GE Capital
Franchise Finance
2015
Canadian Chain
Restaurant
Industry Review
Research Partners
GE Capital
Franchise Finance
2015
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Cost of Doing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
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 sixth annual Canadian Chain Restaurant Industry
Review. I am pleased to bring you this extensive research report on the state
of chain foodservice in the 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, 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 2015 and for several years to come. GE Capital wishes to thank
fsSTRATEGY and The NPD Group 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, we estimate that the Canadian foodservice industry
sales will increase by 4.0%, or approximately $2.8 billion, to $74.1 billion in 2015.
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, Canada Franchise Finance
What we know can help you grow.
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, financing is just the start. On top of smart financing, we provide the know-how 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 operational 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
Now in its sixth 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
Designlink
INTERNATIONAL
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.
LAWYERS & TRADE-MARK AGENTS
MAY 5+6, 2015
hILTON TORONTO hOTEL
*Confirmed Sponsors as of APRIL 7, 2015
RESTAURANTINVEST.CA RESTAURANTINVEST.CA RESTAURANTINVEST.CA RESTAURANTINVEST.CA
5
2
Introduction
fsSTRATEGY Inc. (“fsSTRATEGY”) and The NPD Group (“NPD”) are pleased to
release this 2015 Canadian Chain Restaurant Review as part of the 2015
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.
žž C-Suite Survey conducted by fsSTRATEGY in January and February, 2015
and sent to over 100 CEOs and CFOs in the Canadian chain foodservice
market.
žž Detailed data from NPD’s 2020 Vision: The Future of QSR and Full Service
Dining: How to Win Customers Back reports.
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, 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.
[email protected]@npd.com
[email protected]
(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 approximately 4% of national gross domestic
product in 2014 and industry sales are expected to increase by 4.0% to $74.1 billion in 2015. The
Canadian foodservice industry is divided into commercial and non-commercial sectors. Commercial
foodservice includes full-service restaurants (“FSR”), quick-service restaurants (“QSR”), and drinking
places. Chain foodservice sales reside in these three categories.
Historic Nominal Foodservice Sales by Sector ($millions)
2011
(Millions)
Quick-Service Restaurants
Full-Service Restaurants
Contract and Social Caterers
Drinking Places
Total Commercial
Accommodation Foodservice
2012
Change
(Millions)
2013
Change
(Millions)
2014
Change
(Millions)
2015 (Forecast)
Change
(Millions)
Change
$21,962.0
3.5%
$23,114.4
5.2%
$24,137.9
4.4%
$25,417.2
5.3%
$26,459.3
4.1%
21,486.0
2.6%
22,545.2
4.9%
23,722.0
5.2%
24,813.2
4.6%
25,780.9
3.9%
4,213.5
5.4%
4,447.2
5.5%
4,600.4
3.4%
4,904.0
6.6%
5,168.8
5.4%
2,362.4
-4.3%
2,338.8
-1.0%
2,311.3
-1.2%
2,329.8
0.8%
2,353.1
1.0%
$50,024.0
2.9%
$52,445.6
4.8%
$54,771.6
4.4%
$57,464.2
4.9%
$59,762.1
4.0%
4.6%
$5,235.0
0.6%
$5,456.0
4.2%
$5,623.0
3.1%
$5,890.0
4.7%
$6,162.0
Institutional Foodservice1
3,531.8
2.1%
3,668.6
3.9%
3,898.5
6.3%
3,985.2
2.2%
4,128.7
3.6%
Retail Foodservice2
1,270.0
-1.4%
1,227.1
-3.4%
1,351.3
10.1%
1,425.6
5.5%
1,485.5
4.2%
Other Foodservice3
2,304.4
2.2%
2,362.0
2.5%
2,416.3
2.3%
2,484.0
2.8%
2,558.5
3.0%
Total Non-Commercial
$12,341.2
1.1%
$12,713.7
3.0%
$13,289.1
4.5%
$13,784.8
3.7%
$14,334.7
4.0%
Total Foodservice
$62,365.2
2.5%
$65,159.3
4.5%
$68,060.7
4.5%
$71,249.0
4.7%
$74,096.8
4.0%
Menu Inflation
Real Growth
2.9%
2.5%
2.3%
2.1%
2.4%
-0.4%
2.0%
2.2%
2.6%
1.6%
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc. and Pannell Kerr Forster
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 4.9% in 2014 while non-commercial sales
increased by 3.7%. Commercial foodservice sales are projected by Restaurants Canada to increase by
4.0% to $59.8 billion in 2015.
Historical Foodservice Sales Total versus Commercial – 1998 through 2015 (Forecast)
80
74
1998: Commercial Foodservice 79.5% of Total Foodservice
2015: Commercial Foodservice 80.7% of Total Foodservice
70
71
68
65
59
60
57
45
44
31
33
35
36
37
38
2003
41
39
40
47
47
40
57
52
50
50
2002
Billions of Dollars
55
41
43
45
47
47
62
61
59
49
50
52
60
55
30
20
Commercial Foodservice Sales
Total Foodservice Sales
2015-f
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2001
2000
1999
1998
0
2014-p
10
p = preliminary
f = forecast
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting
Total nominal foodservice sales are expected to increase from $39.0 billion in 1998 to an estimated
$74.1 billion in 2015. This represents a compound average growth rate of 3.6%. Commercial sales
(which include chain restaurant sales) represent 80.7% of total foodservice sales, compared to
79.5% in 1998.
2015 Canadian Chain Restaurant Industry Review
9
2015 Forecasted Share of Foodservice Sales by Sector ($millions)
Total Foodservice
Total Commercial
$1,485.5 $2,558.5
$4,128.7
$6,126.0
Commercial Foodservice
$5,168.8
$2,353.1
$26,459.3
Quick-service restaurants
Accommodation
foodservice
Institutional foodservice
Full-service restaurants
Retail foodservice
Contract and social
caterers
Other foodservice
Drinking places
$57,762.1 $25,780.9
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting
Quick Service Restaurants (“QSRs”) and Full Service Restaurants (“FSRs”) generate relatively similar
sales (about $26 billion each annually) and together represent 87.4% of commercial foodservice sales
and 70.5% 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.
Real Sales Index by Industry Segment
125.0
Real Sales Index 2007 = 100
120.0
118.3
115.0
113.9
106.9
105.0
100.0
111.2
110.8
110.0
100.0
104.0
102.3
101.5
100.9
99.0
95.0
103.5
106.3
105.6
104.3
101.2
99.4
97.3
95.5
94.4
108.7
107.4
100.3
98.8
100.3
96.1
95.9
102.7
104.2
101.7
98.1
90.1
90.0
85.0
83.9
81.1
80.0
78.9
78.0
75.0
2007
2008
Total Commercial
2009
2010
Full-Service Restaurants
2011
2012
Quick-Service Restaurants
2013
Caterers
2014-p
Drinking Places
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc.
As shown, FSR real sales returned to pre-recession levels in 2013 and grew by 2014 to a level
approximately 4% higher than 2007. QSR real sales continue to increase and are now 18% 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.
Canada’s commercial foodservice industry grew by 2,343 units (2.6%) in 2014. The number of FSRs
grew by 3.8% in 2014 while real sales per unit dropped by 1.3% resulting in real sales growth of 2.5%.
In contrast, the number of QSRs grew by 1.7% and sales per unit grew by 2.1%, resulting in sales
growth of 3.8%.
2015 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 2014.
Chain versus Independent Restaurant Expenditures – 2014
100%
80%
30.1%
44.6%
33.9%
36.8%
36.8%
66.1%
63.2%
63.2%
Ontario
West
Canada
60%
40%
69.9%
55.4%
20%
0%
Atlantic
Quebec
Chain Restaurants
Independent Restaurants
Source: The NPD Group/CREST®
As shown, 63.2% of the expenditure in restaurants in Canada is in branded local, regional,
national and international chains. Quebec has the greatest percentage of independent restaurant
expenditures with 44.6% of all restaurant sales in restaurants unaffiliated with chains (down from
48.4% in 2013).
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
$52,445,642
$736,529
$192,728
$1,323,794
$973,567
$10,326,476 $20,104,382
$1,523,914
$1,620,784
$7,662,228
$7,819,284
2013
$54,771,603
$806,715
$199,626
$1,327,662
$972,541
$10,525,899 $20,962,919
$1,600,487
$1,715,724
$8,218,707
$8,272,371
2014-p
$57,464,241
$822,849
$203,219
$1,371,475
$1,000,745
$10,504,847 $22,199,731
$1,686,913
$1,806,657
$8,810,454
$8,892,799
2015-f
$59,762,178
$849,180
$209,316
$1,437,306
$1,023,762
$10,851,507 $23,132,120
$1,761,137
$1,884,344
$9,250,977
$9,239,618
Canada
Newfoundland
and Labrador
Canadian Commercial Foodservice Sales by Province – 2008 through 2015 – (Forecast)
Revenues (thousands)
Percent Change vs Previous Year
2008
4.8%
6.1%
3.2%
8.6%
5.3%
6.1%
5.7%
5.4%
10.2%
3.3%
1.3%
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
4.8%
8.4%
2.8%
3.8%
1.2%
4.2%
4.9%
5.8%
7.6%
8.2%
2.0%
2013
4.4%
9.5%
3.6%
0.3%
-0.1%
1.9%
4.3%
5.0%
5.9%
7.3%
5.8%
2014-p
4.9%
2.0%
1.8%
3.3%
2.9%
-0.2%
5.9%
5.4%
5.3%
7.2%
7.5%
2015-f
4.0%
3.2%
3.0%
4.8%
2.3%
3.3%
4.2%
4.4%
4.3%
5.0%
3.9%
Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc.
As shown, with 5.0% growth expected in 2015 Alberta is projected to be the fastest growing provincial
market, followed by Nova Scotia (forecasted to grow by 4.8%). Ontario accounts for 38.7% of total
commercial foodservice sales.
2015 Canadian Chain Restaurant Industry Review
13
The following table compares total commercial foodservice sales and commercial foodservice sales
per capita by province.
2014 Commercial Foodservice Sales and Commercial Foodservice per capita by Province
25,000
2,500
22,199.7
$2,137.58
National Commercial Foodservice
Sales Per Capita
2,000
$1,920.15
$1,605.33
$1,561.45
$1,622.94
$1,454.89
15,000
1,500
$1,278.79
$1,389.22
$1,327.40
$1,315.80
10,504.8
10,000
8,810.5
8,892.8
5,000
1,000
Per Capita Sales in Dollars
Sales in Millions of Dollars
20,000
500
822.8
1,371.5
203.2
1,686.9
1,000.7
1,806.7
0
0
NL
PE
NS
2014 Commercial Foodservice Sales
NB
QC
ON
MB
SK
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 are similar to the national average. Alberta continues to have the
greatest commercial foodservice sales per capita ($2,137) followed by British Columbia ($1,920).
Quebec has the lowest per capita commercial foodservice sales ($1,278).
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 2014 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 2014, Selected Publicly-Traded Restaurant Chains
Same Store Sales Growth Percentage
2007
2008
2009
2010
2011
2012
2013
2014
Minimum
-3.9%
-1.2%
-6.5%
-1.7%
-0.1%
-1.2%
-3.1%
-5.1%
Average
3.1%
1.8%
-2.5%
1.2%
2.5%
1.3%
0.0%
1.5%
Maximum
5.9%
7.3%
2.9%
4.9%
4.9%
3.3%
2.1%
6.3%
Source: fsSTRATEGY Inc. using data from publicly-traded company annual and quarterly reports
The average SSSG for the selected Canadian restaurant chains is graphically represented below.
Average Same Store Sales Growth 2007 through 2014, Selected Publicly-Traded Restaurant
Chains
4.0%
3.1%
3.0%
2.5%
1.8%
2.0%
1.5%
1.3%
1.2%
1.0%
0.0%
0.0%
-1.0%
-2.0%
-2.5%
-3.0%
2007
2008
2009
2010
2011
2012
2013
2014
Source: fsSTRATEGY Inc. using data from publicly-traded company annual and quarterly reports.
As the above tables demonstrate, SSSG declined significantly through the economic recession. A
gradual recovery ensued in 2010 and 2011. SSSG declined in 2012 and again in 2013. In 2014, SSSG
recovered for the chains in the sample; however, the range of SSSG performance varied in 2014 far
more than it did in 2013.
2015 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-four or 22% 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 2015.
In 2015 Compared to 2014, Sales are Expected to:
Decline more than 10%
0%
Decline 7.6% to 10%
0%
Decline 5.1% to 7.5%
0%
Decline 2.6% to 5%
4%
Decline 0.1% to 2.5%
8%
Remain Flat
16%
Increase 0.1% to 2.5%
52%
Increase 2.6% to 5%
20%
Increase 5.1% to 7.5%
0%
Increase 7.6% to 10%
0%
Increase more than 10%
0%
In 2015 Compared to 2014, Traffic is Expected to:
Decline more than 10%
0%
Decline 7.6% to 10%
0%
Decline 5.1% to 7.5%
0%
Decline 2.6% to 5%
0%
Decline 0.1% to 2.5%
22%
Remain Flat
35%
Increase 0.1% to 2.5%
26%
Increase 2.6% to 5%
13%
Increase 5.1% to 7.5%
4%
Increase 7.6% to 10%
0%
Increase more than 10%
0%
Source: fsSTRATEGY Inc. C-Suite Survey
2015 Canadian Chain Restaurant Industry Review
17
Most respondents (52%) expect industry sales to increase by up to 2.5% in 2015 with 20% expecting
growth of between 2.6% and 5%. These expectations represent increased optimism from last year’s
study when 50% of respondents expected sales to increase by 0.1% to 2.5% and 14% expecting
revenues to increase by 2.6% to 5% in 2014. Thirty-five percent of respondents expect industry traffic
to remain flat in 2015 and 26% expect traffic to grow by up to 2.5%. Respondents to the 2015 survey
were less optimistic than 2014 respondents with respect to industry traffic. Once again this year, the
survey strongly suggests that revenue increases will depend on operators’ ability to increase average
cheques.
3 | Foodservice Industry Profile
18
4
Top-of-Mind:
What CEOs
Think
4.1 Opportunities
4.2Challenges
4.3 Biggest Changes
4.4Sustainability
2015 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 2015. Responses were grouped into common categories.
Greatest Opportunities for the Foodservice Industry, 2015
Opportunity
2013
2014
2015 Change
Menu - innovation, more choice, healthy options, improved
ingredient quality, flavour
27%
27%
27%
à
Concept - fast casual, premium, non-traditional, home meal
replacement, retail grocery, differentiation, take-out, delivery
13%
17%
17%
à
Competition - consolidation, leveraging competitor failures
15%
7%
12%
á
Market Growth - sales, growth, increased traffic
6%
0%
8%
á
Marketing - building loyalty/repeat business, social media
12%
7%
7%
à
Economic Stability - oil/gas prices, changing Canadian dollar
2%
0%
7%
á
Target market - millennials, day part growth, small markets
0%
7%
5%
â
Beverage - bar and beverage programs, craft distilled spirits, happy
hour
0%
10%
3%
â
Location - suburban, strong regional economies, international
4%
10%
3%
â
Financing - availability, low interest rates
2%
0%
3%
á
Sustainability
0%
0%
3%
á
Service consistency and quality
6%
5%
2%
â
Technology
2%
2%
2%
à
Cost Efficiencies
6%
0%
2%
á
Catering and special events
0%
5%
0%
â
Procurement - bulk purchasing initiatives
0%
2%
0%
â
Facilities - smaller footprints, construction
6%
0%
0%
à
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
Consistent with 2014, menu innovation and refinement has remained as the single largest
opportunity and concept refinement has remained as the second largest. Taking advantage of
industry consolidation and competitor failures as well as driving market growth are perceived as
more significant opportunities in 2015 than in 2014. Not surprisingly, the economy is of more concern
to industry executives than in previous years in light of falling oil and gas prices and the decline in
the value of the Canadian dollar. Also, marketing initiatives focused on building loyalty and repeat
business, including social media, remain important to C-Suite executives. Opportunities for the
industry according to industry leaders appear to be more strategic than tactical in 2015.
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
2015. Responses were grouped into common categories.
Greatest Challenges for the Foodservice Industry, 2015
Challenge
2013
2014
2015
Change
2014/2015
Operating costs
33%
50%
29%
â
9%
17%
17%
à
12%
26%
17%
â
Rent
3%
5%
2%
â
General
8%
2%
2%
à
Cost of goods sold
Labour costs, productivity
Economy - US dollar, availability of financing
11%
9%
15%
á
Competition - more dense, growing
9%
7%
7%
à
Labour Issues - availability, quality
3%
0%
7%
á
Human resources - retention and availability
0%
3%
5%
á
Sales
2%
7%
4%
â
Sites - finding sites
0%
17%
2%
â
Government Policy
3%
0%
2%
á
Availability of franchisees
0%
3%
0%
â
Service - improving quality
1%
2%
0%
â
Nutritional information requirements
0%
2%
0%
â
Competition from the United States
2%
0%
0%
à
Food Safety
2%
0%
0%
à
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
Similar to 2014, operating costs continue to be the single greatest challenge for the survey
participants. In 2015, cost of goods sold was mentioned by the same number of respondents as
in 2014. The rising cost of proteins was cited frequently by respondents. In 2015, labour costs and
productivity were mentioned as challenges by fewer respondents than in 2014.
2015 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 2014, participants suggested short-term changes would include intensifying competition, industry
consolidation, improving consumer confidence, higher value expectations, independent restaurants
growth of market share, labour shortages, tightened regulation and rising real estate costs.
This year, participants continued the themes of intensifying competition and industry consolidation.
Competition is expected to continue to grow within Canada as Canadian chains battle for market
share as well as from US chains entering Canada, in particular from fast casual brands. Participants
believe even more mergers, acquisitions and closures will occur in the chain restaurant industry
in Canada. A shakeout in the gourmet burger sector was predicted by one participant. Economic
uncertainty, the potential for a decline in consumer spending, and price pressure and greater
frequency of discounting by operators to increase traffic is expected. Continuing challenges with
labour and greater demand for healthy options were also highlighted by participants.
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 2014, participants suggested long-term changes would include contraction and redefinition,
concept changes, demographic changes, growing population ethnicity, labour shortages and rising
labour costs.
This year, participants reiterated their belief that the industry can expect more consolidation over the
long-term, suggesting that there are too many chains offering the same products and experiences.
Operators foresaw the closures of weaker chains as well as increased competition from global
competitors. Participants also continue to expect more concept changes and the expansion of fast
casual dining.
One participant suggested the industry should expect continuing increases in consumer demand for
healthier dining options. Rising commodity costs and changing demographics are expected to lead
to lower spending per capita in restaurants.
Finally, government intervention on menus and food traceability are also expected to be long-term
issues for our industry.
4 | Top-of-Mind What CEOs Think
22
2015 Canadian Chain Restaurant Industry Review
23
4.4 Sustainability
fsSTRATEGY asked C-Suite Survey participants to provide their views on sustainable foodservice.
Participants were asked to rate the current level of importance that sustainability has for their chain.
Importance of Environmental Sustainability
Very Important
13%
Important
42%
Somewhat Important
13%
Neither Important nor Unimportant
33%
Somewhat Unimportant
0%
Unimportant
0%
Highly Unimportant
0%
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
Fifty-five percent of respondents indicated that environmental sustainability was important or
very important to their chain. A further 33% indicated environmental sustainability was neither
important nor unimportant. Comparison to responses from 2014 indicates the level of importance
of sustainability is gradually increasing in the foodservice industry. In 2014, 60% of respondents
indicated that sustainability had some level of importance to their chains. In 2015, sustainability
increased to 68%.
Respondents that ranked environmental sustainability important or very important were asked to
indicate which of the following contributed to that level of importance.
Sustainability Contributions
Sustainable facilities design
69%
Sustainable operating practices
62%
Use of local food
54%
Certified sustainable food/suppliers
54%
Use of hormone and antibiotic free proteins
46%
Use of organic food
23%
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
Of those that ranked sustainability important or very important, 69% of the respondents indicated
that sustainable foodservice facilities design contributed to their rating, 62% indicated that
sustainable operating practices (e.g., recycling, composting, refillable consumer beverage and/or
food containers) contributed to their rating and 54% indicated the use of local food and hormone and
antibiotic free proteins contributed to their rating. The use of organic food ranked much lower.
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
2015 Canadian Chain Restaurant Industry Review
25
5.1 Key Consumer Profiles
5.1.1 Commercial Restaurant Traffic by Age Group
The overall commercial foodservice market in Canada continued to face challenges during 2014. A
key issue facing the industry is the declining use of restaurants by Canadians on a daily basis. Today,
45% of Canadians go out to a restaurant daily, which remained at the same level of 2013. As a result,
customer traffic through the 72,000+ restaurant doors in Canada declined slightly. Clearly, restaurants
struggled to increase customer counts. Canadians remained concerned about the stalled economy
and future job creation, resulting in a negative impact on customers’ decisions to eat out of home
more frequently.
A key strategy for many restaurants across Canada is to focus on attracting Millennials, 18-34 year
olds. As shown below, Millennials’ use of restaurants is generally higher than other age groups. As well,
Millennials were the only age group to increase the number of visits per capita to restaurants in 2014.
The average Millennial now eats out of home 235 times a year.
Commercial Restaurants – Traffic per Capita – 2014 and 2013
190
229
183
157
235
201
146
185
165
164
YE Nov'13
YE Nov'14
Total
Consumers
Under 18
18-34
35-54
55+
16%
30%
32%
22%
% Share of Traffic
Source: The NPD Group/CREST
®
5.1.2
Commercial Restaurant Traffic by Household Income
As economic concerns continue to weigh on the minds of Canadians, all income groups declined in
their use of restaurants in 2014. As shown in the following table, the sharpest decline in restaurant
use was by households with incomes between $55,000 and over $100K, representing a decline of 13
to 14 visits per year in 2014 compared to 2013.
Commercial Restaurants – Traffic per Capita by Household Income
(Consumers 13 Years of Age and Older)
190 183
203 202
205 203
214 206
226 213
225 222
235 222
YE Nov'13
YE Nov'14
Total
Under $25k $25k-$45k
Consumers
% Share of Traffic
12%
Source: The NPD Group/CREST®
19%
$45k-$55k
10%
$55k-$70k $70k-$100k
14%
22%
$100k +
23%
26
From the perspective of overall spending at restaurants, growth has remained positive. On average,
quarter over quarter spending growth has been on the plus side for the past three years. Consumer
spending at restaurants in the September-to-November quarter rose by 4%, which was the greatest
growth rate noted over the past four quarters. Sustained spending growth is supported by increases
in menu inflation rate, which is roughly 2%, as well as slight gains through consumers selecting higher
priced menu items and therefore increasing average eater cheques.
5.1.3 Percentage Restaurant Sales Growth Quarter over Quarter
Total Restaurants – Percentage Growth in Sales Year-Over-Year
4%
5%
5%
4%
4%
3%
1%
2%
3%
2%
4%
2%
0%
SON'11 DJF'12 MAM'12 JJA'12 SON'12 DJF'13 MAM'13 JJA'13 SON'13 DJF'14 MAM'14 JJA'14 SON'14
Source: The NPD Group /CREST®
5.2
Key Foodservice Industry Trends
With a compound annual traffic growth rate of just over 1% since 2008 and no traffic growth in
2014, the Canadian foodservice industry has not yet fully recovered from the economic downturn
which started in 2008. As Canadians eat out less, the battle for growth across all restaurant market
segments continues. The emphasis for restaurant operators in this flat market must remain on
growing customer traffic by stealing customers from their competitors.
How Canadians use restaurants is continuing to shift. Dayparts such as the morning meal continue to
be popular while supper is less popular compared to five years ago. Quicker meal occasions from QSR
and Home Meal Replacement (HMR) are stealing customer traffic from FSRs.
The QSR segment, with 65% share of the 6.6 billion annual customer visits to restaurants, continued
to outperform the overall market. Customer traffic at QSRs outpaced all other segments with gains of
over 1%. Spending at QSRs also outpaced the overall market. Sales growth at QSRs increased by over
4%, primarily driven by average eater cheque gains, which resulted from increased spending at the
morning meal. A strong focus on menu and beverage innovation from the leading QSR chains was
effective in driving customer traffic and increasing spending.
Within the FSR segment, market conditions continued to be difficult. Customer traffic declined by 1%
while sales growth was flat. The main challenge was attracting customers out for supper. The dinner
meal occasion accounted for 47% of all FSR traffic; the volume of customer traffic at dinner declined
by 4% in this period, while evening snack (after dinner, mainly bar occasions) declined by 7%. The
only bright spot in the FSR segment was lunch. Lunch accounted for 31% of customer traffic and the
volume of customers visiting this daypart increased by 3% in the past year.
2015 Canadian Chain Restaurant Industry Review
27
Home Meal Replacement (“HMR”) has been one of the better performing restaurant segments of the
Canadian foodservice industry over the past five years. HMR is competing head to head with QSR,
a top-of-mind destination for 40% of HMR buyers. While customer traffic at HMR outlets posted
an increase of 1%, sales growth increased by 8%, primarily driven by average eater cheque gains.
Grocery Stores are excelling at maximizing consumer spending per visit on main meals (lunch and
supper), which represents half of total HMR traffic.
Convenience undoubtedly plays a key role in Canadians’ eating habits. QSR operators and grocery
stores are well-positioned to cater to this customer need. Other traffic drivers that are important
to influencing customer preferences for restaurant dining include treating oneself and food quality/
variety. Many QSR operators have been placing an emphasis on indulgent/craveable menu items to
attract visits in the latest year.
Restaurant Market Segments – Share of Traffic and Dollar Sales
PCYA
PCYA
QSR
4%
47
Family/Midscale
Casual Dining
1%
65
Fine Dining
13
-3%
10
1
11
0%
0%
-3%
20
0%
22
1%
4
7
-1%
4%
Dollars
Traffic
PCYA = Percent Change vs. Year Ago
Prepared Food from Retail
Source: The NPD Group /CREST®
All Segments Remain Flat to Declining in the Past Five Years
Traffic Volume (Millions)
6.4 6.6
4.1
Growth
Rate
1%
2009
2014
4.3
1%
-1%
1%
-4%
1.62 1.58
0.47 0.50
Total Market
Source: The NPD Group /CREST®
QSR
FSR
HMR
0.3 0.2
Convenience
5 | Trends Impacting Restaurants
28
5.3 Looking Ahead
5.3.1
Population trends
Canada’s population is expected to become increasingly diverse. Almost a third of the population is
forecasted to be part of a visible minority by 2031. The youngest generations in particular will drive
growth for the Canadian foodservice industry for years to come. Young and multicultural Asians in
particular are making up a growing share of the youngest generations.
Population Projection, by Visible Minority Group
Chinese
South Asian
Black
Filipino
Latin American
Southeast Asian
Arab
West Asian
Korean
Japanese
2006
Other visible minorities
2031
Source: Statistics Canada
2012 Average After-Tax Income (000s), by Economic Family Type
118
87
83
96
79
64
47
32
Economic
families, two
persons or
more
Elderly
families (2)
Source: Statistics Canada
Non-elderly
families (3)
Married
couples
Two-parent
Married
Lone-parent Unattached
families with couples with
families
individuals
children
other
relatives
29
5.3.2 Excerpts from “2020 Vision: The Future of QSR” – NPD’s seven-year forecast for the
Canadian QSR market and Full Service Dining: How to Win Customers Back
Published in 2014, the 2020 Vision: The Future of QSR report forecasts consumer information on
food & beverage categories and visit situations and how QSR in Canada will evolve between now
and the year 2020. The Canadian QSR segment is worth $24 billion, with a total of 36,420 restaurant
units across Canada. However, the segment is expected to grow at a modest rate of less than 1%
per year to the year 2020. This means growth will be derived from stealing customer visits from
competition. There will be winners and losers; operators that remain relevant by giving consumers
what they want can win the battle for market share. This requires staying on top of restaurant trends
and understanding what is resonating most positively with consumers. Areas of growth for the QSR
market through 2020 will come from off-premise occasions, mainly carry out and drive through, while
lunch is expected to be the most challenged daypart.
In 2014, Canadians spent $23 billion at 26,988 FSR units in Canada. With the emergence of Fast
Casual, along with upgrades in food and restaurant ambiance among leading QSR operators, the gap
between QSR and FSR is becoming smaller. It is important for FSR operators to set themselves apart
and determine which situational dining types to focus on. Hanging out with friends, date and special
occasions and family meals with kids are examples of situational dining types that receive more traffic
at FSR. With the FSR segment not seeing any growth, operators must understand what customers
want from their FSR experience and identify drivers to improve revisit intent. According to NPD’s
Full Service Dining: How to Win Customers Back report, food experience is a key differentiator on
which FSR operators need to focus to sustain visits in this segment. Great tasting food should be a
high priority for any FSR operator and beverages at FSR present an opportunity for operators to drive
higher satisfaction. Alternatively, free Wi-Fi and attractive servers are low priority attributes in driving
traffic for FSR operators.
Through NPD’s CREST consumer panel, which tracks the ongoing satisfaction levels of Canadian
restaurant consumers, various customer satisfaction attributes surrounding service, food, beverages,
price/value and environment are scored based on customers’ experiences. Looking at Top 2 Box
score (those that rated having an Excellent/Very Good experience), QSR has made significant inroads
in increasing satisfaction for value for money over the last three years, reaching 56%. Conversely,
value for money at FSR is 61%, which has remained relatively flat year over year since 2008, while
value for money at Fast Casual is 52%, steadily declining since 2011.
Building satisfying dining experiences should be a key focus for all operators, particularly for FSR
restaurants to win customers back. Happy customers are 3.5 times more likely to revisit a restaurant
than unhappy customers.
5 | Trends Impacting Restaurants
30
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
2015 Canadian Chain Restaurant Industry Review
31
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%
2015-f
2014-p
2013
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%
Real Foodservice Sales-Total
Real Disposable Income
Real GDP
Source: Statistics Canada, Restaurants Canada and TD Economics
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 times 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
increased slightly and the decrease in foodservice sales was less than 5%.
6 | Finance
32
6.2
Global Financial Markets
For 2015, the views on the global economy outlook vary. On one hand, the US economy’s recovery is
entrenched, business investment is increasing, the labour market is improving and US dollar continues
to appreciate. On the other hand, the bulk of the Eurozone is lost in stagnation with declining
unemployment, a weakening Euro and increasing fiscal pressures, particularly in Italy and France.
Dramatic shifts in currencies and the price of oil are creating concerns about global growth. Volatility
spiked in mid-October 2014 to the highest levels seen in three years.
The US dollar has recorded important gains against the euro, the yen, the Canadian dollar and a
number of other currencies. GE Capital believes that the strong US dollar cycle has another two to
three years to go. Weak global growth, low inflation dynamics, improved US competitiveness, the
energy boom and lower production costs are all expected to boost the US dollar further.
The growing importance of liquidity of financial markets will continue to drive swings in asset and
commodity prices. In 2014, commodities underperformed with the large drop in oil price that has
already negatively impacted growth in some countries. Although the oil price outlook is arguably the
most complicated to decipher, oil prices are likely to stay lower for some time.
Monetary policy responses diverged in developed and emerging markets in 2014. The US Federal
Reserve ended quantitative easing (QE) in October 2014 and is expected to begin hiking rates
sometime in the second half of the year. In September 2014, the European Central Bank (ECB) cut
its base rate, announced and asset-purchases program and is gearing up its monetary support to
purchase government bonds in 2015.
The global equities market continues to recover; 2014 was another year of above-average returns for
the US stock market. The best performers in the last 12 months were US and Japan. Despite the flat
growth of the Japanese economy, the pro-spending government policy — which also calls for major
reforms to Japan’s highly regulated economy — boosted stock prices in 2014 but also pushed the yen
down. Emerging markets continue to lose ground especially Brazil. For 2015, the positive view toward
the US equity market will increase investors’ confidence but we expect an increase in price volatility.
The following chart shows the current trends of the main stock markets by region.
2015 Canadian Chain Restaurant Industry Review
33
International Stock Market Trends
MIB
Italy
CAC 40
France
BOVESPA
Brazil
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
IBEX
Spain
Hang Seng
China
NIKKEI
Japan
AX 20
Australia
DAX
Germany
FTSE
UK
MexBol
Mexico
S&P
US
Dow Jones
US
150
130
120
110
100
90
80
Europe
Asia Pacific
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
North America
Latin America
Source: GE Market Intelligence Network
In the commodities market, prices fell by 12% in January and 36% year over year, mainly as a result
of a sharp decline in oil prices. Non-fuel prices fell 3.2%, with declines in both metals and agriculture,
partly reflecting appreciation of the US dollar. Many commodity markets are in surplus, particularly in
industrial sectors, and lower prices have led to reductions in capital expenditures which are expected
to result in lower production.
Commodity Prices (International Monetary Fund Index)
300
Commodity Prices, IMF Indices
January 2005 = 100
250
200
150
100
All Commodities
Food
Industrial Materials
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jul-11
Jan-12
Jul-10
Jan-11
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jul-06
Jan-07
Jan-06
Jul-05
Jul-04
Jan-05
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
0
Jul-01
50
Jan-01
60
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
70
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
Index ( Jan 2011 = 100)
140
Crude Oil
Source: International Monetary Fund
6 | Finance
34
Commodities Percentage Change Year-Over-Year
80%
60%
40%
Jul-14
Jan-15
Jul-13
Jan-14
Jul-12
Jan-13
Jul-11
Jan-12
Jul-10
Jan-11
Jul-09
Jan-10
Jul-08
Jan-09
Jul-07
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
Jul-04
Jan-05
Jul-03
Jan-04
Jul-02
Jan-03
-20%
Jan-02
0%
Jan-01
Jul-01
20%
-40%
-60%
Commodities percentage change year over year
Source: GE Capital
Current low oil prices is the result of expanding tight oil supply and the resumption of Libyan exports
at a time of growing concerns about global oil demand. But the sharp and rapid price movement
surprised most observers, especially given the high level of geopolitical tensions and the rising dollar
appreciation. The Energy Information Administration (“EIA”) expects Brent crude oil price to average
$57.56 per barrel in 2015 and $75 per barrel in 2016.
Crude Oil Prices (Price per Barrel) Since 2000
160
$US Dollars
140
120
100
80
60
40
20
Source: GE Capital & EIA
Brent Crude Oil Price Per Barrel
2015 Canadian Chain Restaurant Industry Review
Jul-14
Jul-13
Jul-12
Jul-11
Jul-10
Jul-09
Jul-08
Jul-07
Jul-06
Jul-05
Jul-04
Jul-03
Jul-02
Jul-01
Jul-00
0
35
6.3 Financial Markets in Canada
Analysis
The strong US economy will continue to benefit Canada’s near-term economic outlook and the
stability of its financial markets. Canadian exports have surged in recent months, households continue
to spend at a steady rate, the unemployment rate is decreasing and business confidence is up.
However, in much of the rest of the world, the pace of the recovery is disappointing and downside
risks are substantial.
The Eurozone is now expected to post only lacklustre growth, fiscal pressures will continue and
significant concerns of deflation exist. The Russia-Ukraine crisis has eroded business confidence
across much of Northern and Eastern Europe at a time when Europe’s increasing weakness weighs
on the global recovery. The fall in the oil prices also aggravated Russia’s economic outlook, which
has already been suffering from geopolitical tensions, international sanctions and the consequent
collapse of domestic business and consumer confidence. But the weakness has not been limited to
Europe. Japan, the world’s third-leading economic power, is struggling to regain its footing following a
substantial increase in the national sales tax implemented by Prime Minister Shinzō Abe in April.
Low oil prices are weakening investments in Canada, especially in industries and provinces dependent
on oil revenues. Lower investments and corporate profits will lead to poor employment growth but
lower gasoline prices will support a positive increase in household disposable income.
The Bank of Canada unexpectedly cut the interest rate by 25 points in mid-January as a result of the
negative impact of lower oil prices on inflation. The decline in energy prices will continue pressuring
the inflation rate to run at over 2.0%. GE Capital expects that rates would remain the same until the
second half of 2016.
The drop in oil prices and the cut in Canadian interest rates have weakened the Canadian dollar
considerably. While the Bank of Canada cut the interest rate in January, the Federal Reserve is likely
to raise rates in late 2015. The increase in US rates will likely limit the degree of Canadian dollar
depreciation to about 3% per annum in 2015 and 2016, resulting in year-end values of 85 US cents
and 82 US cents respectively.
Forecast
Despite the slow growth of the Canadian economy early in the year in 2014, GDP recovered in the
second quarter and continued to grow at an above-potential rate in the third and fourth quarter.
Growth of 2.5% at the end of 2014 is expected as net exports provided a significant lift where nonenergy commodities exports made large contributions including transportation equipment and
industrial machinery.
6 | Finance
36
In 2015, the exports of non-energy commodities will continue to grow supported by a weak Canadian
dollar, solid demand south of the border and lower gas prices at the pumps. However, global oil supply
will outstrip demand by a wide margin which will sustain low oil prices over the forecast horizon. As a
consequence, business investment will remain weak, led by a sharp contraction in construction and
non-residential structures.
Despite the decrease in unemployment rate to 6.6% from 7.0% in 2014, wage growth did not catch up
with the general improvement in the labour market. The industrial composite average weekly wage
grew at an average annual rate of 2% which was the same as the inflation rate. In 2015, we expect
labour market conditions will continue to improve, putting upward pressure on wages and providing
consumers with means to spend.
GE Capital expects modest 2% growth in Canada GDP for 2015 based on low oil prices, stable
consumer spending and a weak Canadian dollar that will boost Canadian exports. The US GDP
growth in 2015 is expected to be 2.8% supported by increased business investment, falling
unemployment, rising consumer sentiment and declining gas prices.
2015 Canadian Chain Restaurant Industry Review
37
Canada—GDP Growth
6.0%
Forecast
4.0%
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
0.0%
2003Q1
2.0%
-2.0%
-4.0%
-6.0%
Canada: GDP Growth (%YOY)
Source: GE Capital
In January 2015, all government bonds yields on 10-year treasuries decreased. The US 10 –year yield
decreased 25 points from September 2014 as a response to the potential rise in the short-term rate
by the Federal Reserve. Economies around the globe hold more than $7-trillion in debt from the euro
zone, Switzerland and Japan that carries a negative yield putting persistent downward pressure on
government borrowing costs.
The factors influencing policy interest rates in 2015 for G5 countries will be:
žž easing of monetary policy by central banks in Europe to encourage investors;
žž potential increase in inflation in the US;
žž policy clarity; and
žž oil prices.
6 | Finance
38
G5 Average Policy Interest Rates
5%
4%
3%
2%
1%
Feb-15
Aug-14
Feb-14
Aug-13
Feb-13
Feb-12
Aug-12
Aug-11
Feb-11
Aug-10
Feb-10
Aug-09
Feb-09
Aug-08
Feb-08
Aug-07
Feb-07
Aug-06
Feb-06
Aug-05
Feb-05
Feb-04
Aug-04
Aug-03
Feb-03
0%
GE Average Policy Interest Rate
Source: GE Capital
Note: The G5 economies include the United States, the Euro Area, Japan, the United Kingdom and Canada.
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 assume a total financeable
debt of $5.6 billion. Financeable debt is used for refinancing/renovations, acquisitions and new builds.
Total Financeable Debt by Transaction Type ($millions)
$2,007.7
$1,055.9
$600.9
$5,605.9
Total
Market
Snack
Broad
Casual
$568.2
Family
$565.9
Premium
Menu
QSR
Source: GE Capital
2015 Canadian Chain Restaurant Industry Review
$289.6
Pizza
$276.5
Deli
$109.4
Chicken
$67.4
$64.3
Fast
Asian
Casual
39
Total Financeable Debt by Transaction Type ($millions)
$3,308.8
$5,605.9
$1,636.4
$660.7
Total Market
Renovations
Acquisiton
New Build
Source: GE Capital
Respondents to the C-Suite Survey were asked if their companies transacted any sales or acquisitions
of businesses in 2014 and if so what the multiples on those transactions (X times EBITDA) were.
Nature and Extent of Sale and Acquisition Transactions by C-Suite Survey Participants
Percentage of Respondents Conducting
Transactions
2012
2013
2014
Yes
25%
16%
29%
No
75%
84%
71%
Transaction Multiples (Number of times EBITDA)
2012
2013
2014
Minimum
1.5
3.5
3.0
Maximum
5.0
4.5
8.0
Average
3.6
4.0
5.1
Source: fsSTRATEGY Inc. C-Suite Survey
As shown, 29% of C-Suite Survey participants conducted sale or acquisition transactions in 2014. Of
companies that conducted sales or acquisitions in 2014, the average transaction multiple was 5.1
times EBITDA. Transaction multiples appear to have grown over the past two years, perhaps driven
by the pace of consolidation and restructuring of the industry referred to by participants in their
identification of the greatest changes they have expected in the past two years.
6 | Finance
40
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
2015 Canadian Chain Restaurant Industry Review
41
7.1 Cost of Sales
Restaurant Canada’s 2014 Operations Report indicates that cost of goods sold represented 35.6% of
foodservice revenues in 2012 (the most recent year for which data is available).
Historical Average Cost of Goods Sold as a Percentage of Revenues
37.0%
36.5%
36.0%
Percentage of Sales
36.0%
35.8%
35.7%
35.5%
36.0%
35.6%
35.5%
35.4%
35.0%
34.5%
34.0%
2006
2007
2008
2009
2010
2011
2012
Cost of Sales
Source: Restaurants Canada “2014 Operations Report”
Cost of goods sold as a percentage of revenues dropped to near 2008 levels, indicating that
foodservice operators were able to increase menu prices to absorb increased input costs. Cost of
goods sold as a percentage of revenue has been relatively constant over the past several years.
7 | Cost of Doing Business
42
The following chart tracks consumer price indices for various core ingredients classifications.
Consumer Price Indices
160
CPI = Consumer Price Index
2002 = 100
150.4
146.0
150
140
135.2
137.9
120
110
130.3
112.2
109.8
108.1
107.7
106.6
99.9
100
116.5
114.1
109.5
108.2
106.9
98.5
95.0
90.2
120.4
117.6
112.0
111.9
109.2
100.8
115.7
114.6
109.8
134.8
134.3
134.0
121.7
122.8
125.2
123.4
122.5
113.3
111.8
117.4
114.3
113.3
134.8
132.0
125.4
125.0
118.4
114.4
111.7
110.2
108.6
119.1
116.5
111.2
109.3
108.7
119.9
117.1
110.6
109.0
151.4
145.6
138.8
133.6
129.1
130
152.2
115.2
101.3
100.3
92.0
90
80
2005
2006
2007
2008
2009
2010
2011
2012
2013
Meat
Fish, seafood and other marine products
Dairy products
Bakery and cereal products
Vegetables and vegetable preparations
Alcoholic beverages purchased from stores
2014
CPI - All Items
Source: Statistics Canada
Meats; vegetables and vegetable preparations; and fish, seafood and other marine products have
increased in price at a greater rate than general inflation. Meat and fish, seafood and other marine
products experienced the greatest price increases, both rising by 8% in 2014. Vegetables and
vegetable preparation prices grew by 4.3%. 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.
2015 Canadian Chain Restaurant Industry Review
43
Menu Inflation versus Producer Price Indices
130
125
PPI= Producer Price Index
2002 = 100
125.5
120
115
112.3
108.8
110
105
90
100.0
99.9
95.4
100.5
98.6
100.0
2008
2009
2010
98.6
100
95
99.7
100.2
97
89.3
85.8
96.1
90.7
92.9
87.4
91.2
2006
2007
101.9
103.8
112.2
111.0
111.0
104.4
107.1
104.5
104.9
2012
2013
2014
85
80
2005
2011
IPPI - Meat
IPPI - Fruit, Vegetables and Feed
CPI - Food from Restaurants
IPPI - Dairy
IPPI - Beverages
Source: Statistics Canada
As shown, prices for food purchased from restaurants have increased consistently since 2005. While
industrial product prices for meat, fruit, vegetables and feed have been consistently greater than food
purchased from restaurants, the price for meat has increased by 25.5% increase since 2010 with more
than half the increase occurring in 2014.
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
44
Menu Inflation versus General Inflation
140
CPI = Consumer Price Index
2002 = 100
136.6
135
133.7
131.7
130
132.0
131.3
130.1
128.4
128.0
124.9
125
121.8
120
114.7
111.8
125.2
121.9
121.7
119.4
117.8
115
110
125.5
122.8
119.9
116.5
115.2
115.7
114.4
112.9
111.9
108.6
107.3
107.7
109.4
109.5
105
2005
2006
2007
2008
2009
2010
2011
2012
2013
CPI - Food from Full-Service Restaurants
CPI - Food from Quick-Serivce Restaurants
CPI - Served Alcohol
CPI - All Items
2014
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.
Respondents of the C-Suite Survey were asked how they expected cost of sales as a percentage of
revenues to change in 2015.
2015 Canadian Chain Restaurant Industry Review
45
In 2015 Compared to 2014, Cost of Sales 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
4%
Decline 0.1% to 0.5% points
0%
Remain flat
4%
Increase 0.1% to 0.5% points
38%
Increase 0.6% to 1% points
25%
Increase 1.1% to 1.5% points
8%
Increase 1.6% to 2% points
17%
Increase more than 2% points
4%
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
The majority of respondents (92%) expect cost of sales as a percentage of revenues to increase in
2015. Thirty-eight percent of respondents expect cost of sales to increase by 0.1% to 0.5% and 25%
expect cost of sales to increase by 0.6% to 1.0%. Respondents believe increases will be lower in 2015
than they anticipated in 2014.
fsSTRATEGY interviewed grower associations and government agencies to understand the factors
influencing foodservice cost of sales. Findings of this analysis included:
žž Foodservice demand remained constant in 2014. Demand should be constant in 2015, with
possible reduction in demand in Western Canada, primarily in Alberta and Saskatchewan, as a
result of layoffs in the oil patch. Disposable income and consumer confidence drive demand for
foodservice and the Bank of Canada feels our economy is not robust.
žž Real growth in Canadian food production has not kept up with population growth over the last two
years, resulting in increased food imports. This should be resolved in 2015. Typically, an 18-month
lag occurs between a drop in the Canadian dollar and an increase in Canadian food production
capacity leading to a righting of the trade balance. As production ramps up, Canadians should
benefit from lower food prices.
žž Food prices have not increased as much as input costs to produce the food. Retailers and the
foodservice industry have pushed back on pricing. However, prices for some products have
increased significantly. In 2014, retail beef prices were up 16%, veal up 15% to 25%, pork was up
20% and poultry up 1.7%. Beef prices are at all-time highs as a result of strong global demand
and cattle supply is low. It will take at least another year for supply to increase and for prices to
normalize (beef is a two-year cycle). The relatively low beef supply is affecting the availability and
price of veal products as well. Feed prices, a bellwether for beef production, are relatively low so
supply should increase.
7 | Cost of Doing Business
46
žž Factors affecting food growers and processors that could affect food prices to restaurants include:
žž The perception of growers by consumers and consumer efforts to influence growing
practices (e.g., humane, local, non-GMO, etc.) may have an impact on food costs.
žž Canada has seen many high-profile plant closures due to non-competitiveness (e.g., Heinz
in Leamington, Ontario; a McCain plant in PEI).
žž As a result of the drop in oil prices, input costs for growers should be lower. Canada can
expect lower cost access to US food products as well. Further, the lower Canadian dollar
has resulted in stability for Ontario grown products.
žž Health Canada and the Canadian Food Inspection Agency are modernizing regulations,
which will likely result in greater costs for processors.
žž The Government’s decisions with respect to the Temporary Foreign Worker program may
have an impact on food costs. Seafood, meat and bakery processors don’t benefit as much
as growers from such programs and have challenges with absorbing labour cost increases.
If the program is cancelled, growers could experience similar challenges with rising labour
costs. Labour cost is a key issue for many growers and processors.
žž The development of food hubs, many of which have processing facilities (e.g., packaging)
may enable foodservice operators to purchase local foods more effectively.
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 2014 grew by 1% to 2%. Smaller chains are
experiencing more challenges than the larger chains. Demand is expected to remain flat in the
coming 12 months.
žž In 2013, Distributors were expecting an increase in cross border shopping as a result of the high
Canadian dollar. This year, distributors are worrying about the low Canadian dollar and the effect
on the cost of food products from the United States.
žž In 2014, prices were somewhat steady, expected price increases did not materialize. Various
members of the supply chain are supporting the growth of the foodservice industry by absorbing
cost increases. In the coming 12 months, distributors are mixed on price increases. Some expect
prices to remain flat or below inflation, some expect prices to increase at inflation while others
expect prices to increase at a somewhat greater rate (up to 3%).
2015 Canadian Chain Restaurant Industry Review
47
žž Distributors suggest that a number of issues will affect the foodservice industry in 2015. These
include:
žž Prices for beef and pork products as well as chicken wings increased due to relatively short
supply.
žž Some significant increases in prices of commodities such as meat, coffee and oil.
žž The availability of local food products has increased and will continue to grow.
žž Pressure on supply management is increasing as a result of the Canada-Europe Free Trade
Agreement and lobbying efforts. For the first time ever, dairy producers reduced prices
(down 1.5% in 2014). This pressure is expected to continue.
žž Distributors in Ontario are concerned over the potential impact of a carbon tax on delivery
costs.
žž Chicken quotas (supply management) are currently insufficient to meet demand for fresh
product. Chicken from the US is available but the exchange rate is making US product very
expensive.
žž Distributors are experiencing labour challenges, especially with drivers. Parking initiatives
are also affecting delivery costs – the recent ticketing initiative during rush hours in Toronto
has affected distributors.
48
7.2 Labour Costs
Restaurants Canada’s 2014 Operations Report indicates that salaries and wages represented 33.7%
of foodservice revenues in 2012 (the most recent year for which data is available).
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%
33.7%
2011
2012
33%
32%
31.5%
31%
30%
29%
2006
2007
Source: Restaurants Canada, 2014
2008
Salaries and Wages
Operations Report
Salaries and wages as a percentage of revenues were relatively stable between 2009 and 2012.By the
end of 2015, provincial and territorial minimum wages for adult workers will have increased by 19%
since 2009.
Yukon3
PEI4
New Brunswick
Northwest
Territories
Saskatchewan
Quebec5
Manitoba
Nova Scotia 6
Newfoundland
Ontario7
Nunavut
Liquor Servers/Workers
Receiving Gratuities
Alberta2
Adult Workers
British
Columbia1
Provincial and Territorial Minimum Wage Rates (Year End 2015)
$10.45
$10.20
$10.86
$10.50
$10.30
$12.50
$10.20
$10.55
$10.70
$10.60
$10.50
$11.25
$11.00
9.20
9.20
8.90
First Job/Entry Level
10.10
Students (Under 18)
THIS TABLE IS CURRENT AS AT March 19, 2015
Source: Human Resources and Skills Development Canada
1
British Columbia rates in effect commencing
September 1, 2015
2
Alberta’s minimum wage will be adjusted annually every April
3
Yukon Territory increases minimum wage every April 1 based
on the Consumer Price Index
4
PEI rate in effect commencing July 1, 2015
9.80
10.45
5
6
7
Quebec rate in effect May 1, 2015
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). Rates in effect April 1, 2015.
Ontario rates in effect commencing October 1, 2015
49
7 | Cost of Doing Business
50
By the end of 2015, the Northwest Territories will have the greatest adult minimum wage at $12.50
per hour and Saskatchewan will have the lowest adult minimum wage at $10.20 per 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
$10.20
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
2013
2014
01-Sep-11
$9.40
01-Sep-12
$9.75
01-Sep-13
$9.95
01-Sep-14
$10.20
01-May11
$8.75
01-Nov11
$9.50
01-May12
$10.25
01-Sep-15
$10.45
$10.70
01-Apr-06
$7.60
01-Apr-07
$8.00
01-Apr-08
$8.50
01-May09
$8.75
01-Oct-09
$9.00
01-Oct-10
$9.50
01-Oct-11
$10.00
01-Oct-12
$10.25
New
Brunswick
$10.30
01-Jan-06
$6.50
01-Jul-06
$6.70
05-Jan-07
$7.00
01-Jul-07
$7.25
31-Mar08
$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
$10.25
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
Nova
Scotia
$10.40
Nunavut
$11.00
Ontario
$11.00
01-Feb-06
$7.75
01-Feb-07
$8.00
31-Mar08
$8.75
31-Mar09
$9.50
31-Mar10
$10.25
Prince
Edward
Island
$10.20
01-Apr-06
$7.15
01-Apr-07
$7.50
01-May08
$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
$10.35
01-May06
$7.75
01-May07
$8.00
01-May08
$8.50
01-May10
$9.50
01-May11
$9.65
01-May12
$9.90
$10.20
01-Mar06
$7.55
01-Mar07
$7.95
01-Jan-08
$8.25
01-May08
$8.60
01-May09
$9.25
01-Sep-11
$9.50
01-Dec12
$10.00
$10.72
01-May06
$8.25
01-Apr-07
$8.37
01-Apr-08
$8.58
01-Apr-09
$8.89
01-Apr-11
$9.00
01-Apr-12
$9.27
01-May12
$10.30
Manitoba
Saskatchewan
Yukon
01-Apr-06
$7.15
01-May07
$7.60
01-May08
$8.10
01-Apr-09
$8.60
01-Apr-11
$10.00
01-Apr-10
$9.20
01-Oct-10
$9.65
01-Oct-11
$10.00
05-Sep-08
$10.00
01-Oct-13
$10.45
01-Oct-14
$10.70
31-Dec14
$10.30
01-Oct-14
$10.25
01-Apr-10
$9.00
2015
01-Oct-15
$10.50
01-Jun-15
$12.50
01-Apr-12
$10.15
01-Apr-13
$10.30
01-Apr-14
$10.40
01-Apr-15
$10.60
01-Jun-14
$11.00
01-Oct-15
$11.25
01-Jun-14
$10.20
01-Oct-14
$10.35
01-Jul-15
$10.50
01-May14
$10.35
01-May15
$10.55
01-Jan-11
$11.00
2015 Canadian Chain Restaurant Industry Review
01-Apr-10
$8.93
01-May13
$10.15
01-Oct-14
$10.20
01-Apr-13
$10.54
01-Apr-14
$10.72
01-Apr-15
$10.86
Source: Canada Ministry of Labour
51
Employment Indices—All Industries, Foodservice and Employees per Foodservice Location
150
2002 = 100 138.8
140
134.3
129.7
130
124.9
128.8
126.3
127.5
121.9
120
112.0
108.7
110
101.4
100
103.4
104.1
98.6
105.4
109.7
111.2
109.5
109.4
2007
2008
2009
123.0
115.7
113.1
109.7
107.2
118.9
118.9
117.5
111.0
129.7
110.9
112.6
116.4
114.0
102.5
90
2003
2004
2005
2006
Employment Index
- All Industries
2010
2011
2012
2013
2014
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 increased significantly from 8.4 in 2003 to 11.8 in 2012
before declining to 11.0 in 2014. The number of commercial foodservice locations has increase 2.6%
since 2013 while the number of employees per operation has remained fairly static since 2013.
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 2015.
In 2015 Compared to 2014, Labour Costs are Expected to:
Decline more than 2% points
0%
Decline 1.6% to 2% points
4%
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
17%
Increase 0.1% to 0.5% points
38%
Increase 0.6% to 1% points
17%
Increase 1.1% to 1.5% points
21%
Increase 1.6% to 2% points
4%
Increase more than 2% points
0%
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
Most respondents (80%) expect labour cost as a percentage of revenues to increase in 2015. Thirty-eight
percent of respondents expect labour cost as a percentage of revenues to increase by 0.1% to 0.5% of
revenue, 17% expect labour cost as a percentage of revenues to increase by 0.6% to 1.0% while 25% of
respondents expect labour to increase by more than 1.1%. Compared to 2014, respondents believe labour
cost increases will be lower in 2015.
Source: Restaurants Canada,
2014 Operations Report
2015 Canadian Chain Restaurant Industry Review
53
7.3 Rental and Occupancy Costs
Restaurants Canada’s 2014 Operations Report indicates that rental and leasing costs accounted
for 7.6% of foodservice revenues in 2012 (the most recent year for which data is available).
Historical Average Rental and Leasing Cost as a Percentage of Revenues
7.8%
7.6%
7.6%
7.7%
7.6%
Percentage of Sales
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
2010
2011
2012
Rental and leasing
Rental and leasing costs as a percentage of revenues were relatively stable between 2010 and 2012.
Respondents to the C-Suite Survey were asked how they expected rent and occupancy cost as a
percentage of revenues to change in 2015.
In 2015 Compared to 2014, 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
4%
Decline 0.1% to 0.5% points
4%
Remain flat
17%
Increase 0.1% to 0.5% points
26%
Increase 0.6% to 1% points
13%
Increase 1.1% to 1.5% points
4%
Increase 1.6% to 2% points
17%
Increase more than 2% points
13%
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
7 | Cost of Doing Business
54
Respondents’ expectations on how rent and occupancy costs were anticipated to change as a
percentage of revenues varied. Seventy-three percent of respondents believe rents will increase in
2015 with 13% of respondents expecting rents to increase by more than two percentage points.
Overall, respondents believe rent and occupancy costs will increase more in 2015 than they did
in 2014.
fsSTRATEGY interviewed landlords to understand the factors affecting rental trends and expenses
for restaurants in Canada. Findings from these interviews included:
žž Supply and demand for restaurant space has been stable over the past 12 months and is
žž
žž
žž
žž
expected to remain consistent with inflation in the coming 12 months. Competition is fierce for “A”
restaurant locations and operators are more patient about waiting for the right location. Great
locations are in demand. Overall vacancy has been about 3%, which is essentially no vacancy.
Supply will remain high with changes in power centres and malls. Many landlords specifically
mentioned the re-purposing of spaces vacated by Sears and Target as high quality space. Lots of
new space will open in the Calgary area in 2016 and 2017 and is leasing now.
Where deals have favoured landlords in the past three or four years, the market is becoming more
balanced. Flexibility for negotiation by tenants is increasing.
Foodservice rents have been relatively stable in the past 12 months and are expected to continue
to be stable over the next 12 months.
Some factors that could affect foodservice rents include:
žž In Calgary, the City is limiting the number of drive through restaurants, which is adversely
affected the demand for QSR sites.
žž Personal disposable incomes affect restaurant revenues. Some concern exists among
landlords about the balance between leasing rates and tenant sales.
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 2014 Operations Report
indicates that total other operating costs represented 18.9% of foodservice sales in 2012, the most
recent year for which data is available. The following table shows the average other operating costs
as a percentage of revenues for the most recent five year period (2008 to 2012).
2015 Canadian Chain Restaurant Industry Review
55
Historical Average Other Operating Costs as a Percentage of Revenues
2007
2008
2009
2010
2011
2012
Repair and Maintenance
2.6%
2.6%
2.6%
2.6%
2.5%
2.5%
Utilities Including Telephone
2.9%
2.8%
2.8%
2.8%
2.7%
2.7%
Advertising and Promotion
2.7%
2.8%
2.8%
2.8%
2.8%
2.8%
Depreciation
2.9%
2.9%
3.0%
3.1%
2.9%
3.0%
Other
8.6%
7.0%
7.4%
6.7%
7.6%
7.9%
19.7%
18.1%
18.6%
18.0%
18.5%
18.9%
Total Other Operating Costs
Source: Restaurants Canada, Statistics Canada
As shown, other expenses as a percentage of revenues increased between 2010 and 2012 (the most
recent year for which data is available).
The following chart tracks growth trends of various other operating costs as indices between 2008
and 2012.
Historical Average Other Operating Costs as a Percentage of Revenues
110.0
100.0
2006=100
100.0
104.0
103.6
100.0
104.0
103.4
100.0
104.0
103.4
100.0
106.9
104.0
100.0
96.4
100.0
103.4
100.0
96.4
96.4
89.5
90.0
84.5
84.5
81.8
84.1
85.9
78.2
80.0
70.0
67.3
69.1
67.3
71.8
60.9
60.0
50.0
2006
2007
Repair and maintenance
Depreciation
2008
2009
2010
Utilities including telephone
Other
2011
2012
Advertising and promotion
Total Other Operating Costs
Source: fsSTRATEGY Inc. based on data from Restaurants Canada and Statistics Canada
56
As shown, other operating costs (including repair and maintenance, utilities including telephone,
advertising and promotion and depreciation) have been relatively consistent as a percentage of
revenue over the last several years. Other operating costs (which include such items as commissions
paid to non-employees: professional and business services fees; subcontract expenses; charges for
services provided by corporate office; office supplies; insurance; travel, meals and entertainment;
property and businesses taxes, licenses and permits; royalties, rights, licensing and franchise fees;
delivery, warehousing, postage and courier; financial service fees; interest expense; bad debts; and
all other expenses) had decreased as a percentage of revenues to2010 but have since shown slight
increases.
The following graph compares commodity prices for natural gas and electricity.
Energy Commodity Price Indices
180.0
2006=100
160.0
160.0
150.9
140.0
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
44.3
40.2
31.5
20.0
36.7
0.0
2006
2007
2008
2009
Natural Gas
2010
2011
2012
2013
2014
Electricity
Source: fsSTRATEGY Inc. based on data from the Ontario Energy Board
As shown, natural gas prices, which had declined steadily since 2008 increased by 5.2 index points
in 2013 and by another 7.6 index points in 2014. Electricity prices continue to increase significantly,
growing by 9.1 index points in 2014.
Respondents to the C-Suite Survey were asked how they expected other operating costs as a
percentage of revenues to change in 2015.
2015 Canadian Chain Restaurant Industry Review
57
In 2015 Compared to 2014, 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
9%
Remain flat
13%
Increase 0.1% to 0.5% points
39%
Increase 0.6% to 1% points
26%
Increase 1.1% to 1.5% points
4%
Increase 1.6% to 2% points
9%
Increase more than 2% points
0%
Source: fsSTRATEGY Inc. 2014 C-Suite Survey
As shown, most (78%) of respondents expect other operating costs as a percentage of revenues will
increase in 2015, with 9% of respondents expecting an increase of between 1.6% and 2.0%. At the
same time, 13% of respondents expect other operating costs to remain flat and 9% of respondents
believe other operating costs will decline by 0.1% to 0.5% points in the next 12 months.
7 | Cost of Doing Business
58
7.5 CAPEX
Capital expenditure (“CAPEX”) in the accommodation and foodservice sector was approximately
$3.4 billion in 2014, down $276.3 million from 2013. Approximately $2.2 billion (65%) of CAPEX was
spent on construction projects. The following chart compares capital expenditure and construction
expenditure in the accommodation and foodservice sector for the last ten years.
Capital Expenditure in the Accommodation and Foodservice Sector
$4,500
$4,032.8
$4,000
$3,688.8
$3,500
Millions of Dollars
$3,396.6
$2,911.3
$2,640.2
$2,732.6
$2,604.1
$2,500
$2,278.3
$2,000
$1,000
$3,672.9
$3,320.9
$3,288.0
$3,000
$1,500
$3,687.3
$1,786.2
$2,220.4
$2,256.7
$2,256.7
$2,281.4
$1,432.1
$1,381.6
$1,391.5
2012
2013
$2,192.7
$1,853.2
$1,508.6
$1,300.2
$1,131.6
$1,058.1
$1,009.7
2007
2008
$1,204.0
$1,100.4
$817.9
$500
$0
2005
2006
2009
Total Capital Expenditure
2010
2011
2014
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, and declined in 2014 by 13%. Construction expenditures
have yet to return to pre-recession levels and actually decreased slightly in 2014 over the
previous year.
2015 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
154.5
2002 = 100
150.7
152.3
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
2014
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 2014 non-residential price index was 154.5, 1.4 index points
below the peak in 2008 and 2.2 index points greater than 2013.
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
212.6
205.6
200
198.8
199.6
194.6
190.2
190
187.7
183.1
181.7
180.6
180
200.6
200.7
202.1
193.9
192.7
192.6
182.9
185.7
222.7
220.9
219.1
216.6
214.0
216.2
214.5
221.4
219.7
219.8
218.8
209.6
206.7
205.8
203.0
202.9
200.7
200.2
196.9
194.0
188.5
186.7
184.9
182.5
181.6
2009
2010
174.4
170.6
169.3
170
162.6
150
209.6
207.1
205.4
210
160
230.3
229.4
228.2
227.4
159.4
154.4
163.6
170.1
171.0
165.0
158.6
155.9
156.2
149.2
146.9
146.7
140
2005
Toronto
2006
2007
Calgary
2008
Montreal
2011
Vancouver
2012
2013
Winnipeg
2014
2015e
30 City US Average
Source: RSMeans Square Foot Costs 2015. Copyright RSMeans, Norwell, MA 781-422-5000; All rights reserved
Construction cost growth is expected to slow for major Canadian cities in 2015 relative to the 30-city
US average. The estimated average percentage increase in construction cost indices reported by
RSMeans for the five major Canadian Cities shown above is 0.9%. This forecasted construction price
increase is significantly lower than the average growth of 2.4% realized in 2014 and the estimated
growth of 1.8% in 2015 for the 30-city US average. In 2015, Montreal construction costs are expected
to exceed that of Vancouver, while Winnipeg (having the lowest construction cost index of the major
Canadian Cities) is expected to drop below the 30-city US average index value for the first time in
ten years. At least part of this decline in index growth may be attributed to the weakening Canadian
dollar.
2015 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
Full Service Restaurants
$140
$700
$354
Quick Service Restaurants
$195
$500
$298
Fast Casual Restaurants
$250
$280
$265
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
As shown, building costs range from $140 to $700 per square foot (clearly concept dependent), with
the averages being $354 per square foot for FSRs, $298 per square foot for QSRs and $265 per square
foot for Fast Casual Restaurants.
Respondents to the C-Suite Survey were also asked how they expected building costs for new units to
change in 2015.
In 2015 Compared to 2014, the Cost to Build New Units is Expected to:
Decline more than 10%
0%
Decline 7.6% to 10%
0%
Decline 5.1% to 7.5%
0%
Decline 2.6% to 5%
9%
Decline 0.1% to 2.5%
5%
Remain Flat
41%
Increase 0.1% to 2.5%
0%
Increase 2.6% to 5%
27%
Increase 5.1% to 7.5%
0%
Increase 7.6% to 10%
5%
Increase more than 10%
14%
Source: fsSTRATEGY Inc. 2015 C-Suite Survey
As shown, 41% of respondents the cost to construct a new unit to remain flat in 2015, while 45%
expect an increase in building costs. Fourteen percent of respondents expect the cost to build a new
unit to increase by over 10% in 2015.
Respondents’ reasons for why they expect the construction cost of a new unit to increase included:
žž labour;
žž general inflation;
žž cost of building materials;
žž the weak Canadian dollar; and
žž demand continues to exceed supply.
7 | Cost of Doing Business
62
8
Top Chains
2015 Canadian Chain Restaurant Industry Review
63
During the past 12 months, there were 71,663 commercial restaurant units across Canada, with 52
new chain stores opened. While commercial unit growth stayed flat, chain stores appeared to do a
better job at attracting customers compared to independents. Many Independent restaurants are
at risk of going out of business in 2015. In 2014, 905 independent restaurants closed over the year
(four out of ten closed in Ontario). Manitoba, Newfoundland, PEI and Yukon were the only provinces in
which overall openings outnumbered closings.
Top Growing and Declining Restaurant Categories
Top Three Growing Chains
Top Growing Categories
Top Declining Categories
Midscale Diner
Hot Dog
QSR Other Ethnic
Ice Cream
Casual Spanish
Bakery/Sandwich
YogourtBiscuit/Bun
Midscale Barbeque
Cafeteria
Starbucks
Tim Hortons
Thai Express
Growth Opportunities: Fast Casual Segment in Canada
Fast Casual is the fastest growing segment of the Canadian market. The desire for customization,
for food prepared fresh right in front of you with the toppings of your choosing, and the halo effect of
health and wellness around Fast Casual is propelling the category. Customers are willing to pay a bit
more for a better quick-service meal without the added pressure to tip.
The emerging fast casual segment in Canada continued to experience strong growth on the
year. Although fast casual represents just 1% of the 6.6 billion restaurant visits made annually by
Canadians, according to NPD’s 2020 Vision: The Future of QSR report, it is projected to grow by 5% to
7% per year until 2020. Fast casual unit counts are also expected to double by 2020. The quality and
innovation of menu offerings combined with the explosion of unit counts will drive Fast Casual growth.
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.
2015 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
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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
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