solution should be the shining light for franchise legislation in Canada.

Ontario legislation deals primarily with disclosure and civil remedy. The Prince Edward Island legislation deals with relationship law and criminal enforcement. In drafting our proposal, the corporation’s division of PEI clearly told us they neither have the time nor the resources to handle the mass of filing requirements of the Ontario that the Ontario legislation put on the Government of Ontario. And I understand the OSC has some resources that are using that.

In the US, according to this American Franchisee Association, no one is reviewing the filings. They make the filings in the United States and no one reviews them, and that’s why we want relationship law. We say the franchise agreement becomes the filing held by both parties. There’s no need for it to go into a government office. It’s held by both parties and as long as it meets the law, hopefully, it will never hit the dispute state. If business is transacted honestly, there is nothing to fear in relationship law.

Remember when the premier of this province, Premier Binns publicly noted that retail pork prices didn’t decline even though there were devastating low farm prices for pork several years ago. And remember last year when Ontario companies moved to slow down Prince Edward Island in the market and import US potatoes in our time of need and support. Well these are the same guys who don’t want relationship law. Disclosure law is what they are saying is the remedy here and it has a whole host of well-documented weaknesses relating to agreements, renewal, and termination of their agreements.

Our point is simple. Anyone acting in good faith is not afraid of good faith legislation. Our franchise agreements that go back ten years and plus, for the most part were done on a handshake. I have one franchise agreement that’s less than three pages full. It doesn’t say anything because there’s good faith between the parties and it is the largest goods distributor in Canada. It’s not a small Mickey Mouse organization. They have over three billion dollars in sales. But there’s good faith between the parties.

With regard to civil legislation, to civil enforcement versus criminal enforcement, civil being where you have to sue the other party, I offer a few points. Civil litigation may be appropriate in Ontario. Recently over 120 IGA dealers went to court with Sobeys in a class-action suit. I don’t know the exact number but they could all each put $4,000 in a pot. Now they have a war chest of $500,000, and off they go. They can go to court and appeal and appeal and take the three to five years that it takes and the $500,000 to take. On Prince Edward Island, I am the class-action suit, and that’s one of the differences. Size matters and Prince Edward Island understands better than anyone small versus large.

I already spoke to you about how thin the legal community is and our lawyers here do a lot of real estate property or contract law, but not many are franchise specialists. In short, civil litigation can be pocketbook justice where the large franchisor with the in-house legal staff and deep pockets wins with might instead of right, again a practice that’s not appropriate for a modern enlightened society.

In drafting this legislation, we copied exactly the enforcement as outlined in the Prince Edward Island Farm Implement Dealers’ Act. It makes imminent sense to us to be consistent with existing Prince Edward Island legislation. The precedent for enforcement has already received the political and bureaucratic approval of government. Similar to the effort that the enforcement legislation, the effect that enforcement legislation has on pop bottles, this legislation will have the effect of not being challenged by large companies. And one of our submitters from the Ontario hearings makes that point, unlike civil litigation where a deliberate and budgeted offence will be mounted.

I ask you if it was civil litigation that prevented pop bottles from coming into this province instead of an environmental law. I would say that Seaman’s wouldn’t see the light of day. They’d be in court one day after the next after the next as people just wore them out in the legal system. Our detractors say that this legislation will limit business. There is absolutely no evidence of this in Iowa in the United States which has relationship law. Irving will not stop selling gasoline nor will Tim Hortons stop selling coffee because there’s good faith relationship law in place. Our detractors will say government shouldn’t be involved in business. To this I say, ridiculous. Government is already involved in business. In our business, we are subject to environmental law, consumer law, weights and measures law, labour law, security law, health code, fire codes, building codes, highway law, advertising law, language laws and the list goes on. There should be no exclusion in the law for bad faith franchisors. In meeting with us, franchisors tell us they have to do things to compete with Wal-Mart.

My father is 70 years old. He’s been packing groceries for 56 years. He loves it. He owns his own building. He doesn’t owe them money, yet he may not be able to continue to work in the business he loves. It’s not true that they must destroy him to compete with Wal-Mart, and I’ve told them that. If they could just wake up to the awesome power that can be found in a good faith franchisor/franchisee, they would realize that people like him and the independent business people you will find on this Island are their greatest asset in competing and building a company. Whether or not you recommend passage of this legislation to your peers really speaks to what kind of country, what kind of province, kind of Island, and more importantly, what kind of people we wish to be. Acceptance of the Ontario model would be a great failure.

I have to tell you, and I’m concluding my remarks and getting to my closing, but I have to tell you a wonderful story that was given to me by Don Deacon. Don lives in Charlottetown and was instrumental in helping the Loblaws organization in its early days. He was a veteran of the Second World War, and in the Second World War, he was with the artillery division and saw a lot of action up through Europe. He told me that once he was in a, he was a Colonel or a Major, I’m not sure, he was an officer and he drove in an armoured personnel carrier. There was an armoured personnel carrier ahead of him and he was talking to his friend on the radio. And their discussion, it was towards the end of the war and they thought the war would be ending, and their discussion was, what are we going to do when this thing is over. How are we going to clean up all this mess and devastation, and his friend’s remarks was, “Well, I guess we will all have to look after our own backyards.” These were his last words because the carrier drove over a mine and the next instant the carrier was blown apart. Everybody was killed.

Today I’m asking you to do what you know is right in your heart, in your mind, to do that which is honest and true, and to make the brave decision in regard to this legislation. We have an obligation to look after our own backyard. We no longer use sleighs like this to deliver groceries or pick them up at the train station. We’d be waiting for the train quite a while. But this law is progressive and natural. It’s consistent with franchise development and evolution. It’s the next stage in franchise law, but it is the new vehicle. It’s a new sleigh that we need to conduct business in franchising in Prince Edward Island. We can’t afford to be caught in yesterday.

This legislation does put us at a crossroads. We choose whether or not our future is one where our children will work at Wal-Mart or if we will provide a vehicle that will allow Islanders to survive as independent business people. Today we must recommend passage of legislation based on fairness and reason, for if we knowingly accept that one Islander, that one Island business or one community on this Island will fall for the want of such a law, then God help all of us for if we don’t stand for justice, for equality, and for fairness, we shall fall from the lack of it. Thank you very much.

BETH MacKENZIE (PC) CHAIR: Thank you very much for your presentation, Mr. MacPhee. And you will entertain some questions?

ALAN MacPHEE: It would be a pleasure.

BETH MacKENZIE (PC) CHAIR: Thank you. Gentlemen? Go ahead.

HON. RONALD MacKINLEY (L): You talk about paying $200,000 for a franchise fee. Is that a year or what does that mean?

ALAN MacPHEE: Our franchise agreement is based on 4½ per cent of our sales. They want to raise that to 5½ per cent of sales, unilaterally, no discussion, negotiation so far.

HON. RONALD MacKINLEY (L): So in other words.

ALAN MacPHEE: We will refuse the increase.

HON. RONALD MacKINLEY (L): Yeah, alright, so whatever you sell out of there, they get…

ALAN MacPHEE: A million dollars of sales, they get $45,000.

HON. RONALD MacKINLEY (L): $45,000

ALAN MacPHEE: Plus Ron, what used to happen in the grocery business is when they negotiated with a supplier, there would be rebates that came back to the supplier and they would bill us on a percentage of goods delivered from the warehouse. The rebates would come back to the storeowners. What happens now is they keep all the rebates, all the shelf allowances, all the ad monies, but charge us a franchise fee based on sales, not on deliveries. Take the milk on Prince Edward Island, the wholesale price of milk is regulated. I pay for the cooler. I pay for the light bill. It never hits their warehouse. It is not delivered by their truck. It’s delivered by the dairy guy. We sell it at cost because it’s a competitive item but they get 4½ points off it. They’re making, I don’t know what the farmer is making but it would be close in terms of who’s making the most money on it.

HON. RONALD MacKINLEY (L): So if you, for instance, you got IGA, is it?

ALAN MacPHEE: Yes, that’s correct.

HON. RONALD MacKINLEY (L): So who’s the parent company of that?

ALAN MacPHEE: It was Loblaws in Atlantic Canada, has the rights to use the IGA name for ten years. Sobeys owns the IGA trademark in the rest of Canada. And it was part of this sale that took place three years ago.

HON. RONALD MacKINLEY (L): So who do you deal with? Sobeys now?

ALAN MacPHEE: No, I deal with Loblaws.

HON. RONALD MacKINLEY (L): You deal with Loblaws.

ALAN MacPHEE: One of the problems is they want us to sign a ten-year agreement but they only have the name for six years and they have refused to give us any indication what would happen in year six.

HON. RONALD MacKINLEY (L): Well let’s say, in year six, what happens in year six? That’s what I’m interested in. So they have the right, Loblaws to use IGA for six more years, right?

ALAN MacPHEE: Correct, could be seven.

HON. RONALD MacKINLEY (L): Well let’s say six. They want you to sign a deal for ten years.

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): With Loblaws, so you lose the IGA name, you deal with Loblaws. Wouldn’t they have another company name to put on your store?

ALAN MacPHEE: They should. They haven’t offered that yet. And we’ve said to them, for example, they’re a Save Easy dealer. We’ve said on our correspondence, we recognize that this is a problem. It’s funny, we were an IGA dealer, we had Our Compliments products and Air Miles. Now Sobeys has Our Compliments products in Sobeys. We have the national brands from Loblaws which are excellent. They’re the best in the industry on them. But we’ve even said to them, look, we recognize what happened with this consolidation. We’re not going to have our heads stuck in the sand. We will become Save Easy dealers if you like, and let’s do that now. They’ve not bitten on that. They’ve not responded to affirmatively saying yes. They’ve said, “well, how do you get out of this agreement? Do you just wait ten years? You have all the power and all the rights on your side.”

There’s not even annex of strategy for dissatisfied. They will not negotiate or have not to this point offered any kind of annex clause for this agreement. And if you look at what happened, it’s not just us in PEI. Go to Nova Scotia. Go to New Brunswick. We’re the only independent IGA dealer left in the network. Everybody’s been, it’s like the Towers Mall IGA. The guy runs a $1 store in the Confederation, in the basement of the Confederation Court Mall now, you know. Superstore has announced a big store opening in O’Leary, 20 minutes away from the Save Easy guy up there. It’s my understanding he got no prior notice of that store opening until he went to the public meeting.

HON. RONALD MacKINLEY (L): Are you referring to the store in Alberton?

ALAN MacPHEE: Yes, correct.

HON. RONALD MacKINLEY (L): What’s the name of it?

ALAN MacPHEE: It’s a Save Easy. But it’s also controlled by Loblaws.

HON. RONALD MacKINLEY (L): It’s controlled by Loblaws.

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): Save Easy. Then if this Superstore opens it’s controlled by Loblaws too, right?

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): Then you have the other family they call the Sobeys. So if for instance Loblaws went in and opened a Superstore why wouldn’t Sobeys be interested in going up to that other guys store. There seems to be, I was just going by around Charlottetown. I don’t know anything about the grocery business but I know that you go across the bridge you got Sobeys. You come into Charlottetown there’s a new Sobeys store, then there’s a new Atlantic Superstore and then there’s another Sobeys store and then, so it looks like they’re all looking for the space around the greater Charlottetown area, like across the river and I mean there’s nothing wrong with that. I mean there’s a lot of people in that area. But there seems to be a lot of competition between those two major food wholesalers isn’t there?

ALAN MacPHEE: What they will do with their franchisees, our situation, the only reason we have a chance is that we own our own real estate. We built it ourselves and we’ve been at the business for a long time. What happens with a lot of franchisors and not just the grocery guys, but a lot of them is they own the real estate or they control the lease on the real estate. So Sobeys can’t go to a Save Easy dealer because Loblaws owns or controls the lease and they use that often in terms of negotiation. If you don’t want to do what we do, get out. Even though the guy’s paying his own light bill, he’s paying the rent and everything else, they own the lease and they sublet to him. So the real estate can be used as a method of control in franchising and that’s well documented in all aspects of franchising.

And you know, it’s not necessarily a bad thing. I mean a good franchisor, there’s lot of good franchisors that own and control real estate as well. That’s not the issue. I think the issue is good faith and the fair dealings between the parties.

HON. RONALD MacKINLEY (L): What about, let’s say that store, new IGA or something they were talking about, no, it’s not IGA, in O’Leary, what…they’re talking about a store up in O’Leary being built. It’s Atlantic Superstore, is it?

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): And that’s in O’Leary, isn’t it, outside of O’Leary?

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): And what’s wrong with it being built and a store still being in Alberton? It’s quite a distance.

ALAN MacPHEE: It’s 20 minutes away.

HON. RONALD MacKINLEY (L): All right, it’s 20 minutes away, but would your franchise law that you’re proposing stop that Atlantic Superstore from being built?

ALAN MacPHEE: It would not stop it but we have in our legislation proximity protection which means a franchisor cannot go into the franchisee’s market and put another operation in their market unless they pay them compensation for the detrimental effect it will have on the franchisee. So Loblaws or any other franchisor could go in the market, okay. But what they’re doing now is they’re just walking in, stomping in and they have no consideration for this guy or his clientele or for his work he’s done for his organization. They’re just going to go in and take XYZ per cent of his sales even though they’re the same company. And the difference is a franchisor gets paid off the top. They get paid on the volume. A franchisee, like ourselves, we get paid on the bottom. So they could sell two in the same market and they double their operating revenue whereas if there’s two in the market and I’m a franchisee and I end up only selling one I may not be viable any longer. So if I’m not viable selling and they’ve got deeper pockets they negotiate my close and they end up selling two by taking over my operation without negotiation, without consideration that I’ve been a good operator. They’re taking it over just by coming in and they have your numbers, they see your sales numbers every week. They have your financial statements. They have all your information. And a good faith franchisor, that’s not a problem. They’re helping you build the business because they see your success is their success. A bad faith franchisor uses that to say, ah hah! This guy’s built the business, great opportunity. How can we capitalize on this? We’ll get somebody else in there. We’ll but a second store in or we’ll build a big store of our own and we’ll squeeze him out of business and we won’t give them any compensation or we’ll give them minimum compensation. It’s not fair.

HON. RONALD MacKINLEY (L): The only thing I’m trying to define is the business. Let’s say you’re with Loblaws, you’ve got IGA name, if Sobeys want to go down there and open up a Sobeys store in the same mall or across the road, that’s not going to stop that, right?

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): All right. Then that would be there if that law went through. But if Loblaws wanted to open up a store in the same mall across the road it would stop them.

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): that’s your franchisor. But then how far would you go with this? If you’re in Alberton and all of a sudden there’s a store in say O’Leary where they’re looking, would that still be covered under this law?

ALAN MacPHEE: How you would enforce it would have to be worked out but there is a recommendation in here, there is some information in the brief I’ve submitted. It was either a guy from Ontario, I think, or it could have been the Maritimes but I think it was an Ontario guy and his point was if a franchisee proximity, a breach in proximity would occur if a franchisee can prove a drop of profit greater than five per cent. And if he could prove that his profit was dropped greater than five per cent due to encroachment by a franchisor then he would have the basis to say you have to pay me compensation. This law doesn’t even prevent a franchisor from going into a franchisee’s territory. All it does is says if you’re going to you must pay them compensation if you’re taking their business away from them.

HON. RONALD MacKINLEY (L): Yes, I’m sorry to hold you up, but I’m still not clear on this. Say in the farm machinery business you have a dealership in Charlottetown and you got one in Summerside and I as a farmer go to deal, probably go to the one in Charlottetown. But if you go to the one in Summerside, this major corporation has the franchise for that and this people sell a certain line of equipment. So if I go to Charlottetown, let’s say I have problems with the dealer in Charlottetown, you fall out over something over a period of years, I can go to Summerside but the major companies would say, you might get one deal but the next time you go to deal the dealer up there would say, look, we’re not in that territory. So in a way it’s protecting the dealer and the franchise but then there’s the consumer, myself, like as a farmer. I could see if you had an International dealership where another dealership couldn’t come right across the road from you.

ALAN MacPHEE: Okay, but that’s what the law protects.

HON. RONALD MacKINLEY (L): What?

ALAN MacPHEE: Say you have a dealer in Charlottetown and there’s a need for one in Summerside and they put it in Summerside and it’s not affecting the guy in Charlottetown because they’re different markets, doesn’t affect him. What happens if the company comes in and puts the biggest farm implement site you ever saw and they put in Kinkora because they say, look, these two guys are going pretty good. You know let’s put one in Kinkora, we’re right in the middle of farmland, we’re going to get their customers and their customers and all of a sudden the guy in Summerside his sales go down by 15% and the guy in Charlottetown his sales go down by 25%. Okay. All of a sudden what will happen is that this guy in Kinkora that franchisor has put in place and it could be a corporate store even, is going to eventually wear one or both of these two guys out of business and that’s what we’re trying to protect.

HON. RONALD MacKINLEY (L): Like I’m just talking the farmer’s point of view. If a major company let’s say Tom Jones Company, a machinery company and he has a dealership in Charlottetown and the dealer has a business there and its own equipment and another dealer in Summerside, what they do is they have territory what you call is their customers for those dealerships. And they would not, they don’t allow a major dealership, the only time a major dealership would come in and open up is one company went out of business in Summerside or one company in Charlottetown because they want to supply the consumer which is the farmer.

ALAN MacPHEE: But not all franchise agreements have territory defined. And that’s why we’re saying we need proximity protection. I have no proximity protection in my grocery store. There’s nothing to limit those guys in my agreement from putting a store across the street from me.

HON. RONALD MacKINLEY (L): I can see the store across the street but how far would we go in that law that there’s there? How far would it go? That’s what I see, like for instance there’s a Save Easy in Cornwall. So that Save Easy would belong to the Loblaws group. Would that be correct?

ALAN MacPHEE: Yes.

HON. RONALD MacKINLEY (L): So you’ve got, I don’t know, 4,000 people in Cornwall and maybe they want to go to Charlottetown to shop at Sobeys, it’s only a few minutes away. So that’s really not his market or people in Crapaud, I don’t know what’s up there, maybe a Clover Farm. Or let’s take Bobby Clow’s store out there, he’s Clover Farm. So he’s got his business there and I can see Clover Farm not being able to set up across the street from him or anything like that. But what would happen, it’s still those customers in that area are not his customers, they’re free to go wherever they want to.

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): So then you’d have to define how far, like if you start defining distance, like say if you were in Alberton or O’Leary, maybe those people in O’Leary are going to Summerside to shop down there and when they go down there they leave their money and they eat down there or whatever, who would know. So it gets pretty hard when you get into defining where your territory is. But I can see where if you have a franchise you wouldn’t want somebody, the same company to build another store right across. Say you had a little problem with that company and they just put another store in.

ALAN MacPHEE: Correct.

BETH MacKENZIE (PC) CHAIR: Thank you for your questions.

WES MacALEER (PC): Mr. MacPhee, Alan, I need some clarification on some of the comments you made. You said the Ontario legislation didn’t meet your expectations.

ALAN MacPHEE: Correct.

WES MacALEER (PC): And that the Ontario legislation in broad terms deals with disclosure you said.

ALAN MacPHEE: Correct.

WES MacALEER (PC): Your expectation would be that in the drafting of an agreement between the parties, franchisee and franchisor, that government would set out standards or criteria which would ensure the viability of the franchisee.

ALAN MacPHEE: No. I think if you look at the law we proposed and all parties sit, take that law when they’re drafting their franchise agreement they must take into account the issues like proximity, termination, renewal and if they look at the guidelines that we have provided in our legislation and incorporate those guidelines or consider, or make sure that their contract meets that law, that’s all that’s needed. I don’t think there’s any…Ontario has pages and pages and pages of what’s required for filings and for franchise agreement and we think that’s, I myself think it’s burdensome. I think it’s a red herring and I don’t think it’s necessary. I think if you look at the simple act that we’ve provided and there’s about ten good faith clauses; proximity, termination, renewal, and you write those into your contract it’s done. Ontario’s got pages of the kind of regulations and guidelines that you’re (INDISTINCT). I’m saying it’s irrelevant.

WES MacALEER (PC): Okay, assuming that we would meet that criteria, meet those expectations, then are you suggesting that government become involved in the enforcement of those standards and criteria?

ALAN MacPHEE: Yes. The same as the Farm Dealer Implement Act on Prince Edward Island. It means that if you come and you build a store across the street, well you’ve got to go through the mediation arbitration process or however the legislation is laid out and if there’s an offence occurs guess what? You’re going to curt. And it’s documented in this stuff as well that that type of legislation, enforcement legislation, companies won’t go near it. They won’t cross the line. But if you leave it up to me to sue a $21 billion company what are my odds; even if I’m right.

WES MacALEER (PC): Okay, so what you’re suggesting here is that not only the criteria, which would be described in the agreement, that government would be involved in the enforcement of those criteria.

ALAN MacPHEE: Correct.

WES MacALEER (PC): Now, how does that…

ALAN MacPHEE: If you steal a television you go to the police. If you steal $10,000 from a franchisee why can’t we go to the police?

WES MacALEER (PC): Okay. Then who are you proposing here that would do the suing? Are you suggesting here that government then would become an ally of the franchisee or an ally of the franchisor should the criteria not be met? And what role would the courts play in that enforcement?

ALAN MacPHEE: It’s all laid out in the legislation.

HON. RONALD MacKINLEY (L): If you break the law the government charges the person for breaking the law even once. Government would look after that and the court would decide who’s right or wrong the same as a speeding ticket or anything else. Am I not correct?

ALAN MacPHEE: It’s up to the courts. You know if you make a complaint you go to the minister and if the minister wants to make an investigation he investigates. If he doesn’t , he doesn’t. It’s not unlike any other law on Prince Edward Island.

WES MacALEER (PC): What you’re suggesting is there be some form of enforcement arm within government that would intervene prior to the dispute being taken to a court of law.

ALAN MacPHEE: Well, I think obviously always the government wants to avoid court if it can. Here’s the Farm Implements Dealers Act and we’re saying make the enforcement in our legislation consistent with this legislation. You’ve already as a government looked at it and said this meets our approval. We’re saying we don’t have to re-invent the wheel. If you put this type of enforcement in place it meets the approval of government. We thought it was the most appropriate way to do enforcement because it’s already on the books. And you leave it up to the minister and the…I’m not a lawyer and I’m having difficulty answering the questions on the mechanism. I think somebody later on in the Coalition who’s making presentation later today could answer better than I the specific mechanisms of the enforcement. That’s because of my lack of a legal background. But I guess quite simply we’re just saying do the same thing here.

HON. RONALD MacKINLEY (L): If it was tabled in the House by…

BETH MacKENZIE (PC) CHAIR: Excuse me, Honourable Member, I have another speaker before you.

HON. RONALD MacKINLEY (L): Oh, put me off until later.

WES MacALEER (PC): That’s fine. I appreciate your comments.

ALAN MacPHEE: Thank you.

BETH MacKENZIE (PC) CHAIR: Go ahead.

WILFRED ARSENAULT (PC): Just a clarification here, Mr. MacPhee. You referred to something earlier in your presentations, something to the effect that there was initial electronic invoicing for payment. Now, is there something that was opposed on you or did you have a choice? Just elaborate on that.

ALAN MacPHEE: Yes, I’ll use an example. This one is a Home Hardware example. We’re a franchise there. With Home Hardware when we signed our franchise agreement we used to get a bill of goods. They’re say, okay you were delivered this binder, this glass and this book and this cost $10.000 and this cost $2.00 and you’ll pay those on October 3rd. There’s your invoices. They’ll say this one cost October 5th and you’ll pay that in November. Today, and you have to keep in mind we have 50,000 individual stocking units in that store, I mean there just a huge selection. Maybe we should just call up an invoice. It says you bought that for a dollar, that for a dollar, you bought that for $7.00, you bought this for $3.00. That adds up to $12.00. Now over here I get three pieces of paper and it says we’re going to take $15.00 out of your bank on October; $12.00 out of your bank in August and we’re going to take $3.00 out in November and if I want to know what the $12.00 is I have to go through this 30 days pick list and manually pick out the items, individually by individually, add them all up to see if it adds here. So we’ve got automatic withdrawal happening out of our bank account and to be quite frank we are at the complete trust of that franchisor because there’s no way you can balance those invoices manually.

WILFRED ARSENAULT (PC): Is this standard procedure now with other franchisees as well? Or other franchises?

ALAN MacPHEE: Well, it’s not with Pharmasave. I can only speak the ones I know. In the grocery business it’s similar. It’s not…with the grocery business you don’t get this pick list invoice system but you get this massive invoice with no pick list so it’s harder to check off your order and the order goes out, the money is withdrawn within two weeks. So it’s very hard to balance you ins and outs. The grocery business is not so bad but that hardware invoicing system is really bad. The reason why we put that in, we thought, you know, a deal is a deal and it should be simple. I buy something, I get a bill, the bill should say when I pay for it. And what we did is when we investigated the law there’s no federal or provincial law anywhere that we found that said an invoice has to state the following piece of information. So there’s no commercial standard in Canada that we could find that said this is what an invoice has to have on it. And with automatic withdrawal being so standard it’s a very dangerous practice.

HON. RONALD MacKINLEY (L): Number one is, is this the same bill we’re talking about that Andy Mooney tabled in the House as a private member?

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): And under that bill he tabled last fall was that if there was offence either by the franchisee or the franchisor, either one, it would go to the minister, the minister would go to the Justice Department and decide if there was…it’s the same thing if somebody got caught for environment regulations or the pop machines. Then they would fine them or whatever and then if the company didn’t agree with that, either person, either party, it would end up at the Supreme Court and the government would pay the legal bills because they are the prosecutors if it comes under provincial law. Is that not correct how this reads?

ALAN MacPHEE: Yes it is and thank you for that.

HON. RONALD MacKINLEY (L): And I have another one for you just before you go. The Farm Implement Act, you refer to it, but the Farm Implement Act went through was, let’s say we have a John Deere dealer, Reddins, over here and he’s got a franchise for John Deere. But all of a sudden maybe one of John Deere’s equipment isn’t as good so he takes in another line of equipment to sell off the same lot. The dealers could rip his franchise from him. So that protected him that he can sell, I know his sprayers are good but let’s say one time he was selling a different type of sprayer but his John Deere sprayer wasn’t out on the market; so John Deere could have come in and said to him ‘Look, you have a franchise for us, we don’t want you selling his product cause it’s not John Deere’. We put an act through so the dealers can’t come in and say that.

Like Good Electric sells, I think they were Massey and they Kabota now. So if you look at Kensington Agriculture Equipment they had, they were selling Whites and they were selling Kabotas and White didn’t do anything about it. But then they went to Ford and Ford says we want a whole new separate building. We don’t want any Whites in our equipment being sold off here. We don’ t want any Kabotas being sold off here. So what they had to do then was open a building up down the road, just down the road, and that’s where they got their Kabotas and White’s pars. Still selling all the same things. But as soon as we came in with that law they can sell it all over, they can sell all the equipment from one lot. And what that does is it keeps the cost down to us as farmers, as consumers; it keeps the dealers competitive. For instance not every piece of Ford, John Deere or whatever equipment is, maybe there’s a better sideline equipment so that means they can sell that to us and be protected by law they can’t lose their franchise. That’s what that is.

So if we go back to this one of yours, I want to ask you if you’re buying, I know potatoes; let’s say you’re buying potatoes, do you buy your potatoes from Loblaws?

ALAN MacPHEE: We buy ours locally.

HON. RONALD MacKINLEY (L): You buy yours locally. And you give them 4½% of that?

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): But could they say you had to buy all your potatoes from Loblaws under your agreement?

ALAN MacPHEE: Absolutely.

HON. RONALD MacKINLEY (L): All right.

ALAN MacPHEE: I’ll give you an example.

HON. RONALD MacKINLEY (L): But they don’t say that.

ALAN MacPHEE: Oh, yes they do.

HON. RONALD MacKINLEY (L): No, but you buy it local you say.

ALAN MacPHEE: On potatoes they do. Take Tide, for example.

HON. RONALD MacKINLEY (L): What?

ALAN MacPHEE: Tide laundry detergent. If I can buy Tide over here at this independent wholesalers supply a dollar cheaper than I can buy it from this wholesaler and I do and I take that in and I have a special but it didn’t come through their warehouse they can pull my franchise. I don’t have a right to buy at the lowest cost anywhere. And we put that in our legislation for that reason. The abuses for Tide selling in Canada are well documented.

HON. RONALD MacKINLEY (L): All right. So basically this franchise law will protect you if you want to go and buy potatoes from Chings down there, it actually would give you authority to do under your franchise licence.

ALAN MacPHEE: Correct.

HON. RONALD MacKINLEY (L): Even though, let’s say you signed this contract. Let’s say you signed a contract and you got a franchise and you agree to buy everything from the store or whatever in that franchise, right.

ALAN MacPHEE: Which is in the agreement now.

HON. RONALD MacKINLEY (L): Yes, it’s in the agreement. They’re not going to change that agreement if this law came in I don’t think. How can they?

ALAN MacPHEE: They would have to change the agreement to meet the law.

HON. RONALD MacKINLEY (L): What does the law say?

ALAN MacPHEE: The law says that the franchisee can buy the same goods elsewhere cheaper if they can find it and not exempting the fact the franchisor would still get their 4½%. They would get their franchise fee but it would allow me to buy the same goods cheaper elsewhere if I can find them. Which then incentives the franchisor to make sure they’re delivering the lowest cost to me.

RON. RONALD MacKINLEY (L): All right. So that’s where The Farm Machinery Act come in the same.

BETH MacKENZIE (PC) CHAIR: Thank you, Honourable Member. Thank you very much for your presentation.

ALAN MacPHEE: You’re welcome. Thank you very much.

This document is a spelling-corrected copy of the Verbatim Transcript of House Committee Proceedings, Province of Prince Edward Island, Canada.


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Risks: Prince Edward Island Public Hearings, Canada, 2001, Canadian Franchise Association, CFA, Cannibalization, Greed, Competition rules a farce, Competition Bureau, American Franchisee Association, AFA, Canadian Alliance of Franchise Operators, CAFO, Access to justice, War of attrition, 30 different programs of kickbacks, shelf allowances and inside money, Secret kickbacks and rebates, Encroachment (too many outlets in area), Disclosure laws: 10 per cent solution, Toothless law, Lease controlled by franchisor, Expropriation without compensation, Opportunism (self-interest with deceit), Electronic invoicing, Local suppliers with no shelf space, Canada, 20011025 Alan MacPhee

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