FRANCHISING: An Introduction to Nationwide - Canada

Chambers 2022 Submission – Franchising in Canada

By: Peter Viitre, Sotos LLP, and Jason Brisebois, Sotos LLP

While the onset of the COVID-19 pandemic has caused challenges for businesses across all sectors and industries, noteworthy is the fact that franchising in Canada has proven to be particularly resilient. Although certain traditional franchise sectors continue to see lower revenue levels as compared to prior to the pandemic, including full-service restaurants and certain personal service businesses, many other businesses have seen revenues remain constant, or even grow, since the onset of COVID-19. For the well-placed (and well-financed), the pandemic has provided a wealth of opportunities for growth, often at the expense of commercial landlords and less fortunate competitors.

For instance, many quick-service restaurant brands with limited footprints that were already geared towards take-out and drive-thru orders have, in many cases, seen revenues increase as customers pivoted towards dining at home. The resilience of many franchise systems in Canada throughout the pandemic is a testament to the franchise model, as professional and centralized leadership, greater scale and resources and enhanced purchasing power, allowed franchisees to weather many of the challenges that non-franchised businesses struggled, or ultimately failed, to overcome.

Beyond the onset and direct business impacts of COVID-19, there are a variety of other important trends and issues that franchisors should be carefully observing in the coming year. Certain of these items are listed below.

Extreme Competition in the Labour Market 

Acute labour shortages have arisen throughout Canada, particularly in the service industry. As the pandemic has seen many workers leave the service industry altogether, including to seek further education, take advantage of government assistance, or otherwise find new employment – in many cases, from home – many employers are scrambling to locate new employees as businesses gradually reopen in light of Canada’s largely successful mass-vaccination campaign.

Franchisors and franchisees, alike, should expect to continue to face challenges in filling worker vacancies and, as a result, should expect to incur higher labour costs than prior to the start of the pandemic. Many brands continue to increase pay or offer other incentives to fill gaps in their labour force, including offering increased flexibility or seeking younger or older workers. These costs may be further augmented by the Province of Ontario’s minimum wage increase on January 1, 2022; Ontario being the country’s largest economy and franchise market.

The Resurgence of Classic Concepts and New Innovations 

Overnight, the COVID-19 pandemic radically altered customer habits, preferences, and purchasing trends, causing disruption in the operation of franchised and non-franchised businesses, alike. Suddenly the drive-thru went from being considered a dead concept by some, to featuring as a crucial design element of new or redeveloped quick-service restaurants. Some brands (Burger King being perhaps the most notable) went so far as to introduce new restaurant concepts centred around the primacy of the drive-thru, with dine-in seating becoming an afterthought. While just one example, many of the previously accepted truths surrounding franchising and its sectors in the last decade have been re-examined, and where necessary, discarded.

Considering that many brands were required to go, in some cases, months without direct interaction or engagement with their customers, businesses have been forced to quickly reassess the manner in which to develop and maintain interactions and relationships with potential and current customers. This has taken a variety of forms, including novel product subscription services (such as a weekly pizza subscription), enhanced web presences and instructiveness on social media, and for some brands, an increasingly “gamified” experience. Although McDonald’s may have been a pioneer of product gamification with its “McDonald’s Monopoly” promotion, many brands are following suit with new ways to engage with, and retain the interest of, consumers who can no longer visit physical retail locations as easily as before.

One increasingly common sight in Canadian urban centres is the “ghost kitchen”, which allows brands to combine and simultaneously offer multiple brand offerings from one central location, absent a public-facing storefront. Multiple large Canadian brands and franchisors have already begun establishing ghost kitchens, in some cases teaming up with retail brands like Wal-Mart, to allow consumers to quickly and easily access products that may not otherwise be available in their market from one convenient location. This concept also permits brands to minimize their exposure to the red hot Canadian labour market, as described above, by more or less foregoing a front-of-house staff. Whether ghost kitchens are (in part) the future of Canadian dining habits, or a stopgap solution to generate additional revenue during the throes of the COVID-19 pandemic, remains to be seen.

Customer Relations and Governmental Compliance 

With the proliferation of smartphones and social media, brands, their franchisees, employees, and product offerings are under more intense scrutiny than ever before. With the resulting reliance on social media and online activities, a well-curated online image and reputation (as well as airtight intellectual property licences) are crucial to brand success.

This is especially true in light of the increasing emergence of significant fault lines in public opinion, including with respect to COVID-19 vaccinations. While the significant majority of the eligible Canadian population has received one or both doses of a COVID-19 vaccine, a significant and vocal portion of the Canadian population opposes any form of restrictions on unvaccinated individuals. With the gradual reopening of the Canadian economy throughout 2021 and beyond, various levels of government have imposed requirements on businesses that patrons wear face coverings, present proof of vaccination (where required) and limit patron capacity, among other measures. Such requirements and restrictions are being continuously adjusted in light of the pandemic’s rapidly changing conditions.

The enforcement of these measures has been downloaded to franchisors and franchisees, alike, requiring businesses to devote employees and resources to comply with these measures. In addition to the ongoing monitoring of ever-changing restrictions, businesses are likely to incur greater costs in ensuring that customers and employees remain in constant compliance with them. Moreover, fault lines in public opinion pose the risk that businesses and their employees could become enveloped in wider social divergence with respect to masking and vaccination requirements, thus imposing greater reputational, financial, and in some cases, physical risk on these already vulnerable enterprises.

Data Privacy and Enhanced Requirements on Business 

In November 2020, the Government of Canada tabled An Act to enact the Consumer Privacy Protection Act and the Personal Information and Data Protection Tribunal Act, also known as Bill C-11, proposing to replace and amend substantial elements of the existing Canadian privacy law regime. Although Bill C-11 died on the Order Paper as a result of the governing Liberal Party of Canada’s federal election call in August 2021, it is widely expected that a substantively similar bill will be introduced in the near future.

Pursuant to the original Bill C-11, and following the lead of several other jurisdictions, including the European Union’s General Data Protection Regulation, the Government of Canada proposed to radically rework the nation’s privacy law framework. Assuming that any such future bill is substantively similar to Bill C-11, we can expect that it will provide regulators with increased enforcement powers and significantly more stringent penalties to punish contraventions of Canada’s privacy law regime, among other changes.

While it remains to be seen when a new bill will be introduced, if ever, franchisors and franchisees alike should begin to prepare for the possibility of substantial privacy law reform in the coming years, and should begin ensuring that existing policies, processes, and systems meet best practices in advance of any such reform. Businesses should look to reforms proposed in Bill C-11 to obtain a sense of what may be to come, and begin tailoring their privacy infrastructure accordingly.

Cannabis Franchising 

In 2018, the Government of Canada legalized recreational cannabis sales and usage. In the wake of legalization, multiple new cannabis brands have emerged to establish retail cannabis stores and concepts, including franchised cannabis outlets. Following a period of intense governmental regulation as to the number of cannabis retail outlets that could open in a particular region or municipality, restrictions on the establishment of new retail outlets have been substantially relaxed in many provinces. This has led to an explosion of new cannabis outlets in both urban and rural settings, resulting in significant competition among brands and outlets and oversaturation in some markets.

In an effort to be among the first movers in establishing retail stores, some cannabis producers and brands unknowingly established franchise relationships with retail store operators, also known as “accidental franchises.” In such instances, the producers and brands unintentionally structured their affairs in such a way as to subject themselves to various provincial franchise disclosure and relationship laws, potentially exposing them to significant civil remedies on the part of their (franchised) retailers in the event the retail store failed or the relationship between the parties broke down.