Size Does Matter: Examining the Evolving Canadian Franchise Landscape


While larger chains continue to dominate the Canadian restaurant landscape — MTY group has more than 70 brands in its portfolio and Recipe Unlimited has nearly 20 brands across the country — smaller operators are often more flexible and able to adapt to today’s trends.

Although the franchising juggernauts are able to capitalize on marketing and brand presence, Vince Sgabellone, account specialist with the Toronto-based NPD Group, says many customers are more willing to ditch big brand’s conventional cuisine in favour of exploring the novel, more authentic flavours smaller, more nimble concepts have to offer.

“Today’s consumer is looking for authentic flavours,” he says. “They’re on a flavour exploration and, to a large extent, we’re seeing smaller [gobal] cuisine-driven chains delivering that more than larger brands,” says Sgabellone.

A 2018 study done by the NPD Group and ReCount revealed the fastest-growing segments, by unit count, are salads/vege-tarian entrées — which saw a 27-per-cent increase — while Asian-inspired quick-service restaurants (QSR) saw a growth rate of five per cent. And while the Mexican QSR category may be the smallest in terms of size, Sgabellone says it’s growing the fastest.

The study also found throughout QSR segments — with the exception of pizza oper- ators — small chains are outpacing their larger competitors in terms of growth.

“Macro-trends in the industry include issues around sustainability, clean labelling, all-natural foods and local sourcing of ingredients. And, of course, the topic du jour is plant-based protein. These smaller chains are better suited to adapt to these trends,” says Sgabellone.

But David Hopkins, president of Toronto-based The Fifteen Group, sees things differently, stating that in the Canadian restaurant-franchise market, there remains a sizeable gap between the so-called ‘big guys’ and the rest of the field.

“It’s becoming harder for the little guy to get traction, because of marketing and brand presence of the big players. There’s opportunity for the little guy to get traction if they have a unique enough concept; the big guys still have an edge with their brand presence, which creates volume and also, to some degree, security for a franchisee,” says Hopkins. “Would you rather become a franchisee for a proven, successful pizza chain with 1,000 locations and brand awareness or a small player with 12 locations and not much history?”

Leading the way across a variety of metrics in 2019 were MTY Group, Recipe Unlimited and Restaurant Brands International (RBI). Relative newcomer Foodtastic also made its mark last year, thanks to a $47-million investment in its expansion.

Tim Hortons led the pack in the country for most franchised units with close to 4,000 franchised locations in Canada as of year-end 2019 — representing more than 90 per cent of RBI’s franchised units in Canada.

Recipe Unlimited, Canada’s oldest restaurant company, remained quiet in 2019, posting no major mergers or acquisitions after acquiring The Keg in 2018. Recipe Unlimited currently has more than 1,370 restaurants in Canada, with more than 1,100 of them franchised.

MTY and Foodtastic outpaced the rest of the pack when it came to M&A activity in 2019. MTY completed a number of acquisitions and mergers over the course of the year, including Allô! Mon Coco, Yuzu Sushi, South Street Burger and the assets of the Tortoise Group. Foodtastic brought four new brands under its umbrella, including Les Rôtisseries Au Coq, Big Rig Kitchen & Brewery, CHOCOLATO and Les Rôtisseries Benny.

Peter Mammas, CEO of Foodtastic, attributes his company’s growth to its flexibility and agility in the market. “On the acquisitions side, we buy smaller chains that the bigger companies wouldn’t actually look at, in the area of three to 10 units, because we look for brands we think we could grow,” says Mammas. “We’re nimbler and more focused; we manage [our brands] like smaller companies within our company, which allows for better focus on the individual brands.”

From higher operating costs and skyrocketing rents, to a decrease in overall restaurant traffic, Hopkins says defining a restaurant’s success can be hard, but in the end, it comes down to one factor — efficiency.

“Long-term franchise growth requires franchisees be successful,” he says. “Today, with rising labour and product costs, efficiency in operation is critical to a fran- chisee being successful. With franchisees paying five to seven per cent royalty right off the top, and another one to three per cent in advertising fees, there isn’t any room for an inefficient operation or one that isn’t based around a tight labour model.”

Location remains paramount for any restaurant and, unfortunately, with in-demand locations comes rent hikes — which have been crippling the restaurant industry for the past few years.

“The cost of rent in the bigger cities — especially in A+ areas — is having a large impact on the market. It’s a landlord’s market and square-footage prices are continually increasing. High rent, paired with franchise fees and associated marketing fees, makes it harder for a franchisor to afford good locations,” says Hopkins.

Another challenge that figures prominently in the franchise landscape is the small-business tax, which can be crippling to the smaller franchises trying to gain traction in the industry. But according to the Toronto-based Canadian Franchise Association (CFA), there are ways to combat it.

“Small-business taxation and potentially limited access to capital are two challenges [facing operators]. One of the best ways to navigate these impediments is to hire professional advisors to assist in creating strategic plans for expansion in Canada,” says Sherry McNeil, president & CEO, CFA.

Finally, Hopkins has a warning to franchisors looking to make easy money and increase profitability in the Canadian market: take heed and proceed with caution, because the Canadian market is challenging.

Studies show Canadians prefer home cooking to eating out and product and labour costs are higher than our counterparts across the pond and south of the border.

“The biggest challenge for international companies entering the Canadian market is the profitability challenges we face in the food-and-beverage industry,” says Hopkins. “This is an eye-opener to many when they try to enter our market (and a large reason why we have seen numerous concepts that have been successful in the U.S. or elsewhere fail when they come to Canada). We had one small foreign QSR concept looking at entering the Canadian market, [which], based on its current locations in other countries, thought its Canadian locations would do double the profit [of what] was actually realistic.”

But, says Hopkins, operations that can profit in Canada can profit anywhere. “To some degree, if you can be successful with a concept in Canada, you can be successful anywhere…I exaggerate, but you need your concept and operation pretty polished to be successful in this market.”

The operations seeing the most success in the Canadian market are being driven by a trifecta of trends: sustainability, plant-based diets and third-party delivery.

The world is going green, with a focus on sustainability and environmentally friendly practices sweeping across the foodservice industry. The rise of sustainable practices throughout the industry, regardless of segment, has seen QSR restaurants such as KFC Canada, A&W Canada and McDonald’s leading the way, while full-service restaurant (FSR) franchisors such as Recipe Unlimited are introducing more eco-friendly initiatives.

What started with the banning of plastic straws has blossomed into a war against plastic on every front. KFC tested bamboo buckets in Canada, paper straws replaced its plastic predecessors at KFC and A&W locations across the country and Tim Hortons reengineered its coffee lid to be 100-per-cent recyclable.

Last year, McDonald’s unveiled its sustainable coffee and created two new green-concept restaurants in Canada as a testing ground for sustainable practices such as fully re-pulpable cups, wood-fibre lids, wooden cutlery and stir sticks, as well as paper straws.

“We’re proud of the progress our Canadian organization is making towards our global packaging sustainability goals — it matters to our guests and we’ll continue taking our environmental responsibility seriously,” McDonald’s Canada president and CEO John Betts said in a press release.

FSRs were not far behind their QSR competition as they rode the anti-plastic wave. La Belle & La Boeuf, a restaurant under the Foodtastic brand umbrella, announced it would eliminate the use of all single-use plastics in 2019. Recipe Unlimited announced earlier in the year it would cease using plastic bags across its entire network of brands by the end of 2019.

Frank Hennessey, CEO of the Recipe Unlimited Corporation, says environmentally sustainable ventures are a top priority at the company.

“We have a full-court press on reducing waste wherever we can, as quickly as we can,” says Hennessey. “That means looking at every aspect of how we run our restaurants, including single-use items, energy, water and gas consumption and food waste. [This] announcement is part of our ongoing commitment to make positive contributions to the environment and life in Canada.”

A 2018 study conducted by Dalhousie University found 6.4-million Canadians followed a diet that either restricted meat or cut animal-based proteins out completely. A follow-up survey done by the University found 2.3-million Canadians identified as vegetarian, while another 850,000 considered themselves vegan.

“The biggest surprise of 2019 is the vegan trend; it blew up,” says Mammas.
In fact, according to the NPD Group the number-1 fastest-growing food item, in terms of percentage change, is vegetarian burgers, though according to Sgabellone, they remain “a relatively niche product.”

Montreal-based Cooper Branch took the lead in the plant-based-protein movement. In 2017, the fast-casual plant-based chain had only 12 locations, all of them in Canada. By 2019, its portfolio had grown to more than 50 locations worldwide, with plans to add 50 more locations in the coming years.

Sgabellone says companies such as Copper Branch find success by filling a void in the market. “In terms of restaurant development, two of the fastest-growing segments in Canada are Mediterranean-style as well as health food and vegan operations. While as of now they remain niche, they’re continuing to grow,” says Sgabellone.

A&W, McDonald’s and KFC have all begun testing new plant-based proteins, with the former testing QSR’s first plant-based ‘chicken’ nugget starting in December, while the latter tested plant-based friend chicken. Harvey’s also got in on the plant-based action, debuting the Lightlife burger across all 292 of its Canadian locations.

Kelsey’s Original Roadhouse, a brand under Recipe Unlimited, partnered with Lightlife Foods as well in 2019, bringing the Lightlife burger to 70 of its locations across the country.

According to Sgabellone, the rise of digital ordering and third-party delivery has started to level the playing field for oper-ators. “The little guys can compete with the big guys because of third-party aggregators and that’s changing the entire restaurant landscape, no matter the topic.”

It was a digital takeover across all segments last year, with digital-order traffic increasing by 44 per cent. More than 350,000,000 digital orders were placed between October 2018 and September 2019.

In response, many larger restaurant brands are partnering with third-party aggregators — something Hopkins says wasn’t always the case.

“Restaurants of all sizes are engaging third-party programs. Where previously you may have found only smaller restaurant groups using programs such as Uber Eats as marketing tools to attract new guests to their brand, now you find all restaurant chains, including those thought to be upscale, are participating.”

Hopkins says, for larger, more profitable restaurant franchises, using just one third-party app doesn’t cut it and they usually have more options as their profit margins enable them to carry the commission costs more adeptly than a smaller chain.

Apps such as SkipTheDishes, Uber Eats, DoorDash and Instacart have changed the way Canadians think about delivery. Howard Migdal, managing director of SkipTheDishes Canada, says we’re seeing a paradigm shift when it comes to ordering in.

“Many people think of food delivery as a quick-service solution while customers manage their busy lives, but increasingly we’re seeing more people order for family dinners and social gatherings.”

A C-Suite survey conducted in the 2019 Canadian Chain Restaurant Review by CWB Financial Group, the NPD Group and fsSTRATEGY, found 89 per cent of respondents had used third-party delivery. SkipTheDishes was the most popular across fast-casual, FSR and QSR, with an average usage rate of 96 per cent, followed by Uber Eats at 50 per cent.

SkipTheDishes has more than 23,000 restaurant partners across Canada, with more than 14,000 considered independents. Migdal says this wide variety of options for customers drives the business forward.

“We see 80 per cent of our customers choose to order from a restaurant they’ve never dined-in at before. So, food delivery is a great opportunity for customers to have new food experiences and for restaurants to reach new customers,” says Migdal.
Fast-casual restaurants seem to benefit the most from third-party aggregators, with 66 per cent of respondents saying these delivery apps increase gross revenue by 7.6 per cent or more.

The Restaurants Canada Foodservice Industry Forecast 2018-2022 predicted the QSR segment would grow in total sales by 5.3 per cent in 2018 — compared to the FSR segment, which would grow by 5.7 per cent. But, in fact, QSR sputtered, according to the 2019 Canadian Chain Restaurant Review, which showed only 4.9-per-cent growth for QSR and 5.4 per cent for FSR — a stark contrast from 2015, when QSR sales grew by 6.9 per cent, compared to only 4.3 per cent in FSRs.

Sgabellone says demographics play a key role in the shift in popularity, with millen-nials making up 28 per cent of all traffic. “Our population is aging out of our prime QSR years and nto our prime FSR years.”

Millennials, Hopkins says, tend to be experience-based consumers. “They’re leading the way on plant-based eating and will choose restaurants based on whether they offer a good range of vegetarian and vegan options. Length of dining experiences have increased as more time is spent to photograph food, drinks and environment and post to social-media accounts.”

The 2018 NPD Group and ReCount study shows, in terms of unit growth, midscale restaurants expanded by two per cent, while casual restaurants declined by three per cent and QSR units remained flat.

“[I predict] continued expansion of franchise operations,” says Sgabellone. “As difficult as it is, there’s a lot of money out there — people are looking for investments and the restaurant business is a lucrative one.”

“The franchise industry continues to grow year after year, with both small and large companies continuing to expand. We are seeing small restaurant companies grow by adopting the franchise business model to expand and the larger brands continuing to franchise to increase their market share,” says McNeil.

While the money may not be in the traditional franchises, franchisors who opt to open restaurants with more unique flavour offerings will succeed, according to Hopkins.

“Unique ethnic concepts will continue to grow. For example, Middle-Eastern cuisine has seen huge growth versus where it was at five to 10 years ago. Other concepts are
making their way into the marketplace and [in Canada] we have a very diverse consumer to support such concepts.”

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