FRANCHISING: An Introduction to Nationwide - Canada

Chambers 2023 Submission – Franchising in Canada

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

While the COVID-19 pandemic persists, the past year has seen businesses and consumers alike increasingly return to pre-pandemic behaviours. Demand for in-restaurant dining continues to increase, sports and concert venues are once again playing in front of full (or nearly full) crowds, and most gyms are once again hosting patrons in-person. Although certain “traditional” franchise sectors continue to see lower revenue levels as compared to the period prior to the pandemic, including full-service restaurants and certain types of personal service businesses, many other franchised 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 innovative competitors.

In addition to the continuing challenges posed by COVID-19, 2022 has brought about a variety of additional global challenges that continue to significantly affect franchisors and franchisees alike. In particular, the Russian invasion of Ukraine, strong inflationary pressure, continued supply line disruptions, and a competitive labour market continue to challenge businesses across virtually all industries. Certain of these challenges, along with other prominent trends affecting franchising in Canada, are explored below.

Integrating New and Alternative Concepts in Existing Franchise Systems

As brands struggled to connect with customers throughout the early days of the COVID-19 pandemic, they increasingly turned to new methods of doing business in order to remain relevant. Whether it was increased take-up and reliance on third-party delivery aggregates (such as Uber Eats or Skip the Dishes), or the introduction of ghost kitchen concepts, brands (especially in the restaurant and hospitality space) developed new methods of remaining operational, accessible, and ultimately profitable in a new and uncertain operating environment. And although many consumers are reverting to pre-pandemic behaviour, it is clear that many of these innovations are here to stay.

While these new methods of doing business provide huge opportunities to brands, they also create new challenges that franchisors must navigate, including ensuring that they are keeping their franchisees onside. Franchisors in the provinces that have enacted franchise disclosure and relationship legislation are subject to an ongoing “duty of good faith”, which requires, among other things, that franchisors consider the interests of their franchisees and not act in such a manner as to defeat the benefit that a franchisee has bargained for under its franchise agreement. While franchisors are not required to prioritize franchisees’ interests over their own, they are required to take them (and the interest of the system, generally) into account as part of their decision-making processes.

For example, as an increasing number of franchised restaurant systems rely on third-party delivery services, how should a franchisor manage overlapping delivery areas and increasing competition among its own brick-and-mortar franchisees? Moreover, with the increased importance of delivery, what relevance does a brick-and-mortar’s protected territory continue to have, if any?

As innovation continues to change the way franchise systems do business, franchisors should consider whether their agreements, and their processes, will be able to keep up. Innovation, whether technological or otherwise, creates a variety of new opportunities for franchisors to tap into, but franchisors must ensure that their franchise agreements afford them the flexibility needed to ensure the system has the power to keep up with the times without running afoul of their obligations to franchisees.

Inflationary Pressure 

The first half of 2022 saw inflation levels in Canada rise to levels not seen in decades. Inflation is causing substantial difficulties for both franchisors and their franchisees, including with respect to higher costs of goods, greater challenges to maintaining adequate inventory levels, and higher lending costs. Among other effects, high inflation rates are leading to higher costs and lower revenues for franchisees, as well as a shrinking pool of franchisee prospects as business lenders impose tighter lending conditions, this making it increasingly difficult for all but the best-positioned systems to institute significant network-wide changes, including keeping up with the innovations described above, as such innovations may not be viable in light of their attendant costs.

As systems look for ways to keep costs down, many have been tempted to shrink portion sizes in an effort to minimize price increases. In our experience, however, customers respond quite negatively to such tactics, leading to reputational damage to the business and brands that choose to implement them. Consumers have indicated a willingness to pay more for high quality products with portion sizes that they perceive as fair, and, as such, brands are cautioned to think twice before skimping on services and product quality. Alternatively, brands should consider introducing new product offerings at the same or lower price points, in order to provide consumers with choices in light of reasonable and necessary price increases.

Data Privacy and Enhanced Requirements on Business

Following the Government of Canada’s previous attempt to reform the nation’s privacy laws via its introduction of Bill C-11, which died on the order paper in 2021, the Government of Canada introduced Bill C-27, “An Act to enact the Consumer Privacy Protection Act, the Personal Information and Data Protection Tribunal Act and the Artificial Intelligence and Data Act and to make consequential and related amendments to other Acts”, in June 2022. The introduction of this bill follows the lead of several other jurisdictions, including the European Union’s General Data Protection Regulation, to enhance protection of individuals’ personal information.

Bill C-27 mimics substantial portions of Bill C-11, and proposes to replace and amend substantial elements of the existing Canadian privacy law regime. In particular, Bill C-27 will require many businesses to, among other things:

• implement a privacy management program;

• ensure service providers are providing adequate protection of consumer data transferred to them;

• determine at the time of collection the purpose for which personal information is being collected, used, and recorded;

• limit the collection of personal information to the extent necessary for the purposes established; and

• not retain personal information for a period longer than is necessary to fulfil the purpose at hand.

Bill C-27 also proposes to introduce a tribunal structure to enforce the provisions of the new Consumer Privacy Protection Act, enhance fines for potential violators, introduce a new private right of action for violations of privacy laws, and otherwise reinforce the consent-based nature of Canadian privacy laws.

While it is not known when Bill C-27 will come into force, franchisors and their franchisees should begin to consider how the introduction of Bill C-27 will impact their operations. For many businesses, these new requirements will necessitate reworks to their current privacy policies, data collection and management processes, and consumer interactions to ensure they are in legal compliance. Franchisors should begin to audit their (and their franchisees’) operations to consider which aspects of these operations are, and are not, in compliance with the framework outlined under Bill C-27.

Extreme Competition in the Labour Market  

Acute labour shortages have continued throughout Canada during the first half of 2022, including in the service and hospitality industry. The emergence of COVID-19 has seen many workers leave the service industry altogether, to seek further education, take advantage of government assistance, or otherwise find new employment – in many cases, from home. Coupled with reduced immigration levels during the last two years, and an ageing population, job vacancies have continued to grow throughout 2022. As a result, 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 were further augmented for many employers by the Province of Ontario’s minimum wage increase on January 1, 2022; Ontario being the country’s largest economy and franchise market. Franchisors currently operating in Canada, and those looking to expand to Canada in the coming months, should ensure that the competitive labour market is taken into account in formulating their expansion plans.