Message in a bottle

… Ontario legislation designed to protect franchisees doesn’t apply to Crown corporations. Any rights that franchisees might have when it comes to dealing with companies such as McDonald’s, Grand & Toy and Tim Hortons are nonexistent when head office happens to be the government.

Canadian Business Magazine
March 4, 2002

Message in a bottle
Crown corporation franchisees don’t get equal treatment
Kevin Libin

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It’s remarkable how a few drinks can make even the most unattractive partner seem alluring. Of course, if you’re the powerful and influential Liquor Control Board of Ontario (LCBO), you’ve not only got a limitless bar tab at your disposal but, with deep pockets to boot, it’s pretty easy to come off as charming. That explains why the Crown corporation is having so much success in wooing franchisees, talking them into establishing LCBO outlets, or “agency stores,” in small towns across Ontario. But when the buzz wears off, franchisees may wake up with a whopping hangover and end up swearing off booze permanently.

The LCBO certainly knows all the right lines to get franchisees excited. It approaches established grocery retailers in some tiny burg, ostensibly too small to warrant a full-size LCBO outlet. The retailers apply for a licence, renovate part of their shop and dress it up to resemble a liquor store. They can buy alcohol from the LCBO at a discount (10.7% on domestic beer and 13% on imported beer and liquor) and resell it to their neighbors.

It sure sounds like an enticing offer. And it’s working. Last year, the LCBO smooth-talked more than 100 retailers into joining up, and they’re planning at least 150 more conquests by 2003. Free marketers may be feeling a little tingly themselves, thinking the LCBO’s flirtation with franchising could signal the long-promised (and still undelivered) pledge by Ontario’s Tories to privatize alcohol sales. That’s what the unions are saying. “This is just a backdoor to privatization,” argues John Coones, president of the Ontario Liquor Board Employees’ Union. “It’s a slower way than they wanted to go, but it’s headed in the direction.”

If only that were true. Trouble is, unlike genuine privatization schemes—like Alberta’s liquor store sale in 1993 and Nova Scotia’s plans for same—the LCBO isn’t allowing any competition among retailers. Nor is it divesting itself of any existing stores. Rather, it’s franchising new ones. That means that far from behaving like a private business, the LCBO gets to play by its own set of rules because Ontario legislation designed to protect franchisees doesn’t apply to Crown corporations. Any rights that franchisees might have when it comes to dealing with companies such as McDonald’s, Grand & Toy and Tim Hortons are nonexistent when head office happens to be the government.

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That’s what franchisees of Canada Post found out the hard way in 1999 when legislation in both Alberta and Ontario (the only provinces with any franchise laws) failed to protect them from decisions made inside the Crown corporation when it suddenly decided to cut profit margins on all postage stamps from 17.5% down to a measly 5%, supposedly to stop a few bad apples from selling discounted stamps outside their assigned district. “They had identified 21 out of 1,600 sellers that they thought were doing it,” says Jim Snowdon, a Toronto pharmacist whose Canada Post franchise was forced out of business after 55 years in his store. “It took $40,000 off our bottom line. To control 21 sellers they were shooting the other 1,600 of us.” Snowdon says he personally knows three colleagues also put out of business by Canada Post’s dramatic profit slashing. Were potential franchisees to ask them today, they’d likely warn them not to get in bed with the post office. But unlike private franchisors, who are obliged to provide names and phone numbers of other (successful and unsuccessful) franchisees to interested entrepreneurs, Crown corporations like Canada Post don’t need to bother. Nor do they have to provide financial statements. And franchisees have no right of association, something their counterparts in the private sector often employ when they’re seeking legal recourse against a parent company. Crown corporations are also exempt from the requirement of dealing with franchisees in a “commercially reasonable fashion,” says Ontario NDP MPP Tony Martin, a longtime franchisee advocate. Major skirmishes are far from uncommon in these relationships. “There are a million different ways that a franchisor could screw a franchisee,” says Martin. “If the federal government found it within their purview to do what they did with the post office franchisees,
then the provincial government probably will too.”

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In fact, LCBO franchisees might have had a taste of what’s to come in January, when The Beer Store, a chain of government-licensed retailers owned by Ontario’s major brewers, unrolled a franchisee program of its own. When it approached LCBO agents offering to let them sell both brands under one roof, the liquor board fired off a letter to all its franchisees warning them that any agreement with The Beer Store would result in the immediate revocation of their LCBO licence. Though the LCBO eventually backed off, there’s nothing to stop it from playing that kind of hardball in the future, says Gillian Hadfield, a Canadian professor of economics and law at the University of Southern California in Los Angeles who specializes in franchise law. “The question is why even exclude Crown corporations in the first place?” she asks. “If this is what you want to establish as ground rules for fair play in franchising, then why wouldn’t you want to subject the government to that too?” Good question. But until Ontario’s government fulfills its vow to legitimately privatize liquor stores, potential franchisees should sober up before they do something they might regret.


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