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Mr. Claude J. Pellan,
L.L.B., B.Comm., Attorney

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The Restaurant Industry in Quebec - New Challenges

THE RESTAURANT INDUSTRY IN QUEBEC - NEW CHALLENGES

This article is addressed to the restaurant industry in Quebec, to franchisors in or outside of this province that have restaurants in this province as well as to those that represent the interests of these groups (accountants, notaries, attorneys, etc.). 

A. INTRODUCTION

As every good administrator, you follow the trends that affect the environment in which your industry operates. As you know, as of September 1st, 2010, all restaurant establishments in Quebec will be required to provide their customers with a bill. From September 1st, 2010 until November 1st, 2011, restaurant establishments in Quebec will have to install a sales recording module (a “SRM").

What will be the effects on franchisees and franchisors of these new measures taken by the government to counter tax evasion?

This question is of an even greater importance when we know that, according to data on the franchise industry in Quebec, approximately 50% of restaurant establishments are part of a franchise network. Given its implications, one can only ponder as to whether or not these measures are specifically aimed at franchisees and franchise networks in Quebec.

When we note the number of cases of tax evasion published in the media implicating franchisees of franchise networks, I can only conclude that the new measures aim franchise networks.

However, the majority of franchisors in this industry have already put in place various controls andor computer systems with software and cash registers that make it impossible for a franchisee "to play with money”. Furthermore, in a franchise agreement, the franchisor typically reserves the right to make inspections and verify the accounts and financial books of his franchisees. If that isn’t enough, in the event a franchisee fails to declare all his revenues, the franchisor has the right to terminate the agreement.

Under those circumstances, when a franchisee invests $500,000.00 or more to buy a franchise (including construction costs, equipments, furniture, etc.), he has an interest to declare all his revenues.

Furthermore, in most leases that franchisees sign to rent a location, the property owner also reserves the right to make inspections and to verify the accounts and financial books of his tenant.

Despite the foregoing, I can only note again that there exists a tax evasion problem within certain franchise networks … but to a lesser degree because independent restaurant establishments are not subject to an operating structure, controls, inspections or any other incentive to declare all their revenues.


B. TARGET MARKET

For all these reasons, I think that the new fiscal measures are aimed mainly at independent restaurant establishments.

Indeed, for most of them, the declaration (or not) of all their revenues (including GST and PST) is a question of financial survival.

In that context, despite being aware of the consequences of the new measures to avoid tax evasion, how are these measures going to affect the restaurant industry, and, more specifically, franchisees, franchisors and independent restaurant establishments?

1. Franchise Networks

One of the immediate and direct effects of the new measures for certain franchisors will be an increase in their revenues.

More specifically, for franchisors that receive royalties and other fees based on the revenues of their franchisees (publicity, purchasing, etc.), some consultants in the franchise industry estimate that the revenue increases for these franchisors will vary between 2 % and 4 %.

When we also know that the government will begin, on September 1st, 2010, an intensification of the inspections of restaurant establishments and that we know full well the effects of negative publicity for tax evasion, franchisors should assist their franchisees to make the changes necessary to install the SRM knowing they will also benefit from this assistance. Moreover, the government provides compensation for the costs related to the acquisition and installation of SRM.

What will be the other potential effects for franchisors?

1.1 Opportunities

I think that there are numerous opportunities that will present themselves to franchisors. Indeed, despite the fact that this government initiative is generally well received, certain independent restaurant establishments that owe their survival to the non declaration of revenues run the risk of having to close their restaurants in the context of this initiative. Others will become more vulnerable to the competition, to the overall economic situation in Quebec (or in their cities), etc.

For franchisors, new and existing, this will create opportunities in terms of acquisitions andor available locations. And these available locations will certainly spread among city "locals", which are more often independents than franchisees.

This market segment of restaurant independents, "locals", which has been difficult to penetrate and historically almost untouchable by franchisors in the past, could become a new opportunity for them.

Furthermore, some of these independents could also resort to becoming a franchisee to overcome the challenges of the new measures. It is, again, another opportunity for franchisors.

On another note, certain franchisors will be confronted with restaurant closings of unprofitable points of sale. Indeed, I think that the analogy between the effects of a recession on a franchise network and the new tax evasion measures make an interesting comparison. In both cases, franchisees that survive by tax evasion will become very vulnerable … to the point where franchisors will have to identify them and plan in advance the possible repercussions on their network.

For certain franchisors, restaurant closings of certain points of sale will be the only solution. However, no case is identical and each situation should be evaluated on an individual basis to consider other options: relocation, renovation, expansion, a new franchisee, "co-branding", etc.

Let's now examine the consequences of the new measures on the independent restaurant establishments.

2. The Independents

For an important number of independent restaurant establishments, they will have major challenges… but also opportunities.

Already, many independent restaurant establishments distinguish themselves by their menu, their chef, the atmosphere of the restaurant, their reputation, their location, etc. There advantageous positioning will continue to distinguish them and they will be more or less affected by the new measures.

However, for other restaurateurs, they will have to think “out of the box” as they may have to revise their offering to customers.

2.1 Opportunities

One of the opportunities they have is to regroup. By regrouping, I refer to a regrouping for the purpose of purchasing products and/or certain goods which are identical and offered by a various restaurants. For example, a regrouping of Italian or Chinese restaurants or of steak houses, to purchase the same products at better prices. In the short or medium term, the group could become more homogeneous and decide on a common banner, on common advertising, etc.

Another opportunity for them is to join an existing group or franchise network.

Certainly, this opportunity implies an investment (sometimes important) for the independent and must be evaluated with other opportunities. But to join a franchise network or other group could be as beneficial for the independent as it is for a franchisor who is offered a location, a territory or a city where his banner is not already present.

Certain independent restaurant establishments could also turn to franchising (become a franchisor) as a new business model to overcome the challenges of the new measures.

Finally, another opportunity for an independent who has a unique, innovative andor distinctive restaurant concept could be to sell his concept … to a franchisor.

C. CONCLUSION

I have already written that there are never any problems, only solutions.

The new fiscal measures adopted by the government oblige franchisors, franchisees and other restaurant establishments to evaluate and rethink their current positioning in order to, at first, make the required changes and, then, to examine and pursue the opportunities that are available to them.

I believe that some of the consequences of the new measures will be a more even playing field in the restaurant industry for every one involved as well as healthier competition within this industry.

For further information on the SRM and its implementation, you can visit Revenu Quebec's website at www.revenu.gouv.qc.ca/fr/ministere/evasionfiscale.



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