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Franchised to death

The voluntary group system once worked spectacularly well, both for retailers and wholesalers.

You could say what follows is a reflection on times past. Then again, you might call it a lament. But it's really just my personal remembrance of what I think were happier times for Canada's franchised grocers. I'm thinking about the 1960s, '70s and '80s, when voluntary groups were at their most successful. Let me enlighten those who don't know what a voluntary group is, or was.

A voluntary group was a concept of grocery retailing based on mutual respect between the wholesaler and the retailer. The belief was that, if the wholesaler helped the retailer do well, then the wholesaler would bene t exponentially. The retailers benefited by being part of a group of stores (franchises) that, through their wholesaler, could share in bulk buying and services such as store design, while still buying 20 per cent or so of their goods from whomever had the better price and quality.

It was an incredibly simple but successful concept. Grocery retailers blossomed under various voluntary group banners. In turn, as expected, their wholesalers thrived, not only because of increased sales but because the wholesaler charged the retailers a small fee for its services. For the most part, retailers got their goods at (or almost at) the same price their wholesaler paid, and were happy to pay a small royalty fee because they were making reasonable margins. The profit centre was the store, not the wholesale head offce.

The first blow to that successful formula came around 1994, when Provigo, which owned the Loeb banner at the time, put Jim Robertson as the head of Loeb Ontario operations. Within a year, its franchisees were suing Loeb for breach of contract; Loeb countersued. The franchisees claimed that Loeb's newly instituted strict control over their costs and prices left them with no margin. They claimed it was an effort to turn their stores into corporate, or pseudo-corporate, locations.

The fight got nasty. Dealers feared wiretaps, foreclosure and sabotage. To prevent these things from happening, some locked themselves in their stores. Eventually Loeb/Provigo bought them out to end the dispute. It was not pretty.

At the time, a number of wholesalers criticized Loeb for its heavy-handedness. But with mergers and acquisitions among wholesalers, plus stiffening competition and changing consumer attitudes, wholesalers ultimately began to implement some of those same restrictions on their franchisees. Driven by the interests of their shareholders, several wholesalers switched the profit centre from the stores to their head office. Costs to the retailers rose and margins were cut because the wholesaler also dictated retailers' selling prices.

Many franchisees were not happy with the new arrangements. Sobeys faced a lawsuit by Ontario IGA dealers and is still facing court action from Price Chopper franchisees. Metro faced a suit from dealers who wanted to increase their voting shares, but they were refused by the court. Many Provigo stores were simply closed.

Today, some wholesalers are buying out their long-term successful franchisees in favour of new, more-restrictive franchise agreements being offered to less-experienced independent grocers. This doesn't bode well for the future of independent franchisees. The best-case scenario for the new franchisees is that they will be able to pay their own salaries, but will be unable to build any equity in their stores or for themselves. The worst case is, in this incredibly competitive world, that their restricted margins will force them into bankruptcy (while still owing their wholesaler money).

Clearly, times are very different today, with retail pricing driving our business. Independents who have differentiated themselves in their communities are likely to succeed. Things are less certain for the new breed of franchised independents.

Luckily, there remain a few true voluntary groups (in Western Canada and the East Coast), but they seem limited to rural areas. As for urban centres, the voluntary group appears to be dead. For now.

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