2012 Canadian Chain Restaurant Industry Review

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GE CAPITAL PUBLISHES ANNUAL REVIEW OF CANADIAN CHAIN RESTAURANT INDUSTRY …

GE CAPITAL PUBLISHES ANNUAL REVIEW OF CANADIAN CHAIN RESTAURANT INDUSTRY

The first annual Canadian Chain Restaurant Industry Review, an extensive research report commissioned by GE Capital and compiled by fsSTRATEGY and NPD Group Canada was released MAY 2012 at the Canadian Restaurant Investment Summit. For the first time, a comprehensive analysis and factual overview of the state of chain foodservice in Canada was compiled. These findings have implications for job growth, construction activity and other factors that will impact the economic health of Canada not only for 2012 but for several years to come. The report also sheds light on consumer spending habits and trends from province to province.

Some of the research findings:
• Canadian foodservice industry sales are expected to increase by 3.1% to CAD$65.4 billion in 2012.
• Visits to Canada’s commercial foodservice industry remained relatively flat last year, growing just 1% over the prior year.
• Alberta was the fastest-growing market at 7.8%.
• British Columbia was the only province that experienced foodservice revenue declines.

The report includes insights from the C-suite executives of leading Canadian chains on important issues such as:
• The greatest opportunities and threats in the foodservice industry,
• Restaurant industry merger and acquisition opportunities,
• Expected changes in sales as well as labour and food costs, among other operating and occupancy costs, and
• The outlook on restaurant industry capital expenditures.

For a copy of the 2013 Canadian Chain Restaurant Industry Review, please register for the 2013 Canadian Restaurant Investment Summit. Visit www.restaurantinvest.ca

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  • 1. Research PartnersCanadian The 2012 Canadian Chain Restaurant Industry Review, commissioned by GE Capital Canada and undertaken byChain fsSTRATEGY and NPD Group Canada, is a comprehensiveRestaurant analysis and factual overview of the state of chainIndustry foodservice in Canada.Review The report sheds light on consumer spending habits and the findings have implications for job growth, construction activity and other factors that will impact the economic health of Canada. It’s the outcome of a survey conducted with C-suite executives from leading Canadian chains on important operational areas such as expectations of industry sales, traffic, labour, rental and occupancy costs as well as their opinions on the greatest threats and opportunities in foodservice today. Canadian The 2013 Canadian Chain Restaurant Industry Restaurant Review will be presented at the Canadian Restaurant Investment Summit, MAY 29 & 30, Investment 2013 at The Hilton Toronto Hotel. All registered Summit delegates will receive a complimentary copy. MAY 29+30, 2013 REGISTER TODAY at Hilton Toronto Hotel RESTAURANTINVEST.CA Founding Producer
  • 2. GE CapitalFranchise Finance 2012 Canadian Chain Restaurant Industry Review Research Partners
  • 3. GE CapitalFranchise Finance 2012 Canadian Chain Restaurant Industry Review 1 Introduction 2 Foodservice Industry Profile 3 Trends Impacting Restaurants 4 Finance 5 Cost of Doing Business 6 ReCount® Restaurant Census Trends 7 Notes Research Partners
  • 4. 2 3 GE Capital GE Capital Franchise Finance Franchise Finance The Inaugural Canadian Chain Restaurant Industry Review GE Capital, Franchise Finance Canada We’re More Than Just Bankers, We’re Builders I’m pleased to bring you the first annual Canadian Chain Restaurant Industry Review, a comprehensive GE Capital, Franchise Finance is a leading lender to the restaurant and hospitality industries in analysis and overview of the state of chain foodservice in this country. This work was commissioned Canada. We specialize in financing regional and national restaurant businesses of all sizes across the by GE Capital and compiled by fsSTRATEGY and NPD Group Canada. country. Over the past 10 years, we’ve financed more than 700 restaurant customers with upwards of As the economy moves from recovery to expansion, Canadians are expected to cautiously increase 1,500 property locations. That’s in excess of $1.1 billion that we’ve invested in the Canadian restaurant their spending at restaurants. In fact, we estimate that Canadian foodservice industry sales will space. increase by 3%, or almost $2 billion, to $65 billion in 2012. 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. When an industry of this size starts growing by billions of dollars, there will be a ripple effect on job growth, construction activity, agricultural decisions and a wide variety of other factors that will impact But we offer our clients more than money. Canada’s economic health this year and for several years to come. At GE Capital, we’re not just bankers, we’re builders. 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 We hope attendees at this year’s third annual Canadian Restaurant Investment Summit will use great. It takes money, along with knowledge and expertise. That’s where we come in. this extensive research to shape their future plans, whether that means examining investment opportunities, exploring new concepts or simply expanding their menu options. 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 Ultimately, we believe these insights can be useful when it comes to mapping out the best strategies casual formats — that we’ve maintained through economic ups and downs; to help your business flourish. žž Deep expertise in the franchise business and a special understanding of the brands that operate in this market; Ed Khediguian žž A cash flow-based lending model that allows us to value a business based on performance, while GE Capital, Canada taking into account seasonality and other operating issues that specifically affect restaurants; and Franchise Finance 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.
  • 5. 4 5 CaNadIaN RESTauRaNT 1 Introduction fsSTRATEGY Inc. (“fsSTRATEGY”) and The NPD Group, Inc. (“NPD”) are pleased to INvESTmENT release this 2012 Canadian Chain Restaurant Industry Review as part of the 2012 Canadian Restaurant Investment Summit. SummIT Now in its third successful year, the Canadian Restaurant Investment Summit has solidly established itself as the This report is the culmination of extensive primary and secondary research conducted by fsSTRATEGY and NPD. Sources include: annual business conference that brings the industry žž Research and data provided by the Canadian Restaurant and Foodservices Founding Producer into focus. Association (“CRFA”). Operators, chain executives, franchise operators, investors, žž C-Suite Survey in February 2012 conducted by fsSTRATEGY and sent to over lenders and key suppliers from across the country agree 60 CEOs and CFOs in the Canadian chain foodservice market, resulting in a that this is the event that delivers what they need - insight, resounding response rate of 37%. information and opportunity—all with meaningful content žž Detailed data from NPD’s Future of Foodservice. and a tight focus that is uniquely Canadian. žž Interviews with selected food grower associations, food processors and foodservice distributors. Each year, the Summit presents topical issues and noted žž Interviews with landlords to understand the rental market for restaurant thought leaders who share opinions, stimulate discussion operators. and create new directions. The entire conference program žž Information prepared by GE Canada on the state of money markets and is designed to yield authoritative information and the latest chain restaurant financing. data from across the country. When combined with the žž Secondary research data gleaned from other sources such as such as powerful networking opportunities it presents, the Summit Statistics Canada, TD Economics, the Conference Board of Canada, Hum, is an experience that is unequalled anywhere in Canada. an Resources and Skills Development Canada, Canada Ministry of Labour, Ontario Energy Board, International Monetary Fund and the Chicago Board ThaNk yOu FOR jOININg Options Exchange. ThE dISCuSSION. For further information, please contact: Geoff Wilson and Jeff Dover Robert Carter fsSTRATEGY Inc. The NPD Group, Inc. MAY 30-31, 2012 gwilson@fsSTRATEGY.com robert.carter@npd.com ThE hIlTON TORONTO hOTEl jdover@fsSTRATEGY.com (647) 723-7767 (416) 229-2290 1 | IntroductionRESTauRaNTINvEST.Ca RESTauRaNTINvEST.Ca RESTauRaNTINvEST.Ca RESTauRaNTINvEST.Ca
  • 6. 6 7 2 Foodservice Industry Profile 2.1 Canadian Foodservice Industry Sales 2.2 Chain versus Independent Operator Sales 2.3 Provincial Sales Trends 2.4 Same Store Sales Growth 2.5 C-Suite Expectations for Sales and Traffic Historic Nominal Foodservice Sales by Sector 2008 2009 2010 2011 2012 (Forecast) (Millions) Change (Millions) Change (Millions) Change (Millions) Change (Millions) Change Quick Service Restaurants $ 19,517.1 6.2% $ 20,133.8 3.2% $ 21,219.7 5.4% $ 22,149.8 4.4% $ 22,878.2 3.3% 2.1 Canadian Foodservice Industry Sales Full Service Restaurants 20,864.6 4.3% 20,675.0 -0.9% 20,931.4 1.2% 21,737.4 3.9% 22,389.6 3.0% Contract and S ocial Caterers 3,854.0 3.5% 3,732.8 -3.1% 3,997.6 7.1% 4,216.8 5.5% 4,347.6 3.1% In 2011, Canadian foodservice industry sales represented approximately 3% of national gross Drinking Places 2,559.6 1.5% 2,554.8 -0.2% 2,467.7 -3.4% 2,421.9 -1.9% 2,402.2 -0.8% domestic product, and are expected to increase by 3.1% to $65.4 billion in 2012. The Canadian Total Commercial $ 46,795.3 4.8% $ 47,096.4 0.6% $ 48,616.3 3.2% $ 50,525.9 3.9% $ 52,016.4 2.9% foodservice industry is divided into Commercial and Non-Commercial sectors. Commercial Accommodation Foodservice $ 5,659.0 2.7% $ 4,861.0 -14.1% $ 5,206.0 7.1% $ 5,503.0 5.7% $ 5,764.0 4.7% Institutional Foodservice1 3,377.1 3.8% 3,490.8 3.4% 3,640.6 4.3% 3,822.1 5.0% 3,986.5 4.3% Foodservice includes Full Service Restaurants, Limited-Service Restaurants and Drinking Places. Retail Foodservice2 1,228.5 8.4% 1,282.3 4.4% 1,284.6 0.2% 1,306.4 1.7% 1,326.0 1.5% Chain Foodservice sales reside within these three categories. Other Foodservice 3 2,217.7 3.1% 2,195.5 -1.0% 2,254.8 2.7% 2,304.4 2.2% 2,350.5 2.0% The following table shows nominal sales by industry sector for 2008 to 2012. Total Non-Commercial $ 12,482.2 3.6% $ 11,829.6 -5.2% $ 12,386.0 4.7% $ 12,935.9 4.4% $ 13,427.0 3.8% As shown, non-commercial foodservice was hit harder by the 2009 economic recession than Total Foodservice $ 59,277.5 4.6% $ 58,926.1 -0.6% $ 61,002.3 3.5% $ 63,461.8 4.0% $ 65,443.4 3.1% commercial foodservice due largely to a significant drop in accommodation foodservice sales. Since Menu Inflation 2.5% 3.5% 2.4% 2.9% 2.5% 2009, however, non-commercial annual sales growth has been consistently higher than commercial Real Growth 2.1% -4.1% 1.1% 1.1% 0.6% sales. The 2012 forecast suggests that in 2012, non-commercial sales will have increased 13.5% from 2009 figures, whereas commercial sales will only have increased by 10.4%. Source: Canadian Restaurant and Foodservices Association’s InfoStats, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting 1 Includes self-operated education, transportation, health care, correctional, remote, private & public sector dining and military foodservice. 2 Includes foodservice operated by department stores, convenience stores and other retail establishments. 3 Includes vending, sports and private clubs, movie theatres, stadiums and other seasonal or entertainment operations. 2012 Canadian Chain Restaurant Industry Review 2 | Foodservice Industry Profile
  • 7. 8 9 The table below shows nominal national foodservice and commercial foodservice sales The table below illustrates 2012 forecasted share of total foodservice sales by sector. for 1990 to present. 2012 Forecasted Share of Foodservice Sales by Sector Historical Foodservices Sales Total versus Commercial—1990 through 2012 (Forecast) Total Foodservice Commercial Foodservice $1,326.0 $2,350.5 $2,402.2 $3,986.5 $4,347.6 70 Total Commercial $22,878.2 1990: Commercial Foodservice 75.0% of Total Foodservice 65 64 $5,764.0 Quick-service restaurants 2012: Commercial Foodservice 79.5% of Total Foodservice Accommodation 61 59 59 foodservice 60 Full-service restaurants 57 Institutional foodservice 55 Contract and social 52 52 Retail foodservice caterers 50 51 50 48 49 47 47 47 Other foodservice Drinking places 45 45 44 43 $52,016.4 $22,389.6 41 41 Billions of Dollars 39 40 40 37 38 38 36 35 35 33 33 33 31 31 31 Source: Canadian Restaurant and Foodservices Association ‘s InfoStats, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting 29 30 29 30 28 26 27 As shown, commercial foodservice accounts for approximately 79% of total foodservices sales. Quick 23 24 22 23 service and full service generate relatively similar sales and represent the majority of commercial 20 foodservice sales. 10 0 1990 1991 1992 1995 1996 1999 2000 2001 2002 2005 2006 2009 2010 2012-f 1994 1997 2004 2007 2011-p 1993 1998 2003 2008 Commercial Foodservice Total Foodservice p = preliminary f = forecast Source: Canadian Restaurant and Foodservices Association, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting. Total nominal foodservice sales have increased from $30.8 billion to $65.4 billion since 1990. Commercial sales (which include chain foodservice) represent the majority of total foodservice sales. In fact, commercial foodservice has increased its share of total foodservice by 4.5% and now accounts for 79.5% of total industry sales versus 75.0% in 1990. 3 Adjusted for menu inflation. 2012 Canadian Chain Restaurant Industry Review 2 | Foodservice Industry Profile
  • 8. 10 11 Growth trends vary by sector. The table below compares commercial foodservice sector growth The following table shows nominal foodservice sales by province over the past five years. using a sales index. The index compares real sales to 2007. Canadian Foodservice Sales 2008 through 2012 (Forecast) by Province Sales Index by Industry Segment in Thousands of Dollars Sales Index 2007 = 100 New Brunswick Newfoundland Saskatchewan 110 and Labrador Nova Scotia 108 Manitoba Columbia Canada Ontario Quebec Edward Alberta 107 British Prince Island 105 104 104 2007 $44,636,968 $532,421 $170,777 $1,114,252 $846,629 $8,773,617 $16,649,363 $1,224,444 $1,167,620 $6,409,540 $7,611,363 102 102 101 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 $7,709,844 101 100 100 100 99 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 99 99 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 97 97 96 2011-p $50,525,622 $685,422 $189,013 $1,292,747 $972,265 $10,025,906 $19,252,294 $1,446,520 $1,501,172 $7,173,026 $7,829,050 96 95 94 Percent Change vs Previous Year 90 2007 3.0% 1.0% -2.4% 1.3% -4.2% 2.6% 2.7% -0.3% 6.9% 5.9% 2.8% 90 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% 86 85 2010 3.2% 9.4% 5.1% 3.5% 3.2% 3.5% 4.3% 2.3% 5.3% 2.1% 0.6% 2011 3.9% 6.4% 2.6% 3.3% 0.4% 3.2% 4.7% 5.6% 5.1% 7.6% -0.2% Source: Canadian Restaurant and Foodservices Association’s InfoStats, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting 80 2007 2008 2009 2010 2011 Total Commercial Full-Service Restaurants Quick-Service Restaurants Caterers Drinking Places Source: Canadian Restaurant and Foodservices Association ‘s InfoStats, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting As shown, the fastest growing provincial market in 2011 was Alberta at 7.8% over the previous year. As shown, caterers were affected the most by the recession in 2009, followed by drinking places. Not British Columbia was the only province experiencing foodservice revenue declines in 2011. Almost surprisingly, quick service restaurants fared better than other sectors in the recession, losing less 40% of Canadian foodservice revenue is generated in Ontario. than one index point. The full service sector has yet to recover to prerecession sales levels. The quick service sector generally is less impacted by and recovers faster from recessions. Quick service sales continue to grow, albeit at a slower rate than before the recession. The sharp, continual decline seen in drinking places sales is the result of a decline in the number of establishments classifying themselves as drinking places. Drinking places have experienced similar real sales per location growth trends compared to other commercial foodservice sectors. 2012 Canadian Chain Restaurant Industry Review 2 | Foodservice Industry Profile
  • 9. 12 13 2.2 Chain versus Independent Operator Sales 2.3 Provincial Sales Trends The chart below graphically depicts the share of chain and independent operator sales in various The following table compares total commercial foodservice sales and commercial foodservice sales regions of Canada for 2011. per capita by province. Chain versus Independent Sales—2011 Commercial Foodservice Sales by Province 25,000 2,000 100% $1,897.93 90% National Commercial 1,800 80% Foodservice Sales Per Capita 70% $1,711.90 20,000 19,252.3 1,600 60% 50% $1,342.39 $1,367.41 $1,439.64 $1,419.01 1,400 40% 30% Per Capita Sales in Dollars $1,295.50 $1,286.92 Sales in Millions of Dollars 20% 15,000 $1,256.43 1,200 $1,156.66 10% 0 1,000 Canada Atlantic Quebec Ontario West 10,025.9 10,000 800 Chain Independent 7,829.0 7,173.0 Source: The NPD Group/CREST® 600 5,000 400 Over 60% of restaurant sales in Canada can be attributed to chain operators. Chain penetration is greatest in Atlantic Canada and lowest in Quebec. 1,292.7 1,446.5 1,501.2 200 685.4 972.3 189.0 0 0 NL PE NS NB QC ON MB SK AB BC 2011 Commercial Foodservice Sales 2011 Commecial Foodservice Sales Per Capita National Average Per Capita Spend Source: Canadian Restaurant and Foodservices Association, Statistics Canada As shown, Ontario and Quebec have the greatest commercial foodservice sales. This is not surprising considering these provinces have the greatest populations. However, despite having the greatest population, Ontario has only the third greatest commercial foodservice sales per capita after Alberta ($1,897.93) and British Columbia ($1,711.90). Quebec has the second lowest per capita sales ($1,256.43) after Manitoba ($1,156.66). 2012 Canadian Chain Restaurant Industry Review 2 | Foodservice Industry Profile
  • 10. 14 15 2.4 Same Store Sales Growth The average SSSG for selected Canadian restaurant chains is graphically represented below. Average Same Store Sales Growth 2007-2011 Same Store Sales Growth (“SSSG”) is used to measure the performance of restaurant chains year-over- year, comparing for the same base of stores from one year to the next on a rolling basis. Selected Publicly Traded Canadian Restaurant Chains1 The table below provides an average of SSSG from 2007 to 2011 for the seven largest Canadian 4% As the exhibits demonstrate, SSSG declined publicly traded restaurant chains. Data for 2011 has been taken from either annual reports or Q3 or 2.9% 3% 2.5% significantly through the recession and is Q4 reports, as available by chain. 1.8% beginning to recover. 2% 1.4% In its 2011 Q4 Restaurant Outlook Survey, 1% the CRFA stated that nearly 40% of operators 0% reported higher same store sales in Q4. The Same Store Sales Growth 2007 through 2011, Selected Publicly Traded Canadian table below summarizes the results of its -1% survey. Restaurant Chains -2% -1.5% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Minimum -3.9% -1.2% -6.5% -1.7% 0.4% Source: fsSTRATEGY Inc. using data from publicly traded company annual and quarterly reports. 1. Seven publicly traded Canadian restaurant chains. 2011 data represents year-to-date second or third quarter results. Average 2.9% 1.8% -1.5% 1.4% 2.5% Maximum 5.9% 7.3% 2.9% 4.9% 4.5% Reported 2011 Q4 Same Store Sales versus Q4 2010 Source: fsSTRATEGY Inc. using data from publicly traded company annual reports. 3.0% 3% 2.5% 2.0% 2% 1.4% 1% 0% -1% -2% -1.5% 2007 2008 2009 2010 2011 Source: Canadian Restaurant and Foodservices Association “Restaurant Outlook Survey, Q4, 2011”. The CRFA report went on to say: žž Thirty-four per cent of full service restaurant respondents expect their same store sales to grow at a slower rate in the first six months of 2012 compared to 20% who expect same store sales to grow at a greater rate. žž Thirty-three per cent of quick service restaurant respondents expect same store sales to grow at a faster rate in the first six months of 2012, while only 25% expected same store sales to grow at a slower rate. 2 | Foodservice Industry Profile
  • 11. 16 17 2.5 C-Suite Expectations for Sales and Traffic C-Suite survey respondents were asked how they expected industry sales to change in 2012 compared to 2011 Expected sales growth will be driven primarily by either In 2012, Industry Sales are Expected to: menu inflation or more efficient customer conversions Decline 5.1% to 7.5% 0% through upselling and other sales techniques Decline 2.6% to 5% 10% Decline 0.1% to 2.5% 0% Remain Flat 25% Increase 0.1% to 2.5% 35% Increase 2.6% to 5% 25% Increase 5.1% to 7.5% 0% Not sure 5% Source: fsSTRATEGY Inc. C-Suite Survey Most respondents (60%) expect industry sales to be flat or increase by less than 2.5% in 2012 compared to 2011. Twenty-five percent of respondents expect sales to increase by more than 2.5% and 10% believe that sales will drop by 2.5% to 5.0%. As shown, respondents were less optimistic about traffic with 40% of respondents expecting industry traffic to remain flat, while only 30% expected slight growth of less than 2.5% compared to 2011. This suggests that the expected sales growth depicted above will be driven primarily by either menu inflation or more efficient customer conversions through upselling and other sales techniques. C-suite survey respondents were also asked what changes they expected regarding C-Suite respondents were asked to list the three greatest opportunities and threats in the foodservice industry traffic. industry for 2012. Opportunities that were mentioned by more than one respondent included menu conversions, healthy menu options, local food, general innovation and simplifying operations to In 2012, Industry Traffic is Expected to: focus on core strengths. Operating costs (costs of goods sold, labour, occupancy costs and general Decline 5.1% to 7.5% 0% operating costs) were seen as the largest threat representing 29% of all responses. Other threats Decline 2.6% to 5% 10% included economy (21%), competition (market saturation, undercutting prices, retail, international competition and lack of differentiation between brands) (19%), government regulations (10%), and Decline 0.1% to 2.5% 0% human resource challenges (labour market, employee engagement, availability of management) (7%). Remain Flat 40% Increase 0.1% to 2.5% 30% Increase 2.6% to 5% 15% Increase 5.1% to 7.5% 0% Not sure 5% Source: fsSTRATEGY Inc. C-Suite Survey 2012 Canadian Chain Restaurant Industry Review 2 | Foodservice Industry Profile
  • 12. 18 19 3.1 Key Consumer Profiles 3 Trends Impacting Restaurants 3.1 Key Consumer Profiles 3.2 Key Foodservice Industry Trends The table below compares the number of commercial restaurant meal and snack visits by various age groups in 2008 and 2011. Commercial Restaurants—Traffic Per Capita—2011 and 2008 Source: The NPD Group/CREST® 2012 Canadian Chain Restaurant Industry Review 3 | Trends Impacting Restaurants
  • 13. 20 21 Commercial Restaurant—Traffic (Millions)—2007 through 2011 6,601 Commercial Restaurant—Traffic Per Capita by Household Income 6,530 6,536 6,496 (Consumers 13 Years of Age and Older) 6,428 2007 2008 2009 2010 2011 Source: The NPD Group/CREST® Visits to Canada’s commercial foodservice industry remained relatively flat in 2011, growing just 1% over the prior year, with annual volume that is 70 million visits above 2008 pre-recession levels. GDP and job growth indicate the Canadian economy is moving from recovery to expansion mode, but Canadians remain cautious about spending freely at restaurants. Total Restaurants—Percentage Growth in Sales Year-Over-Year 4% 3% 4% 4% 3% 2% 2% 1% Source: The NPD Group /CREST® 1% 1% 0% Not surprisingly, as household income grows, so do restaurant visits. Greater disposable income is a key indicator for restaurant usage. -2% Just two income groups used restaurants more in 2011 than 2010: -3% SON08 DJF09 MAM09 JJA09 SON09 DJF10 MAM10 JJA10 SON10 DJF11 MAM11 JJA11 SON11 žž Consumers with $100,000 and over in household income increased by an average five visits Source: The NPD Group/CREST® annually; and žž middle income ($55,000 to $70,000) households increased by six visits annually. Growth is attributed to strong sales performance in the second half of 2011, with 4% dollar gains in In a market with minimal growth, driving revenues is a case of stealing share from competitors. With both Q3 and Q4 2011. Increased visits (3%) were the key driver of growth during this period. With a detailed understanding of what customers want, restaurateurs can gain a distinct competitive just 1% coming from increased average spending per person, there is pressure on margins, as menu advantage. Operators must find the means to stay new in consumers’ minds—innovative products, inflation is running at 3%*. unique promotions, competitive pricing – and above all deliver an enjoyable experience that * Statistics Canada, CPI, Food from Restaurants, November 2011. consumers can’t get at home. 2012 Canadian Chain Restaurant Industry Review 3 | Trends Impacting Restaurants
  • 14. 22 23 3.2 Key Foodservice Industry Trends 3.2.2 Regional Trends 3.2.1 Market Segment Trends The table below shows the year over year restaurant sales growth by region. The table below shows restaurant market segment shares in terms of traffic and revenue. Full Service and Quick Service Restaurant Sales Performance by Region Restaurant Market Segments — Share of Traffic and Dollar Sales PYCA - Percent Change vs. Year Ago 6% 6% 5% 4% 4% 3% 3% 3% 2% 2% 1% 1% 1% 0% TOTAL Atlantic Quebec Ontario Manitoba/ Alberta British CANADA Region Saskatchewan Columbia QSR FSR Source: The NPD Group/CREST® As shown above, QSR sales are outperforming FSR in all regions except Alberta and British Columbia. The Quebec market is the most challenged, remaining relatively flat at both segments. 2012 Canadian Chain Restaurant Industry Review 3 | Trends Impacting Restaurants
  • 15. 24 25 3.2.3 Restaurant Trends Analysis Based on the research, restaurant operators should consider the following: žž Bright spots in the foodservice industry žž both chains and independents contributed to QSR’s 2% traffic growth; žž the lunch meal period realized the greatest gains, while morning meals and supper increased modestly; žž average cheque growth at FSR of 4% is outpacing menu inflation—it would appear that while FSR customers may be going less often, the average spend has increased; and žž full serve ethnic restaurants are outperforming the segment, an indication of growing customer interest in authentic ethnic cuisines. žž Areas of the foodservice industry still in need of improvement žž full service restaurants are still experiencing flat to declining traffic across all dayparts, with FSR chains faring worse than independents; žž convenience stores fell by more than 22 million visits for prepared food in the past year in the face of strong QSR competition for key morning and snacking visits; and žž consumers cut back on desserts and appetizers more than other menu items, while sides and beverages are not keeping pace with traffic as consumers try to manage spending. Distribution of the Population by Age—2011 and 2016 3.2.4 What Full Service Restaurant Customers Want From NPD’s FSR Report, 3rd Edition, menu innovation is clearly the key in giving consumers new reasons to visit. Three-quarters of FSR visitors reported that they would like to see greater menu variety, even more than in 2010. The demand for greater variety was strongest for Main Dishes and Appetizers. Consumers voiced the No. of Individuals in the Population greatest interest for innovation with Chicken, Seafood / Fish and Pasta. 3.2.5 A Look Ahead The NPD Group forecasts that commercial foodservice traffic will grow by an average of 1.7% annually, 2012 through 2016, modestly outpacing annual population gains of 1.1%. Acknowledging that current market conditions are not likely to improve dramatically in the near future, it is important to understand and plan for the future. The expectation is that Family/Midscale restaurants will experience the least growth while QSR outlets will experience the greatest gains. The aging of Canada’s population does not support strong growth for the restaurant industry. As consumers age they become less frequent restaurant users, resulting in heavier dependence Age: LT1 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100 on lighter buyers. Certain restaurant brands can benefit however, by effectively targeting older consumers. It will be important to recognize their loyalty, and pay attention to service and their 2011 F2016 requirements for smaller portion sizes and healthier options. *Source: Statistics Canada – 2011 vs. 2016 3 | Trends Impacting Restaurants 2012 Canadian Chain Restaurant Industry Review
  • 16. 26 27 Other pockets of opportunity exist to be taken advantage of by understanding what consumers are The table below shows the average number of menu items by menu section for Canada’s top looking for in their restaurant experience and what will drive growth in the coming years. For example, full service restaurants. expect ethnic foods to grow in interest and influence. Particularly in Canada’s urban centres, tastes Average Number of Menu Items by Menu Section will continue to become more adventurous and sophisticated, with ethnic flavours and dishes trickling Top Full Service Chain Restaurants down to the mainstream. Other food and beverage items that are projected to outpace market growth include burgers, healthy/ light sandwiches, and non-carbonated beverages. Targeting the core customers for these products may reap benefits. 20 18 16 14 12 10 8 6 4 2 0 es a s a ns s rs ts d de up zz st ich la ize ai er Pa Pi Si So Sa M ss w et nd De p Ap Sa s/ er rg Bu 2006 2007 2008 2009 2010 2011 Source: fsSTRATEGY Inc., The NPD Group/Canadian Full Service Chain Restaurant Menu Analysis As shown, side dishes continue to increase on menus at a significant rate, likely as a means to increase average checks without significant increases to menu price. The number of appetizer items on menus spiked in 2010 but have returned to 2009 levels. Burgers and sandwiches continue to increase their prominence on Canadian menus while pastas appear to be gradually declining. 2012 Canadian Chain Restaurant Industry Review 3 | Trends Impacting Restaurants
  • 17. 28 29 4 Finance 4.1 The Economy 4.2 Money Markets 4.3 Restaurant Acquisition Activity Total Foodservice Sales Real Growth vs. Disposable Income and GDP Real Growth 10% 5% 4.1 The Economy Year-Over-Year Percentage Change The table across compares total real foodservice sales growth against two economic indicators: real 0% disposable income and real GDP. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012-f 2011-p The table illustrates a relationship between real foodservice sales, real GDP and real disposable -5% income. Comparing 1991 and 2009 suggests that real disposable income could have a shielding effect on foodservice sales during time of recession. In 1991, both GDP and disposable income declined simultaneously, and foodservice sales fell by 15%. Despite a greater decrease to GDP -10% in 2009, compared to 1991, real disposable income still increased slightly and the decrease in foodservice sales was less than 5%. -15% -20% Real Foodservice Sales-Total Real Disposable Income Real GDP Source: Statistics Canada, Canadian Restaurant and Foodservices Association, TD Economics and Conference Board of Canada 2012 Canadian Chain Restaurant Industry Review 4 | Finance
  • 18. 30 31 The chart below compares Canadian foodservice revenues and consumer confidence. 4.2 Money Markets Canadian Foodservice Revenues versus Consumer Confidence 4.2.1 Global Financial Markets A few key trends will define the global financial environment over the next several years and decades. 160 2002 = 100 The most important is still economic growth occurring at different speeds in different countries. As 140 developed markets de-leverage, emerging markets get larger. The relative size of emerging markets 140 as a share of the world economy has grown dramatically over the last 20 years and will continue to grow. 120 106 100 Decreasing economic vitality and population ageing put pressure on both public and private spending 100 in developing markets. In emerging markets, rapidly growing young populations create pressure for infrastructure and social spending (e.g., health, education). Multi-speed demographics therefore need 80 to be considered. 81 60 The growing importance of financial markets’ liquidity will drive large swings in assets and commodity prices. At the time of publishing, crude oil prices have surged back to levels close to the pre-crisis peak. Cost inflation is already here and threatens margins. If the global recovery continues to 40 take hold, eventually traditional consumer price inflation will accelerate as well. Interest rates are abnormally low in developed markets and will have to rise—the inevitable end of the secular yields 20 decline is unlikely to be smooth. 0 Technology drives the remaining trends. The rapid growth of shale gas is accelerating major changes in the energy space; combined with progress on other unconventional fuels, this could bring not just new market opportunities but also major shifts in the geopolitical and economic balance of power which means international influences from some countries could change. Meanwhile the rise of the Total Foodservice Sales Index Consumer Confidence Index Total Real Foodservice Sales Index (2002 dollars) “industrial internet” is gradually reshaping the industrial landscape, generating a new set of risks, and Source: Calculated using data from the Canadian Restaurant and Foodservices Association, Statistics Canada, hopefully laying the ground for a new productivity renaissance. fsSTRATEGY Inc. and PKF Consulting As shown, consumer confidence closely tracked foodservice industry sales until 2002. Since 2002, however, foodservice sales have increased despite some significant declines in consumer confidence. During the recession, consumers “traded down” (i.e., to casual restaurants as opposed to fine dining). Consumers continued to dine out, but sought value for dollars spent on food away from home. 2012 Canadian Chain Restaurant Industry Review 4 | Finance
  • 19. 32 33 The following two tables show that volatility, long term on first table and short term on second table, The appetite for risk is recovering, and with ample liquidity it is beginning to push commodity prices up has returned to early nineties levels but is far from the recent European crisis peaks. again. Cost pressure on margins will remain. Geopolitical tensions are heightened (e.g., Iran) resulting in a further risk to oil prices. Chicago Board Options Exchange Market Volatility Index—Long Term View Commodity prices are increasing again, however, the rate of the increase has slowed. 90 Lehman Commodity Prices (International Monetary Fund Index) 80 600 Commodity Prices, IMF Indices 70 January 2000 = 100 500 60 Credit Bubble 400 50 40 300 30 200 20 100 10 0 0 Dec - 02 May- 03 Jun - 05 Mar- 04 Nov -05 Aug -04 Sep -01 Sep -06 May-08 Feb -02 Jan -05 Oct- 03 Mar-09 Apr -01 Nov-10 Nov-00 Aug-09 Dec-07 Sep-11 Feb-07 Jun-10 Jun-00 Jan-10 Jan-00 Apr-11 Apr-06 Oct-08 Jul -02 Jul-07 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Chicago Board Options Exchange VIX (Market Volatility Index) Commodities Industrials Materials Food Oil Source: International Monetary Fund Chicago Board Options Exchange Market Volatility Index—Short Term View Commodities Percentage Change Year-Over-Year 60 Italy 80% 50 Greece 60% 40 40% 30 20% 20 0% May-04 May-09 Mar-05 Mar-10 Nov-01 Nov-06 Nov-11 Aug-05 Aug-10 Dec-03 Dec-08 Sep-02 Sep-07 Feb-03 Feb-08 Jun-01 Jun-06 Jun-11 Apr-02 Apr-07 Jan-01 Jan-06 Jan-11 Oct-04 Oct-09 Jul-03 Jul-08 10 -20% 0 -40% May-10 May-11 Mar-10 Mar-11 Nov-10 Nov-11 Aug-10 Aug-11 Dec-10 Dec-11 Apr-10 Sep-10 Apr-11 Sep-11 Feb-10 Feb-11 Feb-12 Jun-10 Oct-10 Jun-11 Oct-11 Jan-10 Jan-11 Jan-12 Jul-10 Jul-11 -60% Commodities (%YOY) Source: Chicago Board Options Exchange VIX (Market Volatility Index) Source: GE Capital 2012 Canadian Chain Restaurant Industry Review 4 | Finance
  • 20. 34 35 Oil prices are increasing and have returned to post-crisis high levels. 4.2.2 Financial Markets in Canada Crude Oil Prices (Price per Barrel) Since 2000 Analysis The global economic volatility generated by the European sovereign debt crisis has increased the 160 uncertainty surrounding Canada’s near-term economic outlook and the stability of its financial $145 markets. Two of the key external threats to the domestic financial system: the risks related to the 140 sovereign debt crisis and the risks from a global economic downturn, have intensified over the past six months. 120 $122 Some key sources of risk in Canada’s financial markets come from the domestic environment. One of these has struck the Bank of Canada as being of particular importance—the state of Canadian 100 household finances. External and internal risks to Canada’s financial system and economic recovery are an important part of the environment shaping the Bank of Canada’s policy decisions. Dollars 80 $78 Canada’s monetary policy, like most of the rest of the world’s, remains highly stimulative. With $72 increased global uncertainty and other central banks loosening monetary policy even further 60 (generally through some combination of rate reductions and credit easing), GE Capital now expects the Bank of Canada to hold off raising interest rates until late in the third quarter of 2012, and even 40 then the pace of raising the bank rate will be more measured. The Canadian dollar is expected to rise back above par by the end of the year as the flow of 20 $27 international capital toward the safety and liquidity of the U.S. dollar ebbs. 0 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Forecast Brent Crude Oil Price Per Barrel Recent activity data have been mixed, with leading indicators rising for a seventh consecutive month, but manufacturing sales are softer than expected and housing continues to weaken. GE Capital still sees a slight deceleration in GDP growth to 2% this year, due to a weaker global environment, the domestic fiscal consolidation and the stronger currency. Thereafter GE Capital sees Source: GE Capital growth picking up to 2.5-3% based on strong domestic fundamentals and well-supported commodity prices. The decline in unemployment will pause in 2012 and then resume at a moderate pace, falling below 7% by 2014. Inflation should settle at around 2%. 2012 Canadian Chain Restaurant Industry Review 4 | Finance
  • 21. 36 37 Canada—GDP Growth G5 Average Policy Interest Rates 6% 8% Forecast 5% 4.9 4.5 6% 5.5 4% 4% 3.8 3.5 3% 2% 2% 1.3 0.8 1.6 0% 1% 2000Q1 2000Q4 2001Q3 2002Q2 2002Q1 2002Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 2013Q3 2014Q2 2015Q1 2015Q4 2016Q3 0.6 -2 % 0% -2.6 Jul-02 Jul-09 Apr-04 Apr-11 Oct-00 Oct-07 Mar-00 Jun-05 Mar-07 Feb-03 Feb-10 Sep-03 Sep-10 Jan-99 Jan-06 Dec-01 Dec-08 Aug-99 Aug-06 Nov-04 May-01 May-08 -4 % G5 Average Policy Interest Rate Canada: GDP Growth (%YOY) Source: GE Capital Source: GE Capital Note: The G5 economies include the United States, the Euro Area, Japan, the United Kingdom and Canada. Factors influencing interest rates include: žž cash remains abundant in corporations, financials; žž resetting of expectations on returns on investment; žž as policy clarity emerges, can jump-start investment; and žž mergers and acquisitions are the preferred option, with an eye on growth markets. 2012 Canadian Chain Restaurant Industry Review 4 | Finance
  • 22. 38 39 4.3 Restaurant Acquisition Activity 4.3.2 Market Sizing and Loan Volumes 4.3.1 Recent Transaction Activity GE Capital estimates assume a total annual financeable debt market in the food space of $4.4billion GE Capital collected and reviewed transaction data encompassing 47 acquisitions and shareholder across all segments. Financeable debt market is defined as any potential renovation, refinance, new buy-out deals in Canada over the past five years. This sample included 163 total locations from both build and acquisition transaction within the Canadian restaurant market. the full service and limited service segments. žž Full service – a total of 26 transactions involving 115 locations resulted in an average transaction Total Financeable Debt Market by Segment Type (millions) multiple of 4.2x EBITDA žž Limited service – a total of 21 transactions involving 58 locations resulted in an average transaction 4,356 multiple of 4.0x EBITDA The following table shows the average minimum, maximum and average multiples for EBITDA 2,008 quoted by participants in the fsSTRATEGY C-Suite Survey used to establish value in transactions completed in 2011. 603 560 502 446 236 C-Suite Survey – Average Multiples for 2011 Acquisition Transactions Total Market QSR Express Family Mid Tier Coffee Premium Minimum Maximum Average Casual Casual Casual Source: GE Capital 3.5 8.0 5.8 Source: fsSTRATEGY Inc. C-Suite fsSTRATEGY researched relevant publicly reported chain restaurant financing and acquisition transactions within the last 12 months. The following table summarizes these transactions. Recent Publicly Reported Chain Restaurant Transactions Total Financeable Debt Market by Transaction Type (millions) Annual Value1 # Sales:Value Date Chain Buyer/Investor Purpose Sales ($ millions) Locations2 Ratio ($ millions)3 February 2012 Elephant & Castle Original Joe’s Acquisition $22.8 19 $50.0 2.2 4,356 January 2012 Prime Restaurants Fairfax Holding Limited Acquisition $71.0 133 $336.7 4.7 December 2011 Imvescor Restaurant Group Fairfax Holding Limited Recapitalization $25.0 254 $413.2 n/a October 2011 Mr. Sub MTY Food Group Inc. Acquisition $23.0 335 $100.0 4.3 2,836 October 2011 Koryo Korean BBQ MTY Food Group Inc. Acquisition $1.8 20 $8.0 4.4 Franchise Corp. August 2011 Jugo Juice MTY Food Group Inc. Acquisition $15.5 136 $36.4 2.4 1133 360 Source: fsSTRATEGY Inc. 1 Media Releases Sources: media releases, Foodservice and Hospitality Magazine, July 2011 2 Total Market Refinance/ Acquisition New Build Renovation Average of acquisition transactions only 3 The average transaction value was $26.8 million and the average sales to transaction value ratio was 3.6. Source: GE Capital 2012 Canadian Chain Restaurant Industry Review 4 | Finance
  • 23. 40 41 Historical Average Cost of Goods Sold as a Percentage of Sales 36.0% Cost of 5 Doing 35.8% 35.70% 35.80% Business 35.6% 35.60% Percentage of Sales 5.1 Cost of Goods Sold 35.50% 5.2 Labour Costs 35.4% 5.3 Rental and Occupancy Costs 35.40% 5.4 Other Operating Costs 5.5 Capital Expenditures 35.2% 35.0% 2005 2006 2007 2008 2009 Source: Canadian Restaurant and Foodservices Association, Statistics Canada 5.1 Cost of Goods Sold Cost of goods sold remains the largest single cost for operators, accounting for 35.8% of sales in the As shown, cost of goods sold as a percentage of sales has been relatively constant, ranging from average foodservice operation. The chart across illustrates average foodservice cost of goods sold 35.4% to 35.8% over five years with a subtle upward trend. However, ingredient prices have increased as a percentage of sales for the most recent five year period available (2005 to 2009—the most recent more dramatically than the above table suggests. year for which data is available). 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 24. 42 43 The following graph compares cost indices for several high demand products in foodservice such as Menu Inflation versus Producer Price Index (Meat, Fish, and Dairy Products) meat, seafood, dairy, baked goods, vegetables and alcohol. Consumer Price Indices 130 150 PPI= Producer Price Index 2002 = 100 CPI = Consumer Price Index 2002 = 100 125 124 121 140 120 117 130 115 114 120 110 111 105 105 102 110 105 99 103 100 100 95 90 90 85 80 2006 2007 2008 2009 2010 2011 80 Meat Fish, seafood and other marine products 2006 2007 2008 2009 2010 Dairy products Bakery and cereal products Menu Inflation PPI (Meat, Fish, and Dairy Products) Vegetables and vegetable preparations Alcoholic beverages purchased from stores Source: Statistics Canada CPI - All Items Source: Statistics Canada With the exception of alcoholic beverages purchased from stores, all indices grew by more than ten As shown, while both menu inflation and the Producer Price Index (“PPI”) have increased steadily over points between 2006 and 2011. As shown, consumers saw the greatest inflation for bakery and the past five years, menu prices are growing at a slightly faster rate as they accommodate other cereal products whose indices rose by more than thirty points since 2006. Inflation on meat and dairy increasing costs in addition to costs of goods sold. products also grew faster than the national Consumer Price Index (“CPI”) for all goods. This could be due to increased grain prices for cereal product inputs and livestock feed. In order to control cost of goods sold, operators have steadily increased menu prices. The following graph compares consumer price index for food purchased from restaurants (menu inflation) against the producer price index for meat, fish and dairy products which represent some of the most costly ingredient inputs. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 25. 44 45 The graph compares consumer price indices for food purchased from restaurants, and served alcohol C-Suite survey respondents were asked how cost of goods sold as a percentage of sales were against the national CPI for all goods. expected to change in 2012 compared to 2011. Menu Inflation versus General Inflation C-Suite Survey – Cost of Goods Sold 130 In 2012, Cost of Sales as a Percent of Sales are Expected to: CPI = Consumer Price Index 128 2002 = 100 Decline more than 2% points 0% Decline 1.6% to 2% points 0% 125 124 125 Decline 1.1% to 1.5% points 0% Decline 0.6% to 1% points 0% 123 Decline 0.1% to 0.5% points 0% 121 Remain flat 5% 120 119 Increase 0.1% to 0.5% points 30% 120 117 Increase 0.6% to 1% points 25% Increase 1.1% to 1.5% points 10% 114 116 117 Increase 1.6% to 2% points 0% 115 Increase more than 2% points 25% 113 114 114 Not sure 5% 111 111 112 110 Source: fsSTRATEGY Inc. C-Suite Survey 109 Almost all respondents expect to see an increase in cost of goods sold as a percentage of sales in 2012. Most respondents (55%) believe the increase will be less than or equal to one percentage point; however, 25% of respondents expect to see an increase of more than two percentage points. One 100 operator who has been studying commodity trends expects food inflation to be between 5% and 7% 2006 2007 2008 2009 2010 2011 in 2012. Food purchased from restaurants Served alcoholic beverages CPI - All Items Source: Statistics Canada The previous graph shows that unlike the CPI for all goods, restaurant menu inflation did not slow during the 2009 recession. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 26. 46 47 fsSTRATEGY also interviewed several grower associations and processors to understand factors 5.2 Labour Costs affecting food prices to foodservice operators. For the most part, food costs are expected by this group to increase with inflation in the next 12 months. In 2011, food inflation was between 4% and Labour costs include all salaries, wages, and benefits associated with running an operation. Labour 5% on a typical shopping basket of goods. The following factors are affecting food prices: costs are the second largest cost item faced by operators and on average represents 33.9% of sales. žžAn increase in the quality and supply of products from overseas markets is putting downward The graph below illustrates average labour cost as a percentage of sales for the most recent five year pressure on pricing. The strength of the Canadian dollar is providing processors with some period of available data (2005 to 2009). purchasing power for imported products. žžFactors providing upward pressure on pricing include fuel, energy (e.g., refrigeration), insurance, Historical Average Labour Cost as a Percentage of Sales packaging and equipment costs, all of which are increasing in excess of the rate of inflation. 35% 35% Labour costs have also increased significantly in recent years (please see the next section of this report for a discussion on minimum wage rates). žžBeef is in tight supply as a result of increased demand for beef as emerging markets are 34% increasingly consuming this product as well as the market is recovering from a reduction in 34% 34% production during the recession. Further, US government incentives on ethanol production have reduced the supply of (and therefore increased the demand for) feed. Prices for beef and processed beef may increase by up to 20% this year. Fortunately for restaurant operators, beef Percentage of Sales 33% suppliers will not allow the gap between the price of beef and the price of pork, which will not allow the gap between the price of beef and the price of pork to increase dramatically, which will artificially lower beef prices. 32% žžEnvironmental compliance is becoming an increasing challenge for growers and processors (e.g., 32% Ministry of Environment regulation with respect to fresh water usage and waste water disposal). Food safety requirements, while important, result in significant costs for growers, processors and 32% distributors. 31% žžCompetition in the foodservice distribution industry is fierce. All distributors implemented significant price increases in 2011 and, as a result, are attempting to hold price increases in 2012 to inflation. Food processors have been forced to hold prices resulting in artificially low pricing. 30% This will result in significant price increases at some point in the future. 2005 2006 2007 2008 2009 Salaries and Wages Source: Canadian Restaurant and Foodservices Association, Statistics Canada 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 27. 48 49 As shown, operators are not able to increase menu prices sufficiently to maintain previous labour to Some provinces have experienced considerable increases in minimum wage in recent years as shown sales ratios. This is due in large part to increased minimum wages in many provinces. On average, in the table below. provincial and territorial minimum wages increased by almost 21% between 2005 and 2009, and Current and Dates of Changes in Minimum Wage by Province between 2009 and 2012, wage rates will have increased again by almost 11% on average nationally. The table below shows minimum wage rates by province and territory. Jurisdiction Current 2005 2006 2007 2008 2009 2010 2011 2012 01-Sep-05 01-Sep-07 01-Apr-08 01-Apr-09 01-Sep-11 Alberta $9.40 $7.00 $8.00 $8.40 $8.80 $9.40 Provincial and Territorial Minimum Wage Rates British Columbia $10.25 01-May-11 01-May-12 $8.75 $10.25 01-Nov-11 $9.50 Northwest Territories 01-Apr-05 01-Apr-06 01-Apr-07 01-Apr-08 01-May-09 01-Oct-10 01-Oct-11 Manitoba $10.00 $7.25 $7.60 $8.00 $8.50 $8.75 $9.50 $10.00 British Columbia New Brunswick 01-Oct-09 Newfoundland Saskatchewan Nova Scotia3 $9.00 Manitoba New 01-Jan-05 01-Jan-06 05-Jan-07 31-Mar-08 15-Apr-09 01-Apr-10 01-Apr-11 01-Apr-12 Nunavut Alberta2 Ontario $10.00 Quebec Yukon1 Brunswick $6.30 $6.50 $7.00 $7.75 $8.00 $8.50 $9.50 $10.00 PEI 01-Jul-06 01-Jul-07 01-Sep-09 01-Sep-10 $6.70 $7.25 $8.25 $9.00 Adult Workers $9.00 $9.40 $9.50 $9.90 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.25 $10.25 $11.00 Newfoundland 01-Jun-05 01-Jan-06 01-Jan-07 01-Apr-08 01-Jan-09 01-Jan-10 $10.00 Liquor Servers/Workers $8.35 $9.00 $8.90 and Labrador $6.25 $6.50 $7.00 $8.00 $8.50 $9.50 Receiving Gratuities 01-Jun-06 01-Oct-07 01-Jul-09 01-Jul-10 First Job/Entry Level $9.50 $6.75 $7.50 $9.00 $10.00 Northwest 01-Apr-10 01-Apr-11 Students (Under 18) $9.60 $10.00 Territories $9.00 $10.00 Homeworkers 01-Oct-05 01-Apr-06 01-May-07 01-May-08 01-Apr-09 01-Apr-10 01-Oct-11 (overrides student $11.28 Nova Scotia $10.00 wage) $6.80 $7.15 $7.60 $8.10 $8.60 $9.20 $10.00 01-Oct-10 $9.65 Source: Human Resources and Skills Development Canada 05-Sep-08 01-Jan-11 Nunavut $11.00 $10.00 $11.00 1 Alberta’s minimum wage will be adjusted annually every April 01-Feb-05 01-Feb-06 01-Feb-07 31-Mar-08 31-Mar-09 31-Mar-10 2 Yukon Territory increases minimum wage every April 1 based on the Consumer Price Index Ontario $10.25 $7.45 $7.75 $8.00 $8.75 $9.50 $10.25 3 Nova Scotia’s entry level minimum wage is for inexperienced workers (less than three months employed in the type of worked Prince 01-Jan-05 01-Apr-06 01-Apr-07 01-May-08 01-Jun-09 01-Jun-10 01-Jun-11 01-Apr-12 Edward $10.00 they are hired to do); minimum wage will increase to $10.15 on April 1, 2012 $6.80 $7.15 $7.50 $7.75 $8.20 $8.70 $9.30 $10.00 Island 01-Oct-08 01-Oct-09 01-Oct-10 01-Oct-11 $8.00 $8.40 $9.00 $9.60 01-May-05 01-May-06 01-May-07 01-May-08 01-May-10 01-May-11 01-May-12 Quebec $9.90 As shown, Nunavut has the highest adult minimum wage at $11.00 per hour while the Yukon Territory $7.60 $7.75 $8.00 $8.50 $9.50 $9.65 $9.90 01-Sep-05 01-Mar-06 01-Mar-07 01-Jan-08 01-May-09 01-Sep-11 has the lowest adult minimum wage at $9.00 an hour. Saskatchewan $9.50 $7.05 $7.55 $7.95 $8.25 $9.25 $9.50 01-May-08 $8.60 01-May-06 01-Apr-07 01-Apr-08 01-Apr-09 01-Apr-10 01-Apr-11 Yukon $9.00 $8.25 $8.37 $8.58 $8.89 $8.93 $9.00 Source: www.labour.gc.ca 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 28. 50 51 Employment Indices C-Suite survey respondents were asked how labour cost as a percentage of sales were expected to change in 2012 compared to 2011. 130 2002 = 100 C-Suite Survey – Labour Cost 127 125 124 124 In 2012, Labour as a Percent of Sales are Expected to: 122 120 Decline more than 2% points 0% 116 Decline 1.6% to 2% points 0% 116 115 115 Decline 1.1% to 1.5% points 0% 110 Decline 0.6% to 1% points 0% 110 110 110 110 Decline 0.1% to 0.5% points 0% 107 105 106 Remain flat 15% 105 102 104 103 Increase 0.1% to 0.5% points 25% 101 102 100 100 100 100 Increase 0.6% to 1% points 10% 99 98 98 Increase 1.1% to 1.5% points 15% 95 98 97 Increase 1.6% to 2% points 15% Increase more than 2% points 10% 90 Not sure 10% 85 Source: fsSTRATEGY Inc. C-Suite Survey 80 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Most respondents (75%) expect to see an increase in labour as a percentage of sales in 2012. A quarter of respondents expect to see an increase of less than 0.5 percentage points, while 30% Employment Index - All Industries Employment Index - Foodservice Employees per FS Location expect an increase of between one and two percentage points. Source: Labour Force Survey, Statistics Canada As shown, employment in the foodservice industry has grown faster than national employment for all industries. Furthermore, the number of employees per foodservice operation has increased significantly since 2005. In 2005, the average foodservice establishment employed 10.95 employees compared to 13.67 employees in 2011. This trend could be due in part to the increased number of chain restaurants as a percentage of total operations. Chain restaurants tend to be managed by employees while independent restaurants are often managed by owners. The job creation experienced in Canada has been mirrored in the United States. A recent report by the National Restaurant Association indicated that restaurants had added 560,000 jobs since the beginning of the employment recovery with more than 200,000 jobs in the last six months. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 29. 52 53 5.3 Rental and Occupancy Costs C-Suite Survey – Rental and Leasing Cost The following graph illustrates average rental and leasing cost as a percentage of sales for the most In 2012, Labour as a Percent of Sales are Expected to: recent five year period available (2005 to 2009). Decline more than 2% points 0% Decline 1.6% to 2% points 0% Decline 1.1% to 1.5% points 0% Rental and Leasing Cost as a Percentage of Sales Decline 0.6% to 1% points 0% Decline 0.1% to 0.5% points 5% Remain flat 25% Increase 0.1% to 0.5% points 5% 7.4% Increase 0.6% to 1% points 20% Increase 1.1% to 1.5% points 15% Increase 1.6% to 2% points 10% 7.2% 7.2% 7.2% Increase more than 2% points 10% Not sure 10% Percentage of Sales 7.0% 7.0% 7.0% Source: fsSTRATEGY Inc. C-Suite Survey As shown, 25% of respondents expect that rental and occupancy costs will remain flat in 2012, compared to 2011. Another 25% of respondents expect rental and occupancy costs to increase by 6.8% 6.8% less than one percentage point and 35% expect it to increase by more than one percentage point. As part of this analysis, fsSTRATEGY interviewed several landlords to understand the rental market for restaurants in Canada. Increasingly, landlords are recognizing that foodservice is an important 6.6% amenity for various properties (e.g., office towers, shopping centres). As a result, market rents for 2005 2006 2007 2008 2009 foodservices are generally relatively low compared to retail operations. A significant amount of recycled restaurant space has become available. As such properties require Rental and leasing less in terms of leasehold improvements, landlords have been able to realize greater rents for such properties. The recession has restricted the amount of new development in recent years and demand Source: Canadian Restaurant and Foodservices Association, Statistics Canada is high for new space, also allowing for greater rents. In general, however, base rents are increasing at or below the rate of inflation. Landlords are affecting tenants’ costs in other ways such as increased expectations with respect to leasehold improvements, displays and signage, cleanliness and the use of disposables. Landlords prefer tenants with a proven track record to minimize risk and are especially risk adverse for prime locations. This makes it very difficult for independent restaurateurs or small chains to secure prime locations. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 30. 54 55 5.4 Other Operating Costs The CRFA operations report classifies other operating costs as utilities including telephone, repair and As shown, other operating costs as a percentage of sales have decreased between 2005 and 2009. maintenance, advertising and promotion, depreciation and other operating costs as a percentage of The following graph the figures above as indices to illustrate differing trends between the different sales. The following table illustrates average other operating costs as a percentage of sales for the types of “other” costs. most recent 5 year period available (2005 to 2009). 120 Historical Other Operating Costs as a Percentage of Sales 2005=100 2005 2006 2007 2008 2009 110 Repair and Maintenance 2.4% 2.5% 2.6% 2.6% 2.6% Utilities Including Telephone 2.8% 2.8% 2.9% 2.8% 2.8% 100 Advertising and Promotion 2.8% 2.8% 2.7% 2.8% 2.8% Depreciation 2.8% 2.9% 2.9% 2.9% 3.0% 90 Other 11.3% 11.0% 8.6% 7.0% 7.4% Total Other Operating Costs 22.1% 22.0% 19.7% 18.1% 18.6% 80 Source: Canadian Restaurant and Foodservices Association, Statistics Canada 70 60 2005 2006 2007 2008 2009 Repair and maintenance Utilities including telephone Advertising and promotion Depreciation Other Total Other Operating Costs Source: fsSTRATEGY Inc. based on data from the Canadian Restaurant and Foodservices Association and Statistics Canada Other expenses include commissions paid to non-employees, professional and business service fees, subcontract expenses, charges for services provided by head office, office supplies, insurance, travel and entertainment, property and business taxes, licenses, permits, royalties, licensing and franchise fees, delivery, warehousing, postage and courier, financial service fees, interest expense, and bad debts. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 31. 56 57 As shown, significant decreases in “other” costs had the most impact on total other operating costs as a percentage of sales. In most other cases, operators have been able to maintain relatively C-Suite survey respondents were asked how other operating costs as a percentage of sales were stable cost ratios. This is true for utility costs as a percentage of sales, which remained relatively flat expected to change in 2012 compared to 2011. throughout the period despite varying commodity prices. The graph below compares commodity price indices for electricity and natural gas based on data from the Ontario Energy Board. C-Suite Survey – Rental and Leasing Cost Energy Commodity Price Indices 140 In 2012, Other Operating Costs as a Percent of Sales are Expected to: 2006=100 129 Decline more than 2% points 0% 116 Decline 1.6% to 2% points 0% 120 Decline 1.1% to 1.5% points 0% 106 100 102 Decline 0.6% to 1% points 0% 100 91 Decline 0.1% to 0.5% points 0% 100 Remain flat 15% 80 Increase 0.1% to 0.5% points 45% Increase 0.6% to 1% points 15% 73 70 Increase 1.1% to 1.5% points 10% 60 62 Increase 1.6% to 2% points 10% Increase more than 2% points 0% 40 46 Not sure 5% 33 Source: fsSTRATEGY Inc. C-Suite Survey 20 As shown, most (45%) respondents expect that other operating costs as a percentage of sales will 0 increase by 0.5 percentage points or less in 2012, compared to 2011. 2006 2007 2008 2009 2010 2011 Natural Gas Electricity Source: fsSTRATEGY Inc. based on data from the Ontario Energy Board Natural gas commodity prices have dropped significantly (66.5%) since 2006 while electricity prices have increased by more than 29.0% in that same time period. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 32. 58 59 5.5 Capital Expenditures The following table shows capital expenditures (“CAPEX”) for construction in the accommodation and The graph below illustrates construction price inflation using the construction price index for non- food services sector for 2007 to 2011. residential buildings. Construction Capital Expenditures for Accommodation and Food Services Construction CAPEX for Accommodation and Food Services 160 $3,000 2002 = 100 Millions of Dollars 151 $2,733 150 147 $2,600 142 141 140 137 $2,278 $2,200 $2,220 $1,942 130 $1,853 125 $1,800 120 $1,400 110 $1,000 100 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Accommodation and Food Services Construction CAPEX Construction Price Index: Total Non-Residential Source: Statistics Canada Source: Statistics Canada As shown, construction peaked in 2009 as pre-recession projects were completed, but investment in Construction prices dropped in 2009 in response to decreased demand. Prices remained relatively low construction has since dropped to $1.9 billion from a peak of $2.7 billion in 2009. in 2010 but are seen increasing again in 2011 – albeit at a slower rate than pre-recession. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 33. 60 61 The table below compares construction prices for major Canadian cities using RSMeans historical cost C-Suite survey respondents were asked to provide the cost per square foot to build a new unit indices. The indices track against a 1993, 30 city United States average. (excluding base building cost and land purchases). RSMeans Construction Cost Indices by Major Canadian City C-Suite Survey – Building Cost per Square Foot 230 Average Min Max 1993 30 City US Average = 100 Quick Service $249.29 $200.00 $400.00 220 Full Service 261.00 170.00 400.00 All 258.93 170.00 400.00 210 Source: fsSTRATEGY Inc. C-Suite Survey 200 Responses for full service and quick service concepts were relatively similar ranging from $170 per square foot to $400 per square foot. The average cost per square foot for building new units reported 190 by respondents was $258.93. Factors affecting respondent’s perception of building costs included the availability of skilled labour, increased labour and material costs, increased demand for construction 180 and materials and the strength of the Canadian dollar. The table below shows how C-Suite Survey respondents expect those building costs to change in 170 2012 compared to 2011. 160 C-Suite Survey – CAPEX In 2012, The Cost of Building New Units is Expected to: 150 Decline more than 10% points 0% Decline 7.6% to 10% points 0% 140 Decline 5.1% to 7.5% points 0% 2005 2006 2007 2008 2009 2010 2011 2012e Decline 2.6% to 5% points 5% Decline 0.1% to 2.5% points 0% Remain Flat 15% Toronto Calgary Montreal Vancouver Winnipeg 30 City US Average Increase 0.1% to 2.5% points 40% Increase 2.6% to 5% points 20% Source: RSMeans Square Foot Costs 2012. Copyright RSMeans, Norwell, MA 781-422-5000; All rights reserved Increase 5.1% to 7.5% points 0% As shown, major Canadian cities are more costly to build in than the 30 city American average. Increase 7.6% to 10% points 0% Toronto has historically been the most expensive in which to build; however, since 2009 building Increase more than 10% points 0% costs in Calgary have surpassed those of Toronto. Winnipeg is the least expensive of the sample of Not sure 20% Canadian cities for construction. Source: fsSTRATEGY Inc. C-Suite Survey Construction costs for Canadian markets decreased in 2010 due to the recession. The drop in prices for Canadian cities was greater than the 30 city American average which was relatively flat during As shown, most (40%) respondents expect that the cost of building new units will increase by up to 2.5 that period. percentage points in 2012, compared to 2011. Factors affecting respondent’s perception of building costs included the availability of skilled labour, increased labour and material costs, increased demand for construction and materials and the strength of the Canadian dollar. 2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business
  • 34. 62 63 6 ReCount® Restaurant Census Trends The number of commercial restaurants in Canada declined by 1,486 in 2011 to 71,827. The unit decline was experienced mainly among independent restaurants, while chains remained relatively stable. Other highlights from NPD’s restaurant census tracking: žž Top three fastest growing restaurant categories: QSR Yogurt, QSR Mexican and Casual Asian žž Only two provinces had a net increase in restaurant units during 2011: Manitoba and Alberta žž CMA’s* that added the most restaurants compared to year ago: Port Hope, Ontario and Salaberry-de-valleyfield, Quebec *Census Metropolitan Area ReCount® is NPD’s trusted census of restaurants in Canada, with unit counts and trends for nearly 72,000 restaurants, both chain and independent operators. ReCount provides an in-depth view of commercial restaurants, categorizing them for each Canadian geographic region, whether from a national view, by market or by specific unit addresses, right down to postal code. Data can be sorted by: žž Service type (Quick Service or Full Service) žž Cuisine žž Segment žž Sales range žž Brand žž System size žž Chain versus Independent 2012 Canadian Chain Restaurant Industry Review 6 | ReCount® Restaurant Census Trends
  • 35. 64 7 Notes Notes Regarding 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. 2012 Canadian Chain Restaurant Industry Review
  • 36. fsSTRATEGY is an alliance of senior consultants focusing onbusiness strategy support-research, analysis, design andimplementation-for the foodservice industry. Our team hasextensive consulting experience in foodservice across Canada.We also offer international experience, having worked in theUnited States, Australia, South America, Africa, Asia and Europe.Our team is unique in that we provide service to all foodservicesectors (restaurants, attractions, hotels and resorts, gamingestablishments and institutions) and all levels of the foodservicesupply chain (growers, processors, distributors and operators).The NPD Group has more than 25 years of experienceproviding reliable and comprehensive consumer-basedmarket information to leaders in the foodservice industry. Withinformation available for Canada, United States, Europe, Asia, andAustralia, NPD provides the latest information about restaurantconcepts, menu activity, and food trends that drive greatersales. NPD’s client development experts add unique insights andperspectives. Powered by CREST®, NPD is the leading source formarket information within the foodservice industry. For moreinformation, visit www.npd.com or contact Jim Harnden atjim.harnden@npd.com. Printed on paper from well managed forests