GE Capital
Franchise Finance
2014
Canadian Chain
Restaurant
Industry Review
Research Partners
GE Capital
Franchise Finance
2014
Canadian Chain
Restaurant
Industry Review
1
2
3
4
5
6
7
8
9
Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Foodservice Industry Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Top-of-Mind: What CEOs Think. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Trends Impacting Restaurants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Cost of Doing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Top Chains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Research Partners
2
1
Preface
GE Capital
Franchise Finance
Insightful and Trustworthy Data to Help Grow our Businesses
Welcome to GE Capital’s third annual Canadian Chain Restaurant Industry
Review. I am pleased to bring you this extensive research report on the state
of chain foodservice in this country with the goal of providing insight into key
factors affecting our Canadian industry.
The Review is a comprehensive analysis and factual overview of market shares,
revenue trends, costs, hot (and not-so-hot) products, consumer behaviour
and the overall state of chain foodservice in Canada. These findings have
implications for job growth, construction activity and other factors that will
impact the economic health of Canada for 2014 and for several years to come.
GE Capital wishes to thank fsSTRATEGY and NPD Group Canada for their great
work at compiling and analyzing these results.
As our economy keeps on improving, the Review shows that Canadians
continue to spend more and more at restaurants, with a year-over-year
increase of 2%. In fact, total Canadian foodservice industry sales are expected
to increase by 4.4%, or almost $3.2 billion, to $71.1 billion in 2014.
I find this data very encouraging for the future of our industry. Reading through
the Review will undoubtedly give you food for thought. Our market insights will
also assist you in building forward-looking plans to help grow your business.
The Canadian chain foodservice industry has gotten stronger in the past years
and it’s thanks to your passion and dedication. I wish you all continued success
in your endeavours.
Ed Khediguian
GE Capital, Canada
Franchise Finance
3
GE Capital
Franchise Finance
GE Capital, Franchise Finance Canada
We’re More Than Just Bankers, We’re Builders
GE Capital, Franchise Finance is a leading lender to the restaurant and hospitality industries in
Canada. We specialize in financing regional and national restaurant businesses of all sizes across
the country. In the past 12 years, we’ve financed more than 750 restaurant customers with upwards
of 1,525 property locations. That’s in excess of $1.35 billion that we’ve invested in the Canadian
restaurant space.
In addition to financing at the franchisee and franchisor levels, we lend money for new developments,
recapitalizations of existing businesses, mergers and acquisitions, and management-led buyouts.
But we offer our clients more than money.
At GE Capital, we’re not just bankers, we’re builders. On top of smart financing, we provide the knowhow of GE to help your capital go further and do more. We’re excited that you’re building something
great. It takes money, along with knowledge and expertise. That’s where we come in.
Here are some reasons to consider financing with us:
žž A vast portfolio of national and regional restaurant relationships – in a variety of quick service and
casual formats – that we’ve maintained through economic ups and downs;
žž Deep expertise in the franchise business and a special understanding of the brands that operate in
this market;
žž A cash flow-based lending model that allows us to value a business based on performance, while
taking into account seasonality and other operation issues that specifically affect restaurants; and
žž The Access GE program, through which we bring the tools, resources, insights and expertise of GE
to help business leaders with their most pressing challenges.
We look forward to working with you as you continue to grow and succeed.
1 | Preface
4
Canadian
RestauRant
investment
summit
Now in its fifth year, the Canadian RestauRant
investment summit has solidly established itself as the
annual business conference that brings the industry
into focus.
Operators, chain executives, franchise operators, investors,
lenders and key suppliers from across the country agree
that this is the event that delivers what they need—insight,
information and opportunity—all with meaningful content
and a tight focus that is uniquely Canadian.
PArTNErS & SPONSOrS
Each year, the Summit presents topical issues and noted
thought leaders who share opinions, stimulate discussion
and create new directions. The entire conference program
is designed to yield authoritative information and the latest
data from across the country. When combined with the
powerful networking opportunities it presents, the Summit
is an experience that is unequalled anywhere in Canada.
TOP NAME INDUSTrY SPEAKErS.
SErIOUS NETWOrKING.
THANK YOU fOr jOINING
THE DISCUSSION.
maY 6+7, 2014
EATON CHELSEA TOrONTO HOTEL
*Confirmed Sponsors as of March 21, 2014
rESTAUrANTINVEST.CA rESTAUrANTINVEST.CA rESTAUrANTINVEST.CA rESTAUrANTINVEST.CA
5
2
Introduction
fsSTRATEGY Inc. (“fsSTRATEGY”) and The NPD Group, Inc. (“NPD”) are pleased
to release this 2014 Canadian Chain Restaurant Review as part of the 2014
Canadian Restaurant Investment Summit.
This report is the culmination of extensive primary and secondary research
conducted by fsSTRATEGY and NPD. Sources include:
žž Research and data provided by Restaurants Canada, formerly the Canadian
Restaurant and Foodservices Association (“CRFA”).
žž C-Suite Survey in January and February, 2014 conducted by fsSTRATEGY
and sent to over 94 CEOs and CFOs in the Canadian chain foodservice
market.
žž Detailed data from NPD’s Future of Foodservice.
žž Interviews with selected food grower associations, foodservice distributors
and landlords.
žž Information prepared by GE Canada on the state of money markets and
chain restaurant financing.
žž Secondary research data from other sources such as Statistics Canada,
PKF Consulting, TD Economics, the Conference Board of Canada, University
of Guelph, Human Resources and Skills Development Canada, Canada
Ministry of Labour, Ontario Energy Board, International Monetary Fund and
RSMeans.
For further information, please contact:
Geoff Wilson or Jeff Dover
Robert Carter
fsSTRATEGY Inc.
The NPD Group (Canada), Inc.
gwilson@fsSTRATEGY.comrobert.carter@npd.com
jdover@fsSTRATEGY.com
(647) 723-7767
(416) 229-2290
2 | Introduction
6
3
Foodservice
Industry
Profile
3.1
3.2
3.3
3.4
3.5
Canadian Foodservice Industry Sales
Chain versus Independent Operator Sales
Provincial Sales Trends
Same Store Sales Growth
C-Suite Expectations for Sales and Traffic
7
3.1 Canadian Foodservice Industry Sales
Canadian foodservice industry sales represented 3.7% of national gross domestic product in
2013 and industry sales are expected to increase by 4.4% to $71.1 billion in 2014. The Canadian
foodservice industry is divided into commercial and non-commercial sectors. Commercial foodservice
includes full-service restaurants (“FSR”), quick-service restaurants (“QSR”), and drinking places. Chain
foodservice sales reside in these three categories.
Historic Nominal Foodservice Sales by Sector ($millions)
2010
(Millions)
Quick-Service Restaurants
Full-Service Restaurants
Contract and Social Caterers
Drinking Places
Total Commercial
Accommodation Foodservice
2011
Change
(Millions)
2012
Change
(Millions)
2013
Change
(Millions)
2014 (Forecast)
Change
(Millions)
Change
$21,219.7
5.4%
$21,962.0
3.5%
$23,144.6
5.4%
$24,024.1
3.8%
$25,177.3
4.8%
20,931.4
1.2%
21,486.0
2.6%
22,693.2
5.6%
23,487.4
3.5%
24,567.8
4.6%
3,997.6
7.1%
4,213.5
5.4%
4,395.8
4.3%
4,602.4
4.7%
4,869.3
5.8%
2,467.7
-3.4%
2,362.4
-4.3%
2,351.3
-0.5%
2,332.5
-0.8%
2,367.5
1.5%
$48,616.3
3.2%
$50,024.0
2.9%
$52,584.8
5.1%
$54,446.3
3.5%
$56,981.9
4.7%
4.2%
$5,206.0
7.1%
$5,235.0
0.6%
$5,544.0
5.9%
$5,794.0
4.5%
$5,886.0
Institutional Foodservice1
3,392.3
4.3%
3,562.1
5.0%
3,697.9
3.8%
3,862.2
4.4%
3,985.2
2.2%
Retail Foodservice2
1,285.4
0.2%
1,267.6
-1.4%
1,314.5
3.7%
1,367.1
4.0%
1,229.4
2.5%
Other Foodservice3
2,254.8
2.7%
2,304.4
2.2%
2,362.0
2.5%
2,416.3
2.3%
2,484.0
2.8%
Total Non-Commercial
$12,138.4
4.7%
$12,369.0
1.9%
$12,918.4
4.4%
$13,439.6
4.0%
$13,584.6
3.2%
Total Foodservice
$60,754.7
3.5%
$62,393.0
2.7%
$65,503.2
5.0%
$67,886.0
3.6%
$71,108.2
4.4%
Menu Inflation
2.4%
2.9%
2.5%
2.5%
2.6%
Real Growth
1.1%
-0.2%
2.5%
1.1%
1.8%
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting
1
Includes self-operated education, transportation, health care, correctional, remote, private & public sector dining and military
foodservice.
2
Includes foodservice operated by department stores, convenience stores and other retail establishments.
3
Includes vending, sports and private clubs, movie theatres, stadiums and other seasonal or entertainment operations.
3 | Foodservice Industry Profile
8
As shown, commercial foodservice sales increased by 3.5% in 2013 while non-commercial sales
increased by 4.0%. Commercial foodservice sales are projected by Restaurants Canada to increase by
4.7% to $57.0 billion in 2014.
Historical Foodservice Sales Total versus Commercial – 1990 through 2014 (Forecast)
$80
1990: Commercial Foodservice 75.0% of Total Foodservice
2014: Commercial Foodservice 80.1% of Total Foodservice
71 $70
66 $50
$40
31 31 29 30 23 22 23 1991
$30
1990
Billions of Dollars
$60
24 33 33 26 27 35 37 28 29 39 31 41 33 44 35 45 47 47 38 36 37 50 40 55 52 41 43 57 45 59 59 47 47 61 49 68 62 50 53 54 57 $20
Commercial Foodservice
Total Foodservice
2014-f
2013-p
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
$0
1992
$10
p = preliminary
f = forecast
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting
Total nominal foodservice sales are expected to increase from $30.8 billion in 1990 to an estimated
$71.1 billion in 2014. This represents a compound average growth rate of 3.55%. Commercial sales
(which include chain restaurant sales) represent over 80% of total foodservice sales, compared to 75%
in 1990.
2014 Canadian Chain Restaurant Industry Review
9
2013 Forecasted Share of Foodservice Sales by Sector ($millions)
Total Foodservice
Total Commercial
$1,229.4 $2,484.0
$3,985.2
$5,886.0
Commercial Foodservice
$2,367.5
$4,869.3
Accommodation
foodservice
Institutional foodservice
$25,177.3
Quick-service restaurants
Full-service restaurants
Retail foodservice
Contract and social
caterers
Other foodservice
Drinking places
$56,981.9 $24,567.8
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting
QSRs and FSRs generate relatively similar sales (about $25 billion each annually) and together
represent 87.3% of commercial foodservice sales and 70.0% of total foodservice sales.
3 | Foodservice Industry Profile
10
Growth trends vary by sector. The following graph compares the real sales indices (adjusted for
inflation; 2007 real sales = 100) of various commercial foodservice sectors.
Sales Index by Industry Segment
120.0
Real Sales Index 2007 = 100
115.0
113.8 111.0 110.0
106.9 105.0
100.0
104.0 102.3 101.5 100.9 100.0
99.0 95.0
107.5 106.0 107.4 104.2 103.5 101.2 99.4 100.3 98.8 100.3 97.3 95.5 94.4 96.1 95.9 102.9 102.2 98.5 90.1 90.0
85.0
83.9 81.6 80.0
2007
2008
Total Commercial
2009
Full-Service Restaurants
2010
2011
Quick-Service Restaurants
80.6 2012
2013-p
Caterers
Drinking Places
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc.
As shown, FSR real sales have returned to pre-recession levels. QSR real sales continue to increase
and are now almost 14% greater than in 2007.
Sales for drinking places continue to decline due largely to a reduction of the number of
establishments classifying themselves as drinking places. Many such operations have been
reclassified as FSRs.
Much of the observed growth may be attributed to the significant increase in the number of
commercial foodservice units in 2013. The commercial foodservice industry grew by 7,401 units (9%)
in 2013; however, average real sales per unit has fallen by almost 6% as unit expansion rates exceed
real sales growth rates.
2014 Canadian Chain Restaurant Industry Review
11
3.2 Chain versus Independent Operator Sales
The chart below graphically depicts the share of chain and independent restaurant expenditures in
various regions of Canada for 2013.
Chain versus Independent Restaurant Expenditures – 2013
100%
80%
30.6%
34.6%
36.8%
37.8%
65.4%
63.2%
62.2%
Ontario
West
Canada
48.4%
60%
40%
69.4%
51.6%
20%
0%
Atlantic
Quebec
Chain Restaurants
Independent Restaurants
Source: The NPD Group/CREST®
As shown, 62.2% of the expenditure in restaurants in Canada is in branded local, regional, national
and international chains. Quebec has the greatest percentage of independent expenditures, with
almost half of all restaurant sales unaffiliated with chains.
3 | Foodservice Industry Profile
12
3.3 Provincial Sales Trends
Prince Edward
Island
Nova Scotia
New
Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta
British
Columbia
2008
$46,795,255
$565,006
$176,233
$1,210,275
$891,334
$9,304,854
$17,593,324
$1,290,495
$1,287,297
$6,618,399
$7,709,844
2009
$47,096,429
$588,886
$175,136
$1,209,506
$938,700
$9,385,175
$17,631,848
$1,338,637
$1,356,991
$6,526,605
$7,795,980
2010
$48,616,283
$644,086
$184,145
$1,252,019
$968,838
$9,715,759
$18,381,418
$1,369,856
$1,428,570
$6,665,414
$7,846,102
2011
$50,023,975
$679,708
$187,481
$1,275,087
$962,206
$9,906,542
$19,159,000
$1,440,093
$1,506,167
$7,082,169
$7,662,998
2012
$52,570,103
$738,905
$194,219
$1,321,404
$982,459
$10,405,241
$20,137,078
$1,516,565
$1,620,509
$7,678,116
$7,814,123
2013-p
$54,964,363
$807,406
$203,153
$1,332,674
$986,566
$10,690,273
$21,005,189
$1,599,598
$1,737,410
$8,156,486
$8,276,882
6.1%
5.7%
5.4%
10.2%
3.3%
1.3%
Canada
Newfoundland
and Labrador
Canadian Commercial Foodservice Sales by Province – 2008 through 2013
Revenues (thousands)
Percent Change vs Previous Year
2008
4.8%
6.1%
3.2%
8.6%
5.3%
2009
0.6%
4.2%
-0.6%
-0.1%
5.3%
0.9%
0.2%
3.7%
5.4%
-1.4%
1.1%
2010
3.2%
9.4%
5.1%
3.5%
3.2%
3.5%
4.3%
2.3%
5.3%
2.1%
0.6%
2011
2.9%
5.5%
1.8%
1.8%
-0.7%
2.0%
4.2%
5.1%
5.4%
6.3%
-2.3%
2012
5.1%
8.7%
3.6%
3.6%
2.1%
5.0%
5.1%
5.3%
7.6%
8.4%
2.0%
2013-p
4.6%
9.3%
4.6%
0.9%
0.4%
2.7%
4.3%
5.5%
7.2%
6.2%
5.9%
Canadian Commercial Foodservice Sales by Province – 2008 through 2013
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc.
As shown, at 9.3% growth in 2013, Newfoundland and Labrador was the fastest growing provincial
market, followed by Saskatchewan which grew by 7.2%. Ontario accounts for 38.2% of total
commercial foodservice sales.
2014 Canadian Chain Restaurant Industry Review
13
The following table compares total commercial foodservice sales and commercial foodservice sales
per capita by province.
2013 Commercial Foodservice Sales and Commercial Foodservice Per Capita by Province
$25,000
$2,500
21,005.2 $2,026.42 $20,000
$2,000
Sales in Millions of Dollars
$1,532.95 $1,416.55 $15,000
$1,567.63 $1,551.57
$1,806.40 $1,500
$1,310.83 $1,398.77 $1,304.90 $1,264.49 10,690.3 $10,000
$1,000
8,156.5 8,276.9 $5,000
Per Capita Sales in Dollars
National Commercial Foodservice
Sales Per Capita $500
807.4 1,332.7 986.6 NS
NB
203.2 1,599.6 1,737.4 MB
SK
$0
$0
NL
PE
QC
ON
2013 Commercial Foodservice Sales
AB
BC
2013 Commercial Foodservice Sales Per Capita
National Average Per Capita Spend
Source: Restaurants Canada, fsSTRATEGY Inc. and Statistics Canada
As shown, Ontario and Quebec have the greatest commercial foodservice sales, driven primarily
by larger populations. Commercial foodservice sales per capita in Saskatchewan, Ontario and
Newfoundland and Labrador approximately match the national average. Alberta continues to have
the greatest commercial foodservice sales per capita ($2,026) followed by British Columbia ($1,806).
Manitoba has the lowest per capita commercial foodservice sales ($1,264).
3 | Foodservice Industry Profile
14
3.4 Same Store Sales Growth
Same Store Sales Growth (“SSSG”) is a measure of the performance of restaurant chains year-overyear, comparing for the same base of stores from one year to the next on a rolling basis. The table
below provides an average of SSSG from 2007 to 2013 for the largest Canadian publicly-traded
restaurant chains. Data from 2013 has been taken from either annual reports or Q3 reports as
available by chain.
Same Store Sales Growth 2007 through 2013, Selected Publicly-Traded Restaurant Chains
Same Store Sales Growth Percentage
2007
2008
2009
2010
2011
2012
2013
Minimum
-3.9%
-1.2%
-6.5%
-1.7%
-0.1%
-1.2%
-3.1%
Average
3.1%
1.8%
-2.5%
1.2%
2.5%
1.3%
0.1%
Maximum
5.9%
7.3%
2.9%
4.9%
4.9%
3.3%
2.1%
Source: Annual reports.
1
2013 YTD 3rd Quarter
The average SSSG for the selected Canadian restaurant chains is graphically represented below.
Average Same Store Sales Growth 2007 through 2013, Selected Publicly-Traded
Restaurant Chains
4%
3.1% 3%
2.5% 1.8% 2%
1.3% 1.2% 1%
0.1% 0%
-1%
-2%
-2.5% -3%
2007
2008
2009
2010
2011
2012
2013
Source: Company annual and quarterly reports.
1.
Selected publicly traded Canadian chains. 2013 data year-to-date 2nd or 3rd quarter results.
As the exhibits demonstrate, SSSG declined significantly through the economic recession. A gradual
recovery ensued in 2010 and 2011. However, SSSG declined in 2012 and again in 2013, underlining the
fragility of the economic recovery and potentially signaling issues around market saturation.
2014 Canadian Chain Restaurant Industry Review
15
3 | Foodservice Industry Profile
16
3.5 C-Suite Expectations for Sales and Traffic
Once again, fsSTRATEGY has completed a survey of Canadian foodservice executives to gain their
insights on the state of the industry for the Canadian Restaurant Investment Summit and to capture
opinions and industry forecasts from Canada’s industry leaders. Twenty-one percent of the brands
that were invited to participate responded. Responses from the C-Suite survey have been included
throughout this book.
Respondents to the C-Suite Survey were asked how they expected industry sales and traffic to change
in 2013.
In 2014 Compared to 2013, Sales are Expected to:
Decline more than 10%
0%
Decline 7.6% to 10%
0%
Decline 5.1% to 7.5%
5%
Decline 2.6% to 5%
0%
Decline 0.1% to 2.5%
14%
Remain Flat
14%
Increase 0.1% to 2.5%
50%
Increase 2.6% to 5%
14%
Increase 5.1% to 7.5%
0%
Increase 7.6% to 10%
0%
Increase more than 10%
5%
In 2014 Compared to 2013, Traffic is Expected to:
Decline more than 10%
0%
Decline 7.6% to 10%
0%
Decline 5.1% to 7.5%
5%
Decline 2.6% to 5%
5%
Decline 0.1% to 2.5%
14%
Remain Flat
36%
Increase 0.1% to 2.5%
41%
Increase 2.6% to 5%
0%
Increase 5.1% to 7.5%
0%
Increase 7.6% to 10%
0%
Increase more than 10%
0%
Source: fsSTRATEGY Inc. C-Suite Survey
2014 Canadian Chain Restaurant Industry Review
17
Most respondents (50%) expect industry sales to increase by up to 2.5% in 2014 with 14% expecting
growth of between 2.6% and 5%. In last year’s study, respondents were more positive with 60% of
respondents expected sales to increase by 0.1% to 2.5% and 30% expecting revenues to increase by
2.6% to 5% in 2013. Thirty-six percent of respondents expect industry traffic to remain flat in 2014
and 41% expect traffic to grow by up to 2.5%. Respondents to the 2014 survey were more positive
than 2013 respondents with respect to industry traffic with 41% expecting traffic to increase by up
to 2.5%. Once again this year, the survey strongly suggests that revenue increases will depend on
operators’ ability to increase average cheques.
Approximately 40% of respondents to Restaurant Canada’s Restaurant Outlook Survey for Q4 2013
experienced a decrease in year-over-year same store sales and one quarter of respondents feel
that same store sales will decrease in the next six months; although, based on historical results,
Restaurants Canada suggests this decrease may reflect seasonality.
3 | Foodservice Industry Profile
18
4
Top-of-Mind:
What CEOs
Think
4.1 Opportunities
4.2Challenges
4.3 Biggest Changes
4.4Sustainability
2014 Canadian Chain Restaurant Industry Review
19
4.1 Opportunities
C-Suite Survey participants were asked to list the three greatest opportunities in the foodservice
industry for 2014. Responses were grouped into common categories.
Greatest Opportunities for the Canadian Foodservice Industry, 2014
Opportunity
2013
2014 Change
Menu - innovation, more choice, improved ingredient quality, flavour
27%
27%
à
Concept - fast casual, premium, non-traditional, home meal replacement,
retail grocery, differentiation
13%
17%
á
Beverage - bar and beverage programs, craft distilled spirits, happy hour
0%
10%
á
Location - suburban, strong regional economies, international
4%
10%
á
Competition - consolidation, leveraging competitor failures
15%
7%
â
Marketing - building loyalty/repeat business, social media
12%
7%
â
Target market - millennials, day part growth
0%
7%
á
Catering and special events
0%
5%
á
Service consistency and quality
6%
5%
â
Procurement - bulk purchasing initiatives
0%
2%
á
Technology
2%
2%
à
Financing - availability, low interest rates
2%
0%
â
Cost Efficiencies
6%
0%
â
Market Growth - Sales, growth, increased traffic
6%
0%
â
Facilities - smaller footprints, construction
6%
0%
â
Economic Stability
2%
0%
â
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
Compared to 2013, menu innovation and refinement has remained as the single largest opportunity.
Concept refinement, increased attention to bar and beverage programs and seeking out new and
different locations (e.g., suburban, strong regional economies and international locations) are topof-mind with executives. Executives remain focused on differentiating from the competitors and
taking advantage of competitor failures but to a slightly lesser extent than last year. Clearly, the
opportunities for the industry as seen by the industry leaders are more refined and more proactive
than in the past 12 months.
4 | Top-of-Mind What CEOs Think
20
4.2 Challenges
Survey participants were asked to list the three greatest challenges in the foodservice industry for
2014. Responses were grouped into common categories.
Greatest Challenges for the Canadian Foodservice Industry, 2014
Challenge
2013
2014 Change
Operating costs
33%
50%
á
12%
26%
á
Cost of goods sold
9%
17%
á
Rent
3%
5%
á
General
8%
2%
â
0%
17%
á
11%
9%
â
Competition - more dense, growing
9%
7%
â
Sales
2%
7%
á
Availability of franchisees
0%
3%
á
Human resources - retention and availability
0%
3%
á
Service - improving quality
1%
2%
á
Nutritional in formation requirements
0%
2%
á
Competition from the United States
2%
0%
â
Government Policy
3%
0%
â
Food Safety
2%
0%
â
Labour Issues - availability, quality
3%
0%
â
Labour costs, productivity
Sites - finding sites
Economy - US dollar, availability of financing
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
Similar to 2013, operating costs continue to be the single greatest challenge for the participants,
with labour being the most commonly mentioned challenge. Not surprisingly, this is even more of a
challenge for executives this year in the face of rising minimum wages and labour shortages. Cost of
goods sold also increased in terms of percentage of responses while concern over rent only increased
marginally. Finding sites has become the second biggest issue for operators as a limited supply of
prime locations is being aggressively targeted by competitors. Economic conditions remain a concern,
evidence again of the stalled economic recovery in Canada.
2014 Canadian Chain Restaurant Industry Review
21
4.3
Biggest Changes
4.3.1
Short-Term Changes
C-Suite Survey participants were asked what they thought would be the biggest short-term changes
in the foodservice industry.
In 2013, participants cited intensifying competition, industry consolidation, increasing specialization of
menus and the growth of social media as an influencer in success.
This year, participants continued the themes of intensifying competition and industry consolidation.
Competition is expected to grow in smaller markets and operators continue to expect entries into the
market by US chains. Participants believe there will be further mergers, acquisitions and closures in
the chain restaurant industry in Canada. Some operators also suggest that independent restaurants
will recapture market share they have been losing to the chains, especially in the premium casual
market.
New this year, operators suggested that they expect consumer confidence to improve somewhat, yet
consumers will have even higher value expectations.
Finally, operators expect labour shortages to persist, regulation to tighten, real estate costs to rise
and availability to be limited and supply management to continue to burden cost of goods sold.
4.3.2
Long-Term Changes
C-Suite Survey participants were asked what they thought would be the biggest long-term changes in
the foodservice industry.
In 2013, participants cited contraction and redefinition, concept changes, technology and changing
consumer behaviour as baby boomers retire.
This year, participants reiterated their belief that the industry can expect more consolidation over the
long-term, suggesting that there are too many chains doing the same thing. Participants also echoed
the expectations of industry redefinition and concept changes. Of note, participants suggested the
following:
žž emergence of more fast casual concepts;
žž expansion of premium casual dining at the expense of fine and mid-scale family dining but with
higher consumer expectations of premium casual dining; and
žž FSRs getting out of the lunch business.
This year, while demographic changes as the population ages continue to be top-of-mind, operators
also mentioned growing population ethnicity as a long-term influencer of the industry.
Finally, labour shortages and rising labour costs are also expected to be long-term issues for our
industry.
4 | Top-of-Mind What CEOs Think
22
2014 Canadian Chain Restaurant Industry Review
23
4.4 Sustainability
Because sustainability has become such a prominent issue in the media, with consumers and
special interest groups, this year fsSTRATEGY asked C-Suite Survey participants to provide their
view on sustainability.
Participants were asked to rate the current level of importance of this issue for their chain.
Importance of Environmental Sustainability
Highly Important
0%
Important
60%
Neither Important nor Unimportant
35%
Unimportant
0%
Highly Unimportant
5%
Sixty percent of respondents indicated that environmental sustainability was important to their chain.
A further 35% indicated it was neither important nor unimportant.
Respondents that ranked environmental sustainability highly important or important, were asked to
indicate which of the following contributed to that level of importance.
Sustainability Contributions
Use of organic food
0%
Use of hormone and antibiotic free proteins
25%
Certified sustainable food/suppliers
35%
Sustainable operating practices
45%
Sustainable facilities design
45%
Other
10%
Other includes: Improved nutrition
Environmentally friendly packaging / paper products
Forty-five percent of the respondents indicated that sustainable operating practices (e.g., recycling,
composting, refillable consumer beverage and/or food containers) and sustainable facilities design
contributed to them rating sustainability important. Thirty-five percent of respondents indicated that
certified sustainable food/suppliers contributed to them rating sustainability important. Finally, 25%
of respondents indicated interest in hormone and antibiotic free proteins.
4 | Top-of-Mind What CEOs Think
24
5
Trends
Impacting
Restaurants
5.1
5.2
5.3
Key Consumer Profiles
Key Foodservice Industry Trends
Looking Ahead
2014 Canadian Chain Restaurant Industry Review
25
5.1 Key Consumer Profiles
5.1.1 Commercial Restaurant Traffic by Age Group
Canadians love using restaurants, but restaurant traffic did not grow in the past year. During 2013,
the percentage of Canadians aged 13+ that visited a restaurant daily decreased to 45%. Compared to
2012, fewer consumers have been eating out across all age groups, making restaurants challenged in
the Canadian foodservice market. While uncertain economic conditions appear to be a factor having
an impact on consumers eating out of home, Canadians still enjoy going out to restaurants to eat for
several reasons, such as family/friends getting together, convenience, and indulgence.
Many restaurants across Canada have been heavily focusing on attracting 18 to 34 year olds,
specifically known as “Millennials”, as their population growth is alluring to a foodservice industry
making slow gains.
5.1.2 Percentage Restaurant Sales Growth Quarter over Quarter
3%
3%
1%
3%
4%
5%
5%
4%
4%
3%
1%
2%
2%
SON’10 DJF’11 MAM’11 JJA’11 SON’11 DJF’12 MAM’12 JJA’12 SON’12 DJF’13 MAM’13 JJA’13 SON’13
Source: The NPD Group /CREST®
26
5.2
Key Foodservice Industry Trends
While the Canadian foodservice industry is still in a fragile recovery as a result of the negative impacts
of the global crisis, the ‘battle for share’ environment continues to intensify across all restaurant
market segments. All provinces reflected a similar trend with visits remaining flat in the past five years.
With a +1% compound annual growth rate in foodservice visits since 2008 and -1% in the latest year,
the Canadian Restaurant Market remains a challenging environment particularly for the QSR segment
in Canada, which represents two thirds of visits. The QSRs that are winning in today’s market are those
that have capitalized on urbanization through improvements on restaurant décor that reflects an
upscale, casual image, as well as those who have an emphasis on menu innovation and promote the
concept of premium menu items.
Customer traffic to the QSR segment has been soft to flat since 2008 in most provinces; Alberta is the
only province exhibiting modest QSR traffic growth of +3% in the last five years.
The FSR segment, which represents 21% of all restaurant traffic continues to experience challenges in
attracting customers on a regular basis. Hardest hit since 2008, all provinces continue to experience
flat to declining customer traffic in this segment since.
During the past five years, Home Meal Replacement (“HMR”) has been one of the best performing
segments of the Canadian foodservice industry. Today, all of the top Grocery Stores are allocating
more resources to their HMR program in order to capture a greater share of consumers’ food dollar.
The challenge for Grocery Stores, similar to the greater challenges faced in the overall restaurant
market is that the volume of out of home prepared meals is expected to remain flat in 2014 versus
last year. Published in late 2013, NPD’s Exploring Untapped Opportunities at HMR report provides
a comprehensive study on how Grocery Stores can successfully increase customer traffic to their
HMR programs, which highlights the strategies that have helped QSR operators realize gains in this
challenging market.
Trends Analysis
Canada’s daypart sales share has experienced a slight change in distribution, which reflects the
changing eating habits of Canadians over the past five years. In particular, morning meal is the fastest
growing daypart in visits versus any other occasion. Success at morning meal is mainly driven by
QSR as a result of convenience, with a +3% compound annual growth since 2008. FSR faces morning
meal challenges with visits down -3% in the last five years. Core offerings such as coffee, breakfast
sandwiches, and muffins are supporting the morning meal success at QSR. QSR restaurants that play
a dominant role in the morning meal daypart are likely to continue to penetrate the existing habitual
preferences among Canadian morning meal consumers.
2014 Canadian Chain Restaurant Industry Review
PCYA = Percent Change vs. Year Ago
27
Source: The NPD Group /CREST®
HMR Outpaced
Outpaced All
All Other
Other Segments
Segments Over
Over Last
Last Five
Five Years
Years
HMR
6.5 6.6
Traffic Volume (Millions)
4.0
Growth
Rate
1%
2008
2013
4.3
1%
-1%
2%
-2%
0.4 0.5
0.3 0.2
HMR
Convenience
1.7 1.6
QSR
Total Market
FSR
Source:
Source: The
The NPD
NPD Group
Group /CREST
/CREST®®
Trends Analysis
Canada’s daypart sales share has experienced a slight change in distribution, which reflects the
changing eating habits of Canadians over the past five years. In particular, morning meal is the fastest
growing daypart in visits versus any other occasion . Success at morning meal is mainly driven by
QSR as a result of convenience, with a +3% compound annual growth since 2008 . FSR faces morning
Daypart
Distributon
meal challenges
with visits down -3% in the last five years. Core offerings such as coffee, breakfast
sandwiches, and muffins are supporting the morning meal success at QSR. QSR restaurants that play
a dominant role in the morning meal daypart are likely to continue to penetrate PM
theSnack
existing habitual
23%
23%
Supper
preferences among Canadian morning meal consumers .
Lunch
27%
25%
26%
26%
24%
26%
2008
5 | Trends Impacting Restaurants
Morning Meal
2013
Source: The NPD Group /CREST®
5 | Trends Impacting Restaurants
28
5.3 Looking Ahead
5.3.1
Population trends
Canada’s demographic environment continues to change with much of the population growth fueled
by immigration. The importance of immigration to Canada is put into context when compared to the
United States. For instance, over the next ten years, the net migration rate in Canada is forecasted to
be nearly 50 percent higher than our neighbours to the south. Immigration to Canada will continue to
come primarily from Asia, and though this represents a varied cross-section of groups from a cultural
and linguistic perspective, linkages among these groups surface when compared to the population.
Visible minorities skew younger and newcomers are more likely to live in a larger household. Given the
younger age and larger household size of this population segment, newcomers can be considered a
prime growth target.
2014 Canadian Chain Restaurant Industry Review
29
Immigrants to Canada, by Country of Last Permanent Residence
Europe
United States, West Indies
South America
Asia
Africa
Australasia
Central America & Other N.A.
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Q3'11
Q4'11
Q1'12
Q2'12
Q3'12
Q4'12
Q1'13
Q2'13
Source: Statistics Canada
Population Projection, by Visible Minority Group
Chinese
South Asian
Black
Filipino
Latin American
Southeast Asian
Arab
West Asian
Korean
Japanese
2006
2031
Other visible minorities
Source: Statistics Canada
5 | Trends Impacting Restaurants
30
Average After-Tax Income (000s), by Economic Family Type
2007
2008
2009
2010
2011
114 115
115 116
109 84 81 82 83 83 78 79 79 79 80 94 91 88 89 89 76 76 76 75 76 59 58 58 58 58 45 46 48 48 45 32 33 33 33 31 Economic
families, two
persons or
more
Elderly
families (2)
Non-elderly
families (3)
Married
couples
Source: Statistics Canada
2014 Canadian Chain Restaurant Industry Review
Two-parent
Married
Lone-parent Unattached
families with couples with
families
individuals
children
other
relatives
31
Population (000s) by Broad Age Groups 2011 for the Six Largest CMAs
4,187
2,748
0 to 14 years
15 to 64 years
1,742
65 years to 79 years
988 988 572 635 212 Toronto
(Ont.)
436 163 Montréal
(Que.)
356 252 93 Vancouver
(B.C.)
241 100 35 Calgary
(Alta.)
922 221 107 39 Edmonton
(Alta.)
917 80 years and over
214 129 45 Ottawa Gatineau
(Ont.)
Source: Statistics Canada
5.3.2 Excerpts from “The Future of Foodservice” – NPD’s five-year forecast for the Canadian
market and Eating Patterns in Canada (EPIC)
Published in 2012, the Future of Foodservice report forecasts consumer information on restaurant
segments, food & beverage categories, and visit situations, to 2016. Other Ethnic entrées (other than
Chinese and Italian) are identified as one of the strongest growing opportunities, and is anticipated
to grow by nearly +3% per year until 2016. Continued growth of the population, primarily through
immigration, supports further development of ethnic choices at restaurants. Tastes will continue to
become more adventurous, with ethnic flavours and dishes trickling down to the mainstream.
According to NPD’s Eating Patterns in Canada report, the challenge for restaurants is that over three
quarters of Canadians consider having “ethnic” food in the home. While Chinese and Italian foods
rank as the favourites for Canadians, consideration is high at over 20% for other different ethnicinspired foods. As Canadians are considering a variety of ethnic-inspired foods as part of their norm,
restaurants need to fortify a point of difference as consumers are continually exposed to more options
that compete for the same share of wallet.
5 | Trends Impacting Restaurants
32
6
Finance
6.1
6.2
6.3
6.4
The Economy
Global Financial Markets
Financial Markets in Canada
Total Financeable Debt Market Size and Loan Volumes
2014 Canadian Chain Restaurant Industry Review
33
6.1 The Economy
The following chart compares total real foodservice sales growth against two economic indicators:
real disposable income growth and real GDP growth.
Total Foodservice Real Growth versus Real Disposable Income Growth and Real GDP Growth
10.0%
2014 -f
2013-p
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0.0%
1990
Year-Over-Year Percentage Change
5.0%
-5.0%
-10.0%
-15.0%
-20.0%
Source: Statistics Canada,
Restaurant
and Foodservices
Association,
and
TD Economics Conference
RealCanadian
Foodservice
Sales-Total
Real
Disposable
Income
Real GDP
Board of Canada
The table illustrates a relationship between real foodservice sales, real GDP and real disposable
income. A moderate correlation exists between changes in real GDP and real foodservice sales and
between real disposable income and real foodservice sales. Comparing 1991 and 2009 suggests that
real disposable income could have a shielding effect on foodservice sales during time of recession. In
1991, both GDP and disposable income declined simultaneously, and foodservice sales fell by 15%.
Despite a greater decrease than GDP in 2009 (compared to 1991), real disposable income still grew
slightly and the decrease in foodservice sales was less than 5%.
6 | Finance
34
6.2
Global Financial Markets
The positive outlook of the 2014 global economy is shaped by key trends: US, Japan and the
Eurozone are experiencing their first synchronized expansion since 2010, supporting global growth
in 2014; consumer confidence is increasing in North America; and financial markets are stabilizing in
developing economies with China’s strong 7.5% GDP growth target for this year.
But while strong, China’s growth will be an important support for the global economy in 2014, debt
has grown quickly and rebalancing the economy has a long way to go. Also, escalating geopolitical
tensions in East Asia and the fast-changing new developments in Ukraine could have substantial
economic repercussions that disrupt growth and trade.
Central banks will maintain loose monetary policies to combat deflationary pressures and the
European Central Bank (ECB) will ease money supply further at a time when the US Fed considers
tapering. The Euro is up by 3% since January, which reduces the ability of Eurozone peripheral
countries to benefit from export boom to offset the decline in domestic demand.
The growing importance of liquidity of financial markets will continue to drive swings in assets and
commodity prices. In 2013, commodities underperformed developed market equities for the third
consecutive year, following ten years of outperformance; slowing China growth, US Fed tightening and
rising supply expectations were the main factors weighing on prices. But 2014 could be a turnaround
year as a slight increase in metal prices could be expected and oil and gas prices are likely to remain
range-bound providing tactical trade opportunities.
Policy response such as tightening rates in emerging markets (EM) in 2013, market volatility and
capital flow exposed some weaknesses, especially in India, Brazil, Indonesia, and Turkey leaving
less room for fiscal stimulus; fiscal balances deteriorated in most EMs since the onset of the global
financial crisis, while the social pressure to expand government spending remained.
The global equities market continues to recover, showing overall better performance in 2013 in
comparison to 2012. The best performers in last three months have been Japan, US, Germany and
France. Japan boosted stock prices in the fourth quarter of 2013 supported by a stronger Yen but
emerging market currencies lost ground. The broadly held view that 2014 would be the year of
equities, with bonds doomed by the taper-driven rise in yields has already hit the first road bump. The
following chart shows the current trends of the main stock markets by region.
2014 Canadian Chain Restaurant Industry Review
35
International Stock Market Trends
MI Italy IBEX
Spain
CAC 40
France
Bovespa Brazil Hang Seng China
AX 20
Australia
NIKKEI Japan Dax
Germany
FTSE
UK
140
S&P
US
MexBol Mexico Dow Jones US
120
110
100
90
80
70
Asia Pacific
Europe
Latin America
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
60
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
Index (Jan 2011=100)
130
North America
Source: GE Market Intelligence Network
In the commodities market, while metal prices declined significantly in 2013, energy and food prices
increased slightly. Most commodities appear likely to remain in a soft patch in the next 12 months with
the exception of several food products such as corn, coffee and wheat.
Commodity Prices (International Monetary Fund Index)
300
250
Commodity Prices, IMF Indices
January 2000 = 100
200
150
100
50
0
All Commodities
Industrials Materials
Food
Crude Oil
Source: International Monetary Fund
6 | Finance
36
Commodities Percentage Change Year-Over-Year
80%
60%
40%
0%
-20%
Jan-01
Jun-01
Nov-01
Apr -02
Sep -02
Feb -03
Jul -03
Dec - 03
May- 04
Oct- 04
Mar- 05
Aug -05
Jan -06
Jun - 06
Nov -06
Apr-07
Sep -07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
20%
-40%
-60%
Commodities percentage change year over year
Source: GE Capital
International crude oil prices were relatively stable to start the year. The uncertainty surrounding
future economic growth, particularly in emerging market economies, as a result of the Federal
Reserve winding down its long-term asset purchase program (quantitative easing), has not had a
large effect on crude oil prices. Crude oil price strength in the face of potentially slower future global
economic growth may reflect the perceived willingness of OPEC swing producers to cut supply and
support prices should global liquid fuel demand weaken. Energy Information Administration (EIA)
expects Brent crude oil price to average $104.68 per barrel this year and $100.92 per barrel in 2015.
2014 Canadian Chain Restaurant Industry Review
37
Crude Oil Prices (Price per Barrel) Since 2000
160
140
$US Dollars
120
100
80
60
40
20
Jul-12
Jul-00
0
Brent Crude Oil Price Per Barrel
Source: GE Capital & EIA
6 | Finance
38
6.3 Financial Markets in Canada
Analysis
The Europe and US economic recovery will benefit Canada’s near-term economic outlook and the
stability of its financial markets. The domestic demand is improving, the unemployment rate is falling,
the Purchasing Manager’s index increasing and business confidence is up. However, high tensions and
geopolitical uncertainty (e.g., Ukraine) are tempering global economic optimism in 2014.
Concerns about the high level of Canadian household debt is still persisting, so a rise in the base
interest rate would be troublesome because so much debt is tied to mortgages and could cause a
sudden deleveraging.
The Bank of Canada held firm on keeping its interest rate at 1% as an incentive to increase investment
and exports as foreign demand strengthens and uncertainty diminishes. With an inflation rate close
to 2% and the economy expanding, GE Capital expects that the Bank of Canada will hold interest rates
steady until the end of 2014.
Since October last year, the Canadian dollar lost 6.8% against the US dollar driven by soft exports, a
limited shift toward business investment, and US Fed’s stance. As the US recovery builds, and exports
and investment improve, GE Capital expects the Canadian dollar to stabilize.
Forecast
Although Canada’s overall export growth rates were below expectations in 2013, the Canadian
economy rebounded at 2.9% GDP growth on a quarter to quarter basis annualized in the fourth
quarter, representing 2% on an annual basis; the oil extraction and mining sectors showed the
strongest growth supporting the GDP’s increase. In 2014, strong increases in investment will
be expected in transportation and warehousing, housing and public administration sectors.
Geographically, total capital investment is anticipated to increase in six of 13 provinces and territories
in 2014. Alberta anticipates the largest increase to support the oil and gas industry.
Despite the unexpected decrease of employment in January, the Canadian unemployment rate will
continue to be close to 7% with a moderated wage growth in the next three years that will help to
keep prices in line as the Canadian government holds the interest rate steady during 2014.
GE Capital sees Canada’s GDP growth picking up to 2.3% in 2014 based on recovery of US, China and
Europe, increased government investment and the weak Canadian dollar that will boost Canadian
exports.
The US economy is forecasted to grow by almost 4% in 2014 with the labour market improving, US
consumer confidence growing, steady gasoline prices and increasing US housing starts.
2014 Canadian Chain Restaurant Industry Review
39
Canada—GDP Growth
0.06
0.04
2017Q3
2017Q1
2016Q3
2016Q1
2015Q3
2015Q1
2014Q3
2014Q1
2013Q3
2013Q1
2012Q3
2012Q1
2011Q3
2011Q1
2010Q3
2010Q1
2009Q3
2009Q1
2008Q3
2008Q1
2007Q3
2007Q1
2006Q3
2006Q1
2005Q3
2005Q1
2004Q3
2004Q1
2003Q3
2003Q1
2002Q3
0
2002Q1
0.02
-0.02
-0.04
-0.06
Canada: GDP Growth (%YOY)
Source: GE Capital
In January, yields on 10-year US Treasuries decreased to 2.74% from 3.0% at the end of last year, as a
result of Fed’s tightening monetary policy. The factors influencing policy interest rates in 2014 for G5
countries include:
žž the Central Bank’s easing of monetary policy to encourage investors and business to take
more risk;
žž China reforms including changing the housing registration system, relaxing the one child policy
and pursuing financial sector liberalization to tighten liquidity;
žž potential increase in inflation in the US; and
žž policy clarity.
6 | Finance
40
G5 Average Policy Interest Rates
6%
5%
4%
3%
2%
1%
Source: GE Capital
GE Average Policy Interest Rate
Note: The G5 economies include the United States, the Euro Area, Japan, the United Kingdom and Canada.
2014 Canadian Chain Restaurant Industry Review
Mar-14
Jul-13
Nov-12
Mar-12
Jul-11
Nov-10
Mar-10
Jul-09
Nov-08
Mar-08
Jul-07
Nov-06
Mar-06
Jul-05
Nov-04
Mar-04
Jul-03
Nov-02
Mar-02
Jul-01
Nov-01
Mar-00
0%
41
6.4 Total Financeable Debt Market Size and Loan Volumes
The following charts summarize total financial debt in the Canadian restaurant industry by transaction
type and segment type as prepared by GE Capital. GE Capital estimates a total financeable debt of
$4.5 billion. Financeable debt is used for refinancing/renovations, acquisitions and new builds.
Total Financeable Debt by Transaction Type ($millions)
$868.1 $1,077.7 $400.2 $4,488.1
Total
Market
QSR
Coffee
Casual
$421.5 Sandwich
$361.2 Family
Casual
$351.3 Premium
Casual
$175.8 Pizza
$62.6 Asian
$45.3 Express
$12.7 Chicken
Source: GE Capital
Total Financeable Debt by Transaction Type ($MM)
$2,394.9
$4,488.1
$1,655.1
$438.2
Total Market
Refinance/Renovation
Acquisiton
New Build
Source: GE Capital
6 | Finance
42
7
Cost of
Doing
Business
7.1
7.2
7.3 7.4 7.5 Cost of Sales
Labour Costs
Rental and Occupancy Costs
Other Operating Costs
CAPEX
2014 Canadian Chain Restaurant Industry Review
43
7.1 Cost of Sales
Restaurant Canada’s 2013 Operations Report indicates that cost of goods sold represented 36.0% of
foodservice revenues in 2011 (the most recent year for which data is available).
Historical Average Cost of Goods Sold as a Percentage of Revenues
37.0%
Percentage of Sales
36.5%
36.0% 36.0%
35.8% 35.7% 35.5%
36.0% 35.5% 35.4% 35.0%
34.5%
34.0%
2006
2007
2008
2009
2010
2011
Cost of Sales
Source: Restaurants Canada “2013 Operations Report”
Cost of goods sold as a percentage of revenues remained unchanged from 2010 indicating that
foodservice operators were able to increase menu prices to match increased input costs.
7 | Cost of Doing Business
44
The following chart tracks consumer price indices for various core ingredients classifications.
Consumer Price Indices
160
150
CPI = Consumer Price Index
2002 = 100
146 140
135.2 130
120
110
100
99.9 80
116.5
114.1 112.2
109.8 108.1 106.6
90
152.2 150.4 108.2 106.9
98.5 95 90.2 2005
2006
120.4 117.6 125
137.9 129.1
118.4 114.6 112 109.2 109.8 100.8 101.3 100.3
111.7 110.2 108.6
138.8 130.3
133.6
134.8
132 134.8 134.3
125.4 119.1 111.2 109.3 108.7
117.1 110.6 109 117.4
114.3 113.3
113.3 111.8 111.8
92 2007
2008
2009
2010
2011
2012
Meat
Fish, seafood and other marine products
Dairy products
Bakery and cereal products
Vegetables and vegetable preparations
Alcoholic beverages purchased from stores
2013
CPI - All Items
Source: Statistics Canada
Bakery and cereal products, dairy products and meats have increased in price at a greater rate than
general inflation. Vegetables and vegetable preparation prices experienced the greatest increase in
2012, growing by 3.6% followed by eggs, which increased by 3.0%. Prices for alcoholic beverages
purchased from stores; vegetables and vegetable preparations; and fish, seafood and other marine
products have historically increased at a rate below general inflation.
The following chart compares menu price inflation (represented by the consumer price index for food
purchased in restaurants) to producer price indices for: meat, fish and dairy; beverages; and fruit,
vegetables and feed.
2014 Canadian Chain Restaurant Industry Review
45
Menu Inflation versus Producer Price Indices
140
PPI= Producer Price Index
2002 = 100
130.9
130
121.7
118.7
120
113.6
110.9
110
106.4
102
100
128.7
126.8
99.1
118.6
116.9
117.9
100.8
108.9
108.1
105.2
102.4
104.1
124.2
118.7
107.7
103.1
123.8
110.2
111.3
105.2
90
80
2006
2006
Source: Statistics Canada
2007
2008
2009
2010
2011
2012
PPI - Meat, Fish and Dairy
PPI - Fruit, Vegetables and Feed
PPI - Beverages
CPI - Food from Restaurants
2013
As shown, prices for food purchased from restaurants have increased consistently since 2005. While
producer prices for beverages, fruit, vegetables and feed have occasionally increased faster than food
purchased from restaurants, core product PPI’s are generally increasing at a slower rate than the price
of restaurant meals.
The following chart compares menu inflation (represented by the consumer price indices for food from
FSR, food from QSR and served alcohol) to general inflation (represented by the consumer price index
for all items).
7 | Cost of Doing Business
46
Menu Inflation versus General Inflation
135
CPI = Consumer Price Index
2002 = 100
133.7 131.7 130
131.3 130.1 128.4 128.0 125
124.9 121.8 120
118.8 115.2 115
111.7 110
113.6 121.9 121.7 119.4 115.9 115.7 125.5 122.8 119.9 116.5 114.4 111.9 109.1 107.5 107.7 109.2 109.5 105
2005
2006
2007
2008
2009
2010
2011
2012
CPI - Food from Full-Service Restaurants
CPI - Food from Quick-Serivce Restaurants
CPI - Served Alcohol
CPI - All Items
2013
Source: Statistics Canada
As shown, prices for food and alcohol purchased in restaurants have increased at a greater rate and
with less variability than general inflation. Furthermore, unlike general inflation, menu prices did not
decline during the 2009 recession. FSR food prices have increased at a greater rate than QSR food
prices since 2002.
The University of Guelph’s Food Price Index 2014 forecasts that overall retail food prices will increase
by 0.3% to 2.6% with the greatest increase seen for fish and seafood (3.0% to 5.0%). 1
Respondents of the C-Suite Survey were asked how they expected cost of sales as a percentage of
revenues to change in 2014.
1
Charlebois, S, Tapon, F., van Duren, E., von Massow, M., & Pinto, W. (2014) Food price index 2014. Guelph, ON:
2014 Canadian Chain Restaurant Industry Review
47
In 2014, Cost of Sales as a Percentage of Revenues is Expected to:
Decline more than 2% points
0%
Decline 1.6% to 2% points
0%
Decline 1.1% to 1.5% points
0%
Decline 0.6% to 1% points
10%
Decline 0.1% to 0.5% points
0%
Remain flat
10%
Increase 0.1% to 0.5% points
33%
Increase 0.6% to 1% points
29%
Increase 1.1% to 1.5% points
5%
Increase 1.6% to 2% points
10%
Increase more than 2% points
5%
Not sure
0%
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
The majority of respondents (80%) expect cost of sales as a percentage of revenues to increase in
2014. Thirty-three percent of respondents expect cost of sales to increase by 0.1% to 0.5% and 29%
expect cost of sales to increase by 0.6% to 1.0%. Respondents believe increases will be lower in 2014
than they anticipated in 2013.
fsSTRATEGY interviewed grower associations and government agencies to understand the factors
influencing foodservice cost of sales. Findings of this analysis included:
žž Wholesale demand for proteins in 2013 remained relatively flat. Growth for branded proteins
(e.g., signature beef) grew slightly while demand for commodity products (e.g., raw ground beef)
was slightly lower. Prices for beef increased in 2013. The demand for fresh fruits and vegetables
demand was strong in 2013.
žž Prices will continue to rise in 2014 due to rising input costs and, in the case of beef, declining North
American supply2. International demand for North American beef is also increasing. Beef prices
are expected to rise in 2014. These dynamics will no doubt have an effect on demand in 2014.
Demand for fresh fruits and vegetables is expected to remain strong in 2014. Mexico appears to be
increasing production; however, drought conditions in California in the early part of the year may
affect supply and, as a result, operators could experience higher costs.
žž All growers that were interviewed cited shortage of labour, increasing minimum wages and rising
labour costs as factors that are contributing to the need for higher prices. Yet, if demand remains
flat, growers may be hard pressed to recover these costs.
2
Growers have been liquidating their herds over last seven years. 2013 saw the lowest
US calf production in North American since the 1950s. Similar declines have occurred in
Canada. Several US processing facilities could close in 2014 due to low supply.
7 | Cost of Doing Business
48
fsSTRATEGY also interviewed foodservice distributors to understand the factors influencing
foodservice cost of sales. Findings of this analysis included:
žž Foodservice distributors report demand in 2013 remained relatively flat compared to 2012.
The only growth experienced was from independent operators; chain demand remained flat.
Distributors did not see prices increase as much as expected, as some of the dire cost increases
that were predicted did not materialize from suppliers.
žž Distributors expect foodservice sales to grow by two to three percent in 2014, with a small amount
of traffic growth and the majority of growth coming through operator price increases. Weather
conditions in the early part of 2014 have dampened restaurant traffic. Some distributors hope
that the declining Canadian dollar will spur some additional cross border tourism and, therefore,
foodservice demand. Distributors are facing significant labour shortage issues and rising fuel costs.
Distributors expect price increases for their customers in 2014 will be at or just over inflation.
Distributors are working hard to absorb rising costs by introducing greater efficiency through
technological innovations and better route scheduling.
žž Distributors suggest that a number of issues will affect the foodservice industry in 2014. These
include:
žž continuing concern over supply-managed products and their effect on foodservice
operating costs;
žž limited product innovation on the part of food processors, leading to some limitations on
new product introduction by foodservice operators3; and
žž continuing consolidation in both the food distribution and foodservice operator sectors.
7.2 Labour Costs
Restaurants Canada’s 2013 Operations Report indicates that salaries and wages represented 33.6%
of foodservice revenues in 2011 (the most recent year for which data is available).
Salaries and wages as a percentage of revenues in 2011 decreased slightly from 33.9% in 2009 and
2010 to 33.6% in 2011.
By the end of 2014, provincial and territorial minimum wages for adult workers will have increased by
15% from minimum wages at the end of 2009.
3
Operators will need to innovate with existing ingredients as opposed to using new producer products.
2014 Canadian Chain Restaurant Industry Review
49
Historical Average Labour Cost as a Percentage of Revenues
36%
34.8%
Percentage of Sales
35%
34%
33.6%
33.9%
33.9%
2009
2010
33.6%
33%
32%
31.5%
31%
30%
29%
2006
2007
2008
2011
Salaries and Wages
Source: Restaurants Canada, 2013 Operations Report
Quebec
PEI
New Brunswick
Northwest Territories
Newfoundland
Nova Scotia2
British Columbia
Manitoba
Ontario
Yukon3
Nunavut
Liquor Servers/Workers
Receiving Gratuities
Alberta1
Adult Workers
Saskatchewan
Provincial and Territorial Minimum Wage Rates (Year End 2014)
$10.25
$9.75
$9.27
$10.00
$10.00
$10.00
$9.50
$10.35
$10.25
$10.40
$10.00
$11.00
$11.00
9.00
9.05
8.90
First Job/Entry Level
Students (Under 18)
9.55
9.65
10.30
Source: Human Resources and Skills Development Canada
THIS TABLE IS CURRENT AS AT March 10 2014
1
Alberta’s minimum wage will be adjusted annually every April
2
Nova Scotia’s entry level minimum wage is for inexperienced workers (less than three months employed in the type of worked
they are hired to do
3
Yukon Territory increases minimum wage every April 1 based on the Consumer Price Index
http://srv116.services.gc.ca/dimt-wid/sm-mw/rpt2.aspx?lang=eng&dec=5
http://srv116.services.gc.ca/dimt-wid/sm-mw/menu.aspx?lang=eng
7 | Cost of Doing Business
50
By the end of 2014, Nunavut and Ontario will have the greatest adult minimum wage at $11.00 per
hour and the Yukon Territory will have the lowest adult minimum wage at $9.27 an hour.
Some provinces have experienced considerable increases in minimum wage in recent years, as shown
in the table below.
Current and Dates of Changes in Minimum Wage by Province
Jurisdiction
Current
Alberta
$9.75
British
Columbia
2006
2007
2008
2009
01-Sep-07
$8.00
01-Apr-08
$8.40
01-Apr-09
$8.80
2010
$10.25
2011
2012
01-Sep-11
$9.40
01-Sep-12
$9.75
01-May-11
$8.75
01-Nov-11
$9.50
01-May-12
$10.25
$10.25
01-Apr-06
$7.60
01-Apr-07
$8.00
01-Apr-08
$8.50
01-May-09
$8.75
01-Oct-09
$9.00
01-Oct-10
$9.50
01-Oct-11
$10.00
01-Oct-12
$10.25
$10.00
01-Jan-06
$6.50
01-Jul-06
$6.70
05-Jan-07
$7.00
01-Jul-07
$7.25
31-Mar-08
$7.75
15-Apr-09
$8.00
01-Sep-09
$8.25
01-Apr-10
$8.50
01-Sep-10
$9.00
01-Apr-11
$9.50
01-Apr-12
$10.00
Newfoundland
and
Labrador
$10.00
01-Jan-06
$6.50
01-Jun-06
$6.75
01-Jan-07
$7.00
01-Oct-07
$7.50
01-Apr-08
$8.00
01-Jan-09
$8.50
01-Jul-09
$9.00
01-Jan-10
$9.50
01-Jul-10
$10.00
Northwest
Territories
$10.00
Manitoba
New
Brunswick
Nova
Scotia
$10.30
01-Apr-06
$7.15
01-May-07
$7.60
01-May-08
$8.10
01-Apr-09
$8.60
01-Apr-10
$9.00
01-Apr-11
$10.00
01-Apr-10
$9.20
01-Oct-10
$9.65
01-Oct-11
$10.00
Nunavut
$11.00
Ontario
$10.25
01-Feb-06
$7.75
01-Feb-07
$8.00
31-Mar-08
$8.75
31-Mar-09
$9.50
31-Mar-10
$10.25
Prince
Edward
Island
$10.00
01-Apr-06
$7.15
01-Apr-07
$7.50
01-May-08
$7.75
01-Oct-08
$8.00
01-Jun-09
$8.20
01-Oct-09
$8.40
01-Jun-10
$8.70
01-Oct-10
$9.00
01-Jun-11
$9.30
01-Oct-11
$9.60
01-Apr-12
$10.00
Quebec
$9.90
01-May-06
$7.75
01-May-07
$8.00
01-May-08
$8.50
01-May-10
$9.50
01-May-11
$9.65
01-May-12
$9.90
$9.50
01-Mar-06
$7.55
01-Mar-07
$7.95
01-Jan-08
$8.25
01-May-08
$8.60
01-May-09
$9.25
$10.30
01-May-06
$8.25
01-Apr-07
$8.37
01-Apr-08
$8.58
01-Apr-09
$8.89
Saskatchewan
Yukon
05-Sep-08
$10.00
01-Apr-12
$10.15
2013
2014
01-Apr-13
$10.30
01-Apr-14
$10.40
01-Jan-11
$11.00
Source: Canada Ministry of Labour
2014 Canadian Chain Restaurant Industry Review
01-Jun-14
$11.00
01-Sep-11
$9.50
01-Apr-10
$8.93
01-Apr-11
$9.00
01-Apr-12
$9.27
01-May-12
$10.30
01-May-13
$10.15
01-May-14
$10.35
51
Employment Indices—All Industries, Foodservice and Employees per Foodservice Location
135
2002 = 100 128.7 130
123.7 125
123.9 130.3 124.7 124.5 121.1 119.1 120
117.4 118.6 116.9 115.9 115
109.0 110
103.5 105
101.4 104.1 110.3 109.2 112.7 111.6 111.7 109.9 109.2 109.9 2007
2008
2009
113.1 114.4 111.4 107.3 105.4 102.0 100
98.0 95
90
2003
2004
2005
2006
Employment Index
- All Industries
2010
2011
2012
2013
Employment Index - Commercial Foodservice
Commercial Foodservice Employees per Location
Source: Labour Force Survey, Statistics Canada
As shown, employment in the commercial foodservice industry has grown at a faster rate than
national employment. The average number of employees per location has increased significantly
from 8.4 in 2003 to 11.1 in 2012 before dipping to 10.6 in 2013. The 2013 decline in employees
per location coincides with the significant increase (9%) in the number of commercial foodservice
locations.
7 | Cost of Doing Business
52
Respondents to the C-Suite Survey were asked how they expected labour cost as a percentage of
revenues to change in 2013.
In 2014 compared to 2013, Labour Cost are Expected to:
Decline more than 2% points
0%
Decline 1.6% to 2% points
0%
Decline 1.1% to 1.5% points
0%
Decline 0.6% to 1% points
5%
Decline 0.1% to 0.5% points
0%
Remain flat
0%
Increase 0.1% to 0.5% points
41%
Increase 0.6% to 1% points
27%
Increase 1.1% to 1.5% points
18%
Increase 1.6% to 2% points
9%
Increase more than 2% points
0%
Not sure
0%
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
Most respondents (95%) expect labour cost as a percentage of revenues to increase in 2014. Forty-one
percent of respondents expect labour cost as a percentage of revenues to increase by 0.1% to 0.5%.
7.3 Rental and Occupancy Costs
Restaurants Canada’s 2013 Operations Report indicates that rental and leasing costs accounted for
7.7% of foodservice revenues in 2011 (the most recent year for which data is available).
Historical Average Rental and Leasing Cost as a Percentage of Revenues
7.8%
7.6%
Percentage of Sales
7.6%
7.7%
7.4%
7.2%
7.2%
2008
2009
7.0%
7.0%
6.8%
7.2%
6.8%
6.6%
6.4%
6.2%
2006
2007
Rental and leasing
2014 Canadian Chain Restaurant Industry Review
2010
2011
Source: Restaurants Canada,
2012 Operations Report
53
Rental and leasing costs as a percentage of revenues increased by 0.1 percentage points in 2011
compared to 2010.
Respondents to the C-Suite Survey were asked how they expected rent and occupancy cost as a
percentage of revenues to change in 2014.
In 2014 Compared to 2013, Rent & Occupancy Costs are Expected to:
Decline more than 2% points
0%
Decline 1.6% to 2% points
0%
Decline 1.1% to 1.5% points
0%
Decline 0.6% to 1% points
0%
Decline 0.1% to 0.5% points
0%
Remain flat
32%
Increase 0.1% to 0.5% points
14%
Increase 0.6% to 1% points
23%
Increase 1.1% to 1.5% points
9%
Increase 1.6% to 2% points
9%
Increase more than 2% points
14%
Not sure
0%
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
Respondents’ opinions on how rent and occupancy costs were expected to change as a percentage
of revenues varied. Thirty-two percent of respondents believe rents will remain flat in 2014 (perhaps
many of these are locked into leases with no changes). The balance of respondents (68%) indicated
they believe rents will increase. Twenty-three percent of respondents believe rents will increase by
0.6% to 1.0% of revenue.
fsSTRATEGY interviewed landlords to understand the factors affecting rental trends and expenses for
restaurants in Canada. Findings from these interviews included:
žž The supply of leasable premises for foodservice has not increased dramatically over the past five
years. Major mall development has been nominal during this period. Landlords have new projects
in development now but that supply will not enter the market for 18 to 24 months. The new
destination mall inventory is expected to offer a substantially improved shopping experience for
consumers. Premiumization of mall products, décor and services, aligned with mall positioning,
may increase mall visitation. Landlords are seeking to balance differentiated foodservice concepts
with those that are familiar to and expected by consumers. Differentiation can come from local
brands with a local following, innovation by existing chains and new market entrants from the US
and elsewhere.
7 | Cost of Doing Business
54
žž Landlords report demand for foodservice space continues to rise. Demand for 1,500 to 3,000
square foot spaces from US chains testing the Canadian market is prevalent. Western Canadian
chains are exploring Eastern Canada sites with greater interest. Some operators are beginning to
favour the economics of regional as opposed to destination malls.
žž Landlords indicate that while foodservice leasing rates are climbing due to market dynamics;
compared to retail leasing, prices are relatively attractive. In addition, foodservice operators are
demanding greater tenant inducements. Landlords confirm that there is very little good space left
in urban areas.
žž Landlords reported that leasing prices rose anywhere between 2% and 6% in 2013, depending
on regional economic and market conditions. Increases in Alberta and Saskatchewan were at the
higher end of the range. Landlords expect price increases in 2014 to track similarly, but perhaps
slightly less in Alberta and Saskatchewan.
Time strapped consumers are aggregating their shopping and dining experiences. In addition to
ongoing demand for new quick service concepts, fast casual dining (modified counter service) and
premium casual dining concepts with healthy food options are in high demand from consumers.
Operators able to offer differentiated concepts of these types will have an advantage in gaining lease
space.
While the leasing market clearly favours landlords, opportunities exist for foodservice operators who
can respond to these trends.
7.4
Other Operating Costs
Other operating costs include utilities (including telephone), repair and maintenance, advertising and
promotion, depreciation and other operating costs.
Restaurants Canada’s 2013 Operations Report indicates that total other operating costs represented
18% of foodservice sales in 2011. The following table shows the average other operating costs as a
percentage of revenues for the most recent five year period available (2007 to 2011).
2014 Canadian Chain Restaurant Industry Review
55
Historical Average Other Operating Costs as a Percentage of Revenues
2007
2008
2009
2010
2011
Repair and Maintenance
2.6%
2.6%
2.6%
2.6%
2.5%
Utilities Including Telephone
2.9%
2.8%
2.8%
2.8%
2.7%
Advertising and Promotion
2.7%
2.8%
2.8%
2.8%
2.8%
Depreciation
2.9%
2.9%
3.0%
3.1%
2.9%
Other
8.6%
7.0%
7.4%
6.7%
7.6%
19.7%
18.1%
18.6%
18.0%
18.5%
Total Other Operating Costs
Source: Restaurants Canada, Statistics Canada
As shown, other expenses as a percentage of revenues decreased between 2007 and 2011 (the most
recent year for which data is available).
The following chart tracks growth trends of various other operating costs as indices between 2007
and 2011.
Historical Average Other Operating Costs as a Percentage of Revenues
120.0
110.0
2005=100
100.0
90.0
80.0
70.0
60.0
50.0
2007
2008
2009
2010
2011
Repair and maintenance
Utilities including telephone
Advertising and promotion
Depreciation
Other
Total Other Operating Costs
Source: fsSTRATEGY Inc. based on data from Restaurants Canada and Statistics Canada
1
Other expenses include commissions paid to non-employees, professional and business service fees, subcontract expenses,
charges for services provided by head office, office supplies, insurance, travel and entertainment, property and business
taxes, licenses, permits, royalties and franchise fees, delivery, warehousing, postage and courier, financial service fees, interest
expense, and bad debts.
56
As shown, utilities, and advertising and promotion cost ratios have maintained at 2005 levels.
Depreciation and repairs and maintenance costs ratios declined slightly in 2011 but are still greater
than 2005.
The following graph compared commodity prices for natural gas and electricity.
Energy Commodity Price Indices
160.0
140.0
150.9 2006=100
129.1 116.4 120.0
100.0
134.5 101.8 100.0 100.0 80.0
90.9 105.5 99.1 85.4 60.0
58.3 40.0
45.3 40.2 31.5 20.0
0.0
2006
2007
2008
2009
Natural Gas
2010
2011
2012
36.7 2013
Electricity
Source: fsSTRATEGY Inc. based on data from the Ontario Energy Board
As shown, natural gas prices, which have declined steadily since 2008 increased by 5.2 index points in
2013. Electricity prices continue to increase significantly, growing by 16.4 index points in 2013.
Respondents to the C-Suite Survey were asked how they expected other operating costs as a
percentage of revenues to change in 2014.
2014 Canadian Chain Restaurant Industry Review
57
In 2014 Compared to 2013, Other Operating Costs are Expected to:
Decline more than 2% points
0%
Decline 1.6% to 2% points
0%
Decline 1.1% to 1.5% points
0%
Decline 0.6% to 1% points
0%
Decline 0.1% to 0.5% points
0%
Remain flat
29%
Increase 0.1% to 0.5% points
48%
Increase 0.6% to 1% points
5%
Increase 1.1% to 1.5% points
10%
Increase 1.6% to 2% points
5%
Increase more than 2% points
5%
Not sure
5%
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
As shown, most (71%) of respondents expect other operating costs as a percentage of revenues will
increase in 2014, while 29% expect the cost ratio will remain flat.
7 | Cost of Doing Business
58
7.5 CAPEX
Capital expenditure (“CAPEX”) in the accommodation and foodservice sector was approximately
$3.8 billion in 2013, down $182.7 million from 2012. Approximately $2.4 billion (62%) CAPEX was
spent on construction projects. The following chart compares capital expenditure and construction
expenditure in the accommodation and foodservice sector for the last nine years.
Capital Expenditure in the Accommodation and Foodservice Sector
$4,500
$4,032.8 $4,032.5 $4,000
$3,500
$3,320.9 $3,288.0 $2,911.3 $3,000
$2,640.2 Millions of Dollars
$3,849.8 $3,688.8 $2,732.6 $2,604.1 $2,500
$2,445.7 $2,278.3 $2,000
$1,786.2 $2,220.4 $2,256.7 $2,378.6 $1,853.2 $1,508.6 $1,500
$1,000
$1,300.2 $1,131.6 $1,058.1 $1,586.8 $1,471.2 $1,100.4 $1,009.7 $817.9 $500
$0
$1,432.1 2005
2006
2007
2008
Total Capital Expenditure
2009
2010
2011
2012
2013
Capital Expenditures for Construction
Capital Expenditure on Equipment and Machinery
Source: Statistics Canada
As shown, the 2009 recession had a significant impact on capital expenditure. Expenditures on
equipment and machinery were affected less by the 2009 recession than construction and recovered
to pre-recession levels within two years, but declined slightly in 2013. Construction expenditures have
yet to return to pre-recession levels and are also down slightly from 2012.
2014 Canadian Chain Restaurant Industry Review
59
The following chart illustrates the changes to non-residential construction price indices over the most
recent eight years.
Non-Residential Construction Price Index
160
155.9 2002 = 100
150.7 152.1 150
141.4 140
146.6 142.0 138.7 130
126.5 120
117.0 110
100
2005
2006
2007
2008
2009
2010
2011
2012
2013
Construction Price Index: Total Non-Residential
Source: Statistics Canada
As shown, construction costs declined significantly in 2009, most likely due to competitive pricing
efforts to capture declining demand during the recession. Since 2009, prices have increased albeit at
a slower rate than pre-recession. The 2013 non-residential price index was 152.1 – 3.8 index points
below the peak in 2008 and 1.4 index points greater than 2012.
7 | Cost of Doing Business
60
The following chart compares average construction cost indices for major Canadian cities against
a 30-city United States average.
RSMeans Construction Cost Indices by Major Canadian City
240
230
1993 30 City US Average = 100
220
210
200
190
180
170
160
150
140
2005
Toronto
2006
Calgary
2007
2008
2009
Montreal
2010
Vancouver
2011
2012
Winnipeg
2013
2014e
30 City US Average
Source: RSMeans Square Foot Costs 2014. Copyright RSMeans, Norwell, MA 781-422-5000; All rights reserved
As shown, construction costs in each of the major Canadian cities continue to increase steadily. Cost
ranking between cities remains unchanged from 2012 with Calgary having the greatest cost index
and Winnipeg having the lowest cost index. All Canadian cities in the analysis exceed the 30-city
United States average; however, Winnipeg’s slowed increase may position the city at or below the 30city United States average in the future.
2014 Canadian Chain Restaurant Industry Review
61
Respondents to the C-Suite Survey were asked to provide the average cost per square foot to
construct a new unit excluding base building cost and land purchases.
C-Suite – Building Cost per Square Foot
Service Style
Minimum
Maximum
Average
Fast Casual
$250
$388
$319
Full Service
$180
$550
$304
Quick Service
$125
$1,100
$380
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
As shown, building costs range from $125 to $1,100 per square foot (clearly concept dependent, with
the averages being $319 per square foot for fast casual, $304 per square foot for full service and
$380 per square foot for quick service).
Respondents to the C-Suite Survey were also asked how they expected building costs for new units to
change in 2014.
In 2014 Compared to 2013, the Cost to Build New Units is Expected to:
Decline more than 10%
0%
Decline 7.6% to 10%
5%
Decline 5.1% to 7.5%
0%
Decline 2.6% to 5%
0%
Decline 0.1% to 2.5%
0%
Remain Flat
14%
Increase 0.1% to 2.5%
24%
Increase 2.6% to 5%
24%
Increase 5.1% to 7.5%
24%
Increase 7.6% to 10%
5%
Increase more than 10%
5%
Not sure
0%
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
As shown, 14% of respondents expect building costs to remain flat in 2013, while 81% expect an
increase in building costs.
Respondents’ reasons for expecting building costs to increase included:
žž labour;
žž general inflation;
žž weak Canadian dollar; and
žž demand exceeds supply.
7 | Cost of Doing Business
62
8
Top Chains
2014 Canadian Chain Restaurant Industry Review
During 2012, there were 71,979 commercial restaurant units across Canada, with over 1,100 new
chain stores opened. While commercial unit growth stayed flat, QSR Other Ethnic and Casual Asian
restaurants primarily increased the number of new units faster than any other type of restaurant
concept in Canada. The continued expansion of chain concepts is putting pressure on Independent
restaurant operators. In 2013, Independent restaurant operators netted out at 0% unit growth.
Total Units: 71,979 Chains Units grew by +4% while Independents netted out at 0%.
Alberta, Ontario, Quebec and BC lead chain unit growth.
Top Three Growing Chains:
Five Guys Burgers & Fries
Thai Express
Fresh Slice Pizza
Growth Opportunities: Fast Casual Segment in Canada
The term “fast casual” has been a buzzword in the Canadian foodservice industry for a few years
now, just as it was at the beginning of the decade in the US. The upscale quick-service restaurant
(QSR) sub-segment offers quality service and food, which amounts to a higher cheque average than
QSR. It also compels consumers to choose between freshness, quality and variety rather than speed
of service and value pricing. While still relatively underdeveloped in the Canadian market, the fast
casual sub-segment is making significant inroads, capturing six percent of all QSR visits in Canada, as
the steady increase in units drives growth. Canadian fast casual concepts are likely to continue on a
strong growth path in 2014 and 2015. US fast casual operators are looking to the Canadian landscape
to extend their brands. This expansion combined with the continued development of Canada’s own
fast casual brands will result in aggressive unit growth. Expect fast casual to lead over the next 5
years, outpacing all other segments for unit development.
8 | Top Chains
64
9
Notes
Notes About This Report
This report is not a complete analysis of every material fact with respect to
any company, segment or industry. Data has been obtained from sources
considered reliable, but are not guaranteed and GE Capital, fsSTRATEGY and
The NPD Group make no representations or warranties as to the accuracy
or completeness of this data. Discussion of tax, financial, and economic
developments and the potential consequences of those developments is
provided for informational purposes only. Nothing in this report should be
construed as investment, tax or financial advice. Readers of the report are
encouraged to consult their own tax, financial or legal advisor before acting
upon the information provided herein.
2014 Canadian Chain Restaurant Industry Review
fsSTRATEGY is an alliance of senior consultants focusing on
business strategy support - research, analysis, innovation and
implementation - for the foodservice industry. Our team has
extensive consulting experience in foodservice across Canada.
We also offer international experience, having worked in the
United States, Australia, South America, Africa and Europe. Our
team is unique in that we provide service to all foodservice
sectors (restaurants, attractions, hotels and resorts, gaming
establishments and institutions) and all levels of the foodservice
supply chain (growers, processors, distributors and operators).
The NPD Group provides global information and advisory services
to drive better business decisions. By combining unique data assets
with unmatched industry expertise, we help our clients track their
markets, understand consumers, and drive profitable growth.
Practice areas include automotive, beauty, consumer electronics,
entertainment, fashion, food/foodservice, home, luxury, mobile,
office supplies, sports, technology, toys, and video games.
For more information, visit npdgroup.ca and npdgroupblog.com.
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