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Failure of American restaurant chains in Canada highlights differences in consumer preferences

Did you ever notice how many successful American restaurant companies fail when they try to establish operations in Canada?

Over the past few years, we have seen a number of American restaurant companies trying to penetrate and then fail in Canada, such as Ben and Jerry's, Chi Chi's and Fudruckers. Wendy's, Taco Bell and Burger King keep struggling to achieve a reasonable market share while McDonald's was forced to make significant operational modifications in order to succeed.

As assimilated as our two cultures are, there are vast differences in the restaurant industry, which come down to four major areas: taste, operating costs, tax and marketing boards.

Canadians demand higher quality ingredients and healthier foods than Americans. This is reflected in the higher per capita success of American fast-food operations that specialize in deep-fried foods, compared to Canada's more healthy fast-food concepts such as Mmmarvelous Mmmuffins, Cultures and other similar operations.

Finally, ingrained in the American thinking process is an absolute freedom of choice. This is reflected in the food service industry by providing customers with A la carte menus, While Americans enjoy picking and choosing which items they will or will not have during a meal, Canadians believe that by being forced to pick and choose each entree and side dish they are being "nickeled and dimed" throughout the dining experience.

American restaurants typically earn between 20 and 25 per cent operating profit in the US, while many can earn upwards of 30 per cent. In Canada, the industry average operating profit is 9.8 per cent.

This lower profit margin is not the result of weaker management, but rather of the excessive labour cost, significantly higher tax requirements and price controls dictated by product marketing boards.

In the US, restaurants receive a "tip tax credit," which is used by restaurateurs to offset the minimum wage earned by restaurant service staff. The tip tax credit allows restaurateurs to include tips received in the minimum wage equation, thus allowing them to pay wait staff as little as $2 per hour, compared to the Canadian minimum wage of approximately $7 per hour. This difference ensures that American restaurateurs can provide two to three times the level of service, and still pay less than the cost of one service staff person in Canada.

Americans who enter the Canadian marketplace trying to provide the level of service that they normally provide are bound to lose money.

On the tax front, American operators who do not perform their 'due diligence," which, according to our experience, is not many, are slammed with taxes that they have never seen before. Rental of a 10,000-square-foot restaurant space in downtown Toronto, for example, is accompanied with the tax base of approximately $125,000, while similar space in New York City or Chicago is usually under $20,000.

Employment Insurance and other legislative benefits to employees represent approximately 3 per cent of an already inflated labour cost in Canada, while similar employee taxes in the US represent five to six per cent of a significantly lower paycheque. Thus, restaurant labour costs can be 10 to 15 per cent higher in Canada for service standards similar to those in the US

Finally, our marketing boards strip away whatever free enterprise profit remains. For example, liquor, beer and wine are all government controlled, and restaurateurs do not receive any significant discount over the retail market price. In the US, restaurant chains can negotiate volume discounts; they can buy a case of beer for 50 per cent of the Canadian cost, or a bottle of Scotch for 25 per cent of the Canadian cost.

Dairy products, poultry products and other perishable goods are controlled by marketing boards in Canada. These marketing boards have artificially inflated the cost of products to restaurants and thus reduce margins significantly.

Americans coming into the Canadian marketplace are finding that they cannot deliver the quality service that keeps their restaurants full in the US, nor can they achieve the operating profit that they require for their company and shareholders.

The American restaurants that survive in Canada are the ones that arrive with knowledge of the marketplace and customer base, and come to this country with the aim of achieving international exposure and presence rather than developing another cash cow.

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