2012 canadian chain restaurant industry review

Research Partners

The 2012 Canadian Chain Restaurant Industry Review,

commissioned by GE Capital Canada and undertaken by

fsSTRATEGY and NPD Group Canada, is a comprehensive

analysis and factual overview of the state of chain

foodservice in Canada.

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 Chain Restaurant Industry Review

Founding Producer

MAY 29+30, 2013Hilton toronto Hotel

The 2013 Canadian Chain Restaurant Industry

Review will be presented at the Canadian

Restaurant Investment Summit, MAY 29 & 30,

2013 at The Hilton Toronto Hotel. All registered

delegates will receive a complimentary copy.

Canadian restaurantinvestment summit

restaurantinvest.Ca REGISTER TODAY AT

fsSTRATEGY is an alliance of senior consultants focusing on business strategy support-research, analysis, design and implementation-for the foodservice industry. Our team has extensive consulting experience in foodservice across Canada. We also off er international experience, having worked in the United States, Australia, South America, Africa, Asia and Europe. Our team is unique in that we provide service to all foodservice sectors (restaurants, attractions, hotels and resorts, gaming establishments and institutions) and all levels of the foodservice supply chain (growers, processors, distributors and operators).

The NPD Group has more than 25 years of experience providing reliable and comprehensive consumer-based market information to leaders in the foodservice industry. With information available for Canada, United States, Europe, Asia, and Australia, NPD provides the latest information about restaurant concepts, menu activity, and food trends that drive greater sales. NPD’s client development experts add unique insights and perspectives. Powered by CREST®, NPD is the leading source for market information within the foodservice industry. For more information, visit www.npd.com or contact Jim Harnden [email protected].

GE CapitalFranchise Finance

2012Canadian ChainRestaurantIndustry Review

Research Partners

Printed on paper from well managed forests


2012Canadian ChainRestaurantIndustry Review1 Introduction2 Foodservice Industry Profile3 Trends Impacting Restaurants4 Finance5 Cost of Doing Business6 ReCount® Restaurant Census Trends7 Notes

Research Partners

The Inaugural Canadian Chain Restaurant Industry Review

I’m pleased to bring you the first annual Canadian Chain Restaurant Industry Review, a comprehensive analysis and overview of the state of chain foodservice in this country. This work was commissioned by GE Capital and compiled by fsSTRATEGY and NPD Group Canada.

As the economy moves from recovery to expansion, Canadians are expected to cautiously increase their spending at restaurants. In fact, we estimate that Canadian foodservice industry sales will increase by 3%, or almost $2 billion, to $65 billion in 2012.

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 Canada’s economic health this year and for several years to come.

We hope attendees at this year’s third annual Canadian Restaurant Investment Summit will use this extensive research to shape their future plans, whether that means examining investment opportunities, exploring new concepts or simply expanding their menu options.

Ultimately, we believe these insights can be useful when it comes to mapping out the best strategies to help your business flourish.

Ed KhediguianGE Capital, CanadaFranchise Finance

GE Capital, Franchise Finance Canada

We’re More Than Just Bankers, We’re Builders

GE Capital, Franchise Finance is a leading lender to the restaurant and hospitality industries in Canada. We specialize in financing regional and national restaurant businesses of all sizes across the country. Over the past 10 years, we’ve financed more than 700 restaurant customers with upwards of 1,500 property locations. That’s in excess of $1.1 billion that we’ve invested in the Canadian restaurant space.

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.

But we offer our clients more than money.

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 great. It takes money, along with knowledge and expertise. That’s where we come in.

Here are some reasons to consider financing with us:

� A vast portfolio of national and regional restaurant relationships — in a variety of quick service and casual formats — that we’ve maintained through economic ups and downs;

� Deep expertise in the franchise business and a special understanding of the brands that operate in this market;

� A cash flow-based lending model that allows us to value a business based on performance, while taking into account seasonality and other operating issues that specifically affect restaurants; and

� 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.



2 3

fsSTRATEGY Inc. (“fsSTRATEGY”) and The NPD Group, Inc. (“NPD”) are pleased to release this 2012 Canadian Chain Restaurant Industry Review as part of the 2012 Canadian Restaurant Investment Summit.

This report is the culmination of extensive primary and secondary research conducted by fsSTRATEGY and NPD. Sources include:

� Research and data provided by the Canadian Restaurant and Foodservices Association (“CRFA”).

� C-Suite Survey in February 2012 conducted by fsSTRATEGY and sent to over 60 CEOs and CFOs in the Canadian chain foodservice market, resulting in a resounding response rate of 37%.

� Detailed data from NPD’s Future of Foodservice. � Interviews with selected food grower associations, food processors and foodservice distributors.

� Interviews with landlords to understand the rental market for restaurant operators.

� Information prepared by GE Canada on the state of money markets and chain restaurant financing.

� Secondary research data gleaned from other sources such as such as Statistics Canada, TD Economics, the Conference Board of Canada, Hum, an Resources and Skills Development Canada, Canada Ministry of Labour, Ontario Energy Board, International Monetary Fund and the Chicago Board Options Exchange.

For further information, please contact:

Geoff Wilson and Jeff Dover Robert CarterfsSTRATEGY Inc. The NPD Group, [email protected] [email protected] [email protected] (647) 723-7767(416) 229-2290

Now in its third successful year, the Canadian Restaurant

Investment Summit has solidly established itself as the

annual business conference that brings the industry

into focus.

Operators, chain executives, franchise operators, investors,

lenders and key suppliers from across the country agree

that this is the event that delivers what they need - insight,

information and opportunity—all with meaningful content

and a tight focus that is uniquely Canadian.

Each year, the Summit presents topical issues and noted

thought leaders who share opinions, stimulate discussion

and create new directions. The entire conference program

is designed to yield authoritative information and the latest

data from across the country. When combined with the

powerful networking opportunities it presents, the Summit

is an experience that is unequalled anywhere in Canada.

Founding Producer

CaNadIaN RESTauRaNTINvESTmENT SummIT

MAY 30-31, 2012ThE hIlTON TORONTO hOTEl

RESTauRaNTINvEST.Ca RESTauRaNTINvEST.Ca RESTauRaNTINvEST.Ca RESTauRaNTINvEST.Ca

ThaNk yOu FOR jOININg ThE dISCuSSION.

Introduction1

5

1 | Introduction

4

2.1 Canadian Foodservice Industry Sales

In 2011, Canadian foodservice industry sales represented approximately 3% of national gross domestic product, and are expected to increase by 3.1% to $65.4 billion in 2012. The Canadian foodservice industry is divided into Commercial and Non-Commercial sectors. Commercial Foodservice includes Full Service Restaurants, Limited-Service Restaurants and Drinking Places. Chain Foodservice sales reside within these three categories.

The following table shows nominal sales by industry sector for 2008 to 2012.

As shown, non-commercial foodservice was hit harder by the 2009 economic recession than commercial foodservice due largely to a significant drop in accommodation foodservice sales. Since 2009, however, non-commercial annual sales growth has been consistently higher than commercial 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%.

Historic Nominal Foodservice Sales by Sector2008 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%

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%

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%

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%

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%

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%

Other Foodservice3 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%

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%

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%

Menu Inflation 2.5% 3.5% 2.4% 2.9% 2.5%

Real Growth 2.1% -4.1% 1.1% 1.1% 0.6%

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.

FoodserviceIndustryProfile2.1 Canadian Foodservice Industry Sales2.2 Chain versus Independent Operator Sales 2.3 Provincial Sales Trends2.4 Same Store Sales Growth2.5 C-Suite Expectations for Sales and Traffic

2

6 7

2012 Canadian Chain Restaurant Industry Review 2 | Foodservice Industry Profile

The table below shows nominal national foodservice and commercial foodservice sales for 1990 to present.

Historical Foodservices Sales Total versus Commercial—1990 through 2012 (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.

The table below illustrates 2012 forecasted share of total foodservice sales by sector.

2012 Forecasted Share of Foodservice Sales by Sector

Total Foodservice Commercial Foodservice

Source: Canadian Restaurant and Foodservices Association ‘s InfoStats, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting

3 Adjusted for menu inflation.

As shown, commercial foodservice accounts for approximately 79% of total foodservices sales. Quick service and full service generate relatively similar sales and represent the majority of commercial foodservice sales.

2322 23 24

26 27 28 2931

3335

36 38 3840 41

43 45 47 47

4951

52

3129 30 31

33 3335

3739

4144

4547 48

5052

5557

59 5961

6465

0

10

20

30

40

50

60

70

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-p

2012

-f

Billi

ons

of D

olla

rs

Commercial Foodservice Total Foodservice p = preliminaryf = forecast

1990: Commercial Foodservice 75.0% of Total Foodservice2012: Commercial Foodservice 79.5% of Total Foodservice

$52,016.4

$5,764.0

$3,986.5$1,326.0 $2,350.5

Total Commercial

Accommodation foodserviceInstitutional foodservice

Retail foodservice

Other foodservice

$22,878.2

$22,389.6

$4,347.6$2,402.2

Quick-service restaurants

Full-service restaurants

Contract and social caterers

Drinking places

8 9


Growth trends vary by sector. The table below compares commercial foodservice sector growth using a sales index. The index compares real sales to 2007.

Sales Index by Industry Segment

Source: Canadian Restaurant and Foodservices Association ‘s InfoStats, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting

Source: Canadian Restaurant and Foodservices Association’s InfoStats, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting

As shown, caterers were affected the most by the recession in 2009, followed by drinking places. Not surprisingly, quick service restaurants fared better than other sectors in the recession, losing less 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.

As shown, the fastest growing provincial market in 2011 was Alberta at 7.8% over the previous year. British Columbia was the only province experiencing foodservice revenue declines in 2011. Almost 40% of Canadian foodservice revenue is generated in Ontario.

The following table shows nominal foodservice sales by province over the past five years.

Canadian Foodservice Sales 2008 through 2012 (Forecast) by Province in Thousands of Dollars

Cana

da

New

foun

dlan

d an

d La

brad

or

Prin

ce

Edw

ard

Isla

nd

Nov

a Sc

otia

New

Bru

nsw

ick

Que

bec

Ont

ario

Man

itoba

Sask

atch

ewan

Albe

rta

Briti

sh

Colu

mbi

a

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

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

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

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

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

Percent Change vs Previous Year

2007 3.0% 1.0% -2.4% 1.3% -4.2% 2.6% 2.7% -0.3% 6.9% 5.9% 2.8%

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%

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%

100

102

99100

101102

9796

97

104104

107108

101

94

99

101

99

96

90

86

80

85

90

95

100

105

110

2007 2008 2009 2010 2011

Total Commercial Full-Service Restaurants Quick-Service Restaurants Caterers Drinking Places

Sales Index 2007 = 100

10 11


2.2 Chain versus Independent Operator Sales

The chart below graphically depicts the share of chain and independent operator sales in various regions of Canada for 2011.

Chain versus Independent Sales—2011

Source: The NPD Group/CREST®

Over 60% of restaurant sales in Canada can be attributed to chain operators. Chain penetration is greatest in Atlantic Canada and lowest in Quebec.

2.3 Provincial Sales Trends

The following table compares total commercial foodservice sales and commercial foodservice sales per capita by province.

Commercial Foodservice Sales by Province

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).

010%20%30%40%50%60%70%80%90%

100%

Canada Atlantic Quebec Ontario West

Chain Independent

685.4189.0

1,292.7 972.3

10,025.9

19,252.3

1,446.5 1,501.2

7,173.07,829.0

$1,342.39

$1,295.50

$1,367.41

$1,286.92 $1,256.43

$1,439.64

$1,156.66

$1,419.01

$1,897.93

$1,711.90

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0

5,000

10,000

15,000

20,000

25,000

NL PE NS NB QC ON MB SK AB BC

Per C

apita

Sal

es in

Dol

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2011 Commercial Foodservice Sales 2011 Commecial Foodservice Sales Per Capita

National Average Per Capita Spend

National Commercial Foodservice Sales Per Capita

Sale

s in

Mill

ions

of D

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12 13


Reported 2011 Q4 Same Store Sales versus Q4 2010

The CRFA report went on to say: � 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.

� 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.

Source: Canadian Restaurant and Foodservices Association “Restaurant Outlook Survey, Q4, 2011”.

-2%

-1%

0%

1%

2%

3%3.0%

2007

2.0%

2008

-1.5%

2009

1.4%

2010

2.5%

2011

-2%

-1%

0%

1%

2%

3%

4%

2011

2.5%

2010

1.4%

2009

-1.5%

2008

1.8%

2007

2.9%

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.

The average SSSG for selected Canadian restaurant chains is graphically represented below.

Average Same Store Sales Growth 2007-2011 Selected Publicly Traded Canadian Restaurant Chains1

As the exhibits demonstrate, SSSG declined significantly through the recession and is beginning to recover.

In its 2011 Q4 Restaurant Outlook Survey, the CRFA stated that nearly 40% of operators reported higher same store sales in Q4. The table below summarizes the results of its survey.

2.4 Same Store Sales Growth

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.The table below provides an average of SSSG from 2007 to 2011 for the seven largest Canadian publicly traded restaurant chains. Data for 2011 has been taken from either annual reports or Q3 or Q4 reports, as available by chain.

Same Store Sales Growth 2007 through 2011, Selected Publicly Traded Canadian Restaurant Chains

2007 2008 2009 2010 2011Minimum -3.9% -1.2% -6.5% -1.7% 0.4%Average 2.9% 1.8% -1.5% 1.4% 2.5%Maximum 5.9% 7.3% 2.9% 4.9% 4.5%

Source: fsSTRATEGY Inc. using data from publicly traded company annual reports.

15

2 | Foodservice Industry Profile

14

Source: fsSTRATEGY Inc. C-Suite Survey

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 respondents were asked to list the three greatest opportunities and threats in the foodservice 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 focus on core strengths. Operating costs (costs of goods sold, labour, occupancy costs and general operating costs) were seen as the largest threat representing 29% of all responses. Other threats included economy (21%), competition (market saturation, undercutting prices, retail, international competition and lack of differentiation between brands) (19%), government regulations (10%), and human resource challenges (labour market, employee engagement, availability of management) (7%).

Expected sales growth will be driven primarily by either menu inflation or more efficient customer conversions through upselling and other sales techniques

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

In 2012, Industry Sales are Expected to:

Decline 5.1% to 7.5% 0%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%


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%.

C-suite survey respondents were also asked what changes they expected regarding industry traffic.

In 2012, Industry Traffic is Expected to:

Decline 5.1% to 7.5% 0%Decline 2.6% to 5% 10%

Decline 0.1% to 2.5% 0%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%

16 17


3.1 Key Consumer Profiles

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


TrendsImpactingRestaurants3.1 Key Consumer Profiles3.2 Key Foodservice Industry Trends

3

18 19

2012 Canadian Chain Restaurant Industry Review 3 | Trends Impacting Restaurants

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http://www.restaurantinvest.ca

Commercial Restaurant—Traffic Per Capita by Household Income(Consumers 13 Years of Age and Older)

Not surprisingly, as household income grows, so do restaurant visits. Greater disposable income is a key indicator for restaurant usage.

Just two income groups used restaurants more in 2011 than 2010: � Consumers with $100,000 and over in household income increased by an average five visits

annually; and � middle income ($55,000 to $70,000) households increased by six visits annually.

In a market with minimal growth, driving revenues is a case of stealing share from competitors. With a detailed understanding of what customers want, restaurateurs can gain a distinct competitive advantage. Operators must find the means to stay new in consumers’ minds—innovative products, unique promotions, competitive pricing – and above all deliver an enjoyable experience that consumers can’t get at home.

Source: The NPD Group /CREST®

Commercial Restaurant—Traffic (Millions)—2007 through 2011


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

2007

6,428

2008

6,530

2009

6,496

2010

6,536

2011

6,601

Growth is attributed to strong sales performance in the second half of 2011, with 4% dollar gains in both Q3 and Q4 2011. Increased visits (3%) were the key driver of growth during this period. With just 1% coming from increased average spending per person, there is pressure on margins, as menu inflation is running at 3%*. *Statistics Canada, CPI, Food from Restaurants, November 2011.


4%

1%

-3% -2%

0% 1%

3%

2% 3%

1% 2%

4% 4%

SON'08 DJF'09 MAM'09 JJA'09 SON'09 DJF'10 MAM'10 JJA'10 SON'10 DJF'11 MAM'11 JJA'11 SON'11

20 21



3.2 Key Foodservice Industry Trends

3.2.1 Market Segment Trends

The table below shows restaurant market segment shares in terms of traffic and revenue.

Restaurant Market Segments — Share of Traffic and Dollar Sales

3.2.2 Regional Trends

The table below shows the year over year restaurant sales growth by region.

Full Service and Quick Service Restaurant Sales Performance by RegionPYCA - Percent Change vs. Year Ago


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.

3%1% 0%

4% 4%6%

1%2%

1%2% 3%

6%

3%5%

TOTALCANADA

AtlanticRegion

Quebec Ontario Manitoba/Saskatchewan

Alberta BritishColumbia

QSR FSR

22 23



3.2.3 Restaurant Trends Analysis

Based on the research, restaurant operators should consider the following: � Bright spots in the foodservice industry

� both chains and independents contributed to QSR’s 2% traffic growth; � the lunch meal period realized the greatest gains, while morning meals and supper increased

modestly; � 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 � full serve ethnic restaurants are outperforming the segment, an indication of growing

customer interest in authentic ethnic cuisines. � Areas of the foodservice industry still in need of improvement

� full service restaurants are still experiencing flat to declining traffic across all dayparts, with FSR chains faring worse than independents;

� 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

� 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.

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 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 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 requirements for smaller portion sizes and healthier options.

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

F20162011

Age:

No.

of I

ndiv

idua

ls in

the

Popu

latio

n

Distribution of the Population by Age—2011 and 2016

*Source: Statistics Canada – 2011 vs. 2016

24 25

2012 Canadian Chain Restaurant Industry Review

3 | Trends Impacting Restaurants

Other pockets of opportunity exist to be taken advantage of by understanding what consumers are looking for in their restaurant experience and what will drive growth in the coming years. For example, expect ethnic foods to grow in interest and influence. Particularly in Canada’s urban centres, tastes will continue to become more adventurous and sophisticated, with ethnic flavours and dishes trickling 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.

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.

Source: fsSTRATEGY Inc., The NPD Group/Canadian Full Service Chain Restaurant Menu Analysis

0

2

4

6

8

10

12

14

16

18

20

2006 2007 2008 2009 2010 2011

Mains

Appetizers

Soups

Burgers/

Sandwiches

SaladPasta Sides

Desserts Pizz

a

The table below shows the average number of menu items by menu section for Canada’s top full service restaurants.

Average Number of Menu Items by Menu Section Top Full Service Chain Restaurants

26 27


4.1 The Economy

The table across compares total real foodservice sales growth against two economic indicators: real disposable income and real GDP.

The table illustrates a relationship between real foodservice sales, real GDP and real disposable 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 in 2009, compared to 1991, real disposable income still increased slightly and the decrease in foodservice sales was less than 5%.

Total Foodservice Sales Real Growth vs. Disposable Income and GDP Real Growth

Source: Statistics Canada, Canadian Restaurant and Foodservices Association, TD Economics and Conference Board of Canada

Finance 4.1 The Economy4.2 Money Markets4.3 Restaurant Acquisition Activity

4

-20%

-15%

-10%

-5%

0%

5%

10%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-p

2012

-f

Year

-Ove

r-Ye

ar P

erce

ntag

e Ch

ange

Real Foodservice Sales-Total Real Disposable Income Real GDP

28 29

2012 Canadian Chain Restaurant Industry Review 4 | Finance

The chart below compares Canadian foodservice revenues and consumer confidence.

Canadian Foodservice Revenues versus Consumer Confidence

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.

Source: Calculated using data from the Canadian Restaurant and Foodservices Association, Statistics Canada, fsSTRATEGY Inc. and PKF Consulting

4.2 Money Markets

4.2.1 Global Financial Markets A few key trends will define the global financial environment over the next several years and decades. The most important is still economic growth occurring at different speeds in different countries. As developed markets de-leverage, emerging markets get larger. The relative size of emerging markets as a share of the world economy has grown dramatically over the last 20 years and will continue to grow.

Decreasing economic vitality and population ageing put pressure on both public and private spending 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 to be considered.

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 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 decline is unlikely to be smooth.

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 “industrial internet” is gradually reshaping the industrial landscape, generating a new set of risks, and hopefully laying the ground for a new productivity renaissance.

140

100

81

106

0

20

40

60

80

100

120

140

160

Total Foodservice Sales Index Consumer Confidence Index Total Real Foodservice Sales Index (2002 dollars)

2002 = 100

30 31


The following two tables show that volatility, long term on first table and short term on second table, has returned to early nineties levels but is far from the recent European crisis peaks.

Chicago Board Options Exchange Market Volatility Index—Long Term View

Chicago Board Options Exchange Market Volatility Index—Short Term View

Source: Chicago Board Options Exchange

Source: Chicago Board Options Exchange

The appetite for risk is recovering, and with ample liquidity it is beginning to push commodity prices up again. Cost pressure on margins will remain. Geopolitical tensions are heightened (e.g., Iran) resulting in a further risk to oil prices.

Commodity prices are increasing again, however, the rate of the increase has slowed.

Commodity Prices (International Monetary Fund Index)

Commodities Percentage Change Year-Over-Year

Source: International Monetary Fund

Source: GE Capital

0

10

20

30

40

50

60

70

80

90

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

VIX (Market Volatility Index)

Credit Bubble

Lehman

0

10

20

30

40

50

60

Jan-

10

Feb-

10

Mar

-10

Apr-

10

May

-10

Jun-

10

Jul-1

0 Au

g-10

Se

p-10

O

ct-1

0 N

ov-1

0 D

ec-1

0 Ja

n-11

Fe

b-11

M

ar-1

1 Ap

r-11

M

ay-1

1 Ju

n-11

Ju

l-11

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

VIX (Market Volatility Index)

Greece

Italy

0

100

200

300

400

500

600

Jan-

00

Jun-

00

Nov

-00

Apr -

01

Sep

-01

Feb

-02

Jul -

02

Dec

- 02

M

ay- 0

3 O

ct- 0

3 M

ar- 0

4 Au

g -0

4 Ja

n -0

5 Ju

n - 0

5 N

ov -0

5 Ap

r-06

Se

p -0

6 Fe

b-07

Ju

l-07

Dec

-07

May

-08

Oct

-08

Mar

-09

Aug-

09

Jan-

10

Jun-

10

Nov

-10

Apr-

11

Sep-

11

Commodities Industrials Materials Food Oil

Commodity Prices, IMF IndicesJanuary 2000 = 100

-60%

-40%

-20%

0%

20%

40%

60%

80%

Jan-

01

Jun-

01

Nov

-01

Apr-

02

Sep-

02

Feb-

03

Jul-0

3 D

ec-0

3 M

ay-0

4 O

ct-0

4 M

ar-0

5 Au

g-05

Ja

n-06

Ju

n-06

N

ov-0

6 Ap

r-07

Se

p-07

Fe

b-08

Ju

l-08

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug-

10

Jan-

11

Jun-

11

Nov

-11

Commodities (%YOY)

32 33


4.2.2 Financial Markets in Canada

Analysis

The global economic volatility generated by the European sovereign debt crisis has increased the uncertainty surrounding Canada’s near-term economic outlook and the stability of its financial markets. Two of the key external threats to the domestic financial system: the risks related to the sovereign debt crisis and the risks from a global economic downturn, have intensified over the past six months.

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 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.

Canada’s monetary policy, like most of the rest of the world’s, remains highly stimulative. With increased global uncertainty and other central banks loosening monetary policy even further (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 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 international capital toward the safety and liquidity of the U.S. dollar ebbs.

Forecast

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 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%.

Oil prices are increasing and have returned to post-crisis high levels.

Crude Oil Prices (Price per Barrel) Since 2000

Source: GE Capital

$27

$78

$145

$72

$122

0

20

40

60

80

100

120

140

160 Ju

l-00

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Dol

lars

Brent Crude Oil Price Per Barrel

34 35


Canada—GDP Growth G5 Average Policy Interest Rates

Source: GE CapitalSource: GE Capital

Note: The G5 economies include the United States, the Euro Area, Japan, the United Kingdom and Canada.

Factors influencing interest rates include: � cash remains abundant in corporations, financials; � resetting of expectations on returns on investment; � as policy clarity emerges, can jump-start investment; and � mergers and acquisitions are the preferred option, with an eye on growth markets.

5.5

0.8

3.8

-2.6

3.5

1.3

-4 %

-2 %

0 %

2 %

4 %

6 %

8 %

2000

Q1

2000

Q4

2001

Q3

2002

Q2

2002

Q1

2002

Q4

2004

Q3

2005

Q2

2006

Q1

2006

Q4

2007

Q3

2008

Q2

2009

Q1

2009

Q4

2010

Q3

2011

Q2

2012

Q1

2012

Q4

2013

Q3

2014

Q2

2015

Q1

2015

Q4

2016

Q3

Canada: GDP Growth (%YOY)

Forecast 4.9

1.6

4.5

0.6

0 %

1 %

2 %

3 %

4 %

5 %

6 %

Jan-

99

Aug-

99

Mar

-00

Oct

-00

May

-01

Dec

-01

Jul-0

2

Feb-

03

Sep-

03

Apr-

04

Nov

-04

Jun-

05

Jan-

06

Aug-

06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9

Feb-

10

Sep-

10

Apr-

11

G5 Average Policy Interest Rate

36 37


4.3 Restaurant Acquisition Activity

4.3.1 Recent Transaction Activity

GE Capital collected and reviewed transaction data encompassing 47 acquisitions and shareholder buy-out deals in Canada over the past five years. This sample included 163 total locations from both the full service and limited service segments.

� Full service – a total of 26 transactions involving 115 locations resulted in an average transaction multiple of 4.2x EBITDA

� Limited service – a total of 21 transactions involving 58 locations resulted in an average transaction multiple of 4.0x EBITDA

The following table shows the average minimum, maximum and average multiples for EBITDA quoted by participants in the fsSTRATEGY C-Suite Survey used to establish value in transactions completed in 2011.

C-Suite Survey – Average Multiples for 2011 Acquisition Transactions Minimum Maximum Average

3.5 8.0 5.8Source: 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

Date Chain Buyer/Investor Purpose Value1

($ millions)#

Locations2

Annual Sales

($ millions)3

Sales:Value Ratio

February 2012 Elephant & Castle Original Joe’s Acquisition $22.8 19 $50.0 2.2January 2012 Prime Restaurants Fairfax Holding Limited Acquisition $71.0 133 $336.7 4.7December 2011 Imvescor Restaurant Group Fairfax Holding Limited Recapitalization $25.0 254 $413.2 n/aOctober 2011 Mr. Sub MTY Food Group Inc. Acquisition $23.0 335 $100.0 4.3October 2011 Koryo Korean BBQ

Franchise Corp.MTY Food Group Inc. Acquisition $1.8 20 $8.0 4.4

August 2011 Jugo Juice MTY Food Group Inc. Acquisition $15.5 136 $36.4 2.4

Source: fsSTRATEGY Inc.1 Media Releases2Sources: media releases, Foodservice and Hospitality Magazine, July 20113Average of acquisition transactions only

The average transaction value was $26.8 million and the average sales to transaction value ratiowas 3.6.

4.3.2 Market Sizing and Loan Volumes

GE Capital estimates assume a total annual financeable debt market in the food space of $4.4billion across all segments. Financeable debt market is defined as any potential renovation, refinance, new build and acquisition transaction within the Canadian restaurant market.

Total Financeable Debt Market by Segment Type (millions)

Total Financeable Debt Market by Transaction Type (millions)

Source: GE Capital

Source: GE Capital

4,356

Total Market

2,008

QSR

603

Express

560

FamilyCasual

502

Mid TierCasual

446

Coffee PremiumCasual

236

4,356

2,836

1133360

Total Market Refinance/Renovation

Acquisition New Build

38 39


Cost ofDoing Business 5.1 Cost of Goods Sold5.2 Labour Costs5.3 Rental and Occupancy Costs5.4 Other Operating Costs 5.5 Capital Expenditures

5

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 average foodservice operation. The chart across illustrates average foodservice cost of goods sold as a percentage of sales for the most recent five year period available (2005 to 2009—the most recent year for which data is available).

As shown, cost of goods sold as a percentage of sales has been relatively constant, ranging from 35.4% to 35.8% over five years with a subtle upward trend. However, ingredient prices have increased more dramatically than the above table suggests.

35.60%

35.40%

35.70%

35.50%

35.80%

35.0%

35.2%

35.4%

35.6%

35.8%

36.0%

2005 2006 2007 2008 2009

Perc

enta

ge o

f Sal

es


Historical Average Cost of Goods Sold as a Percentage of Sales

40 41

2012 Canadian Chain Restaurant Industry Review 5 | Cost of Doing Business

The following graph compares cost indices for several high demand products in foodservice such as meat, seafood, dairy, baked goods, vegetables and alcohol.

Consumer Price Indices

Menu Inflation versus Producer Price Index (Meat, Fish, and Dairy Products)

With the exception of alcoholic beverages purchased from stores, all indices grew by more than ten points between 2006 and 2011. As shown, consumers saw the greatest inflation for bakery and cereal products whose indices rose by more than thirty points since 2006. Inflation on meat and dairy 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.

As shown, while both menu inflation and the Producer Price Index (“PPI”) have increased steadily over the past five years, menu prices are growing at a slightly faster rate as they accommodate other increasing costs in addition to costs of goods sold.

80

90

100

110

120

130

140

150

2006 2007 2008 2009 2010 2011

Meat Fish, seafood and other marine products

Dairy products Bakery and cereal products

Vegetables and vegetable preparations Alcoholic beverages purchased from stores

CPI - All Items

CPI = Consumer Price Index 2002 = 100

Source: Statistics Canada


111

114

117

121124

99

102

103105

105

80

85

90

95

100

105

110

115

120

125

130

2006 2007 2008 2009 2010

Menu Inflation PPI (Meat, Fish, and Dairy Products)

PPI= Producer Price Index2002 = 100

42 43


The graph compares consumer price indices for food purchased from restaurants, and served alcohol against the national CPI for all goods.

Menu Inflation versus General Inflation

The previous graph shows that unlike the CPI for all goods, restaurant menu inflation did not slow during the 2009 recession.


111

114

117

121

124

128

111

113

116

119

123

125

109

112

114 114

117

120

100

110

115

120

125

130

2006 2007 2008 2009 2010 2011

Food purchased from restaurants Served alcoholic beverages CPI - All Items

CPI = Consumer Price Index 2002 = 100

C-Suite survey respondents were asked how cost of goods sold as a percentage of sales were expected to change in 2012 compared to 2011.

C-Suite Survey – Cost of Goods Sold

In 2012, Cost of Sales as a Percent of Sales are Expected to: Decline more than 2% points 0%Decline 1.6% to 2% points 0%Decline 1.1% to 1.5% points 0%Decline 0.6% to 1% points 0%Decline 0.1% to 0.5% points 0%Remain flat 5%Increase 0.1% to 0.5% points 30%Increase 0.6% to 1% points 25%Increase 1.1% to 1.5% points 10%Increase 1.6% to 2% points 0%Increase more than 2% points 25%Not sure 5%


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 operator who has been studying commodity trends expects food inflation to be between 5% and 7% in 2012.

44 45


fsSTRATEGY also interviewed several grower associations and processors to understand factors 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 5% on a typical shopping basket of goods. The following factors are affecting food prices:

�An increase in the quality and supply of products from overseas markets is putting downward pressure on pricing. The strength of the Canadian dollar is providing processors with some purchasing power for imported products. �Factors providing upward pressure on pricing include fuel, energy (e.g., refrigeration), insurance, packaging and equipment costs, all of which are increasing in excess of the rate of inflation. Labour costs have also increased significantly in recent years (please see the next section of this report for a discussion on minimum wage rates). �Beef is in tight supply as a result of increased demand for beef as emerging markets are increasingly consuming this product as well as the market is recovering from a reduction in 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 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. �Environmental compliance is becoming an increasing challenge for growers and processors (e.g., 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 distributors. �Competition 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. This will result in significant price increases at some point in the future.

5.2 Labour Costs

Labour costs include all salaries, wages, and benefits associated with running an operation. Labour costs are the second largest cost item faced by operators and on average represents 33.9% of sales. The graph below illustrates average labour cost as a percentage of sales for the most recent five year period of available data (2005 to 2009).

Historical Average Labour Cost as a Percentage of Sales

32%

32%

34%

35%

34%

30%

31%

32%

33%

34%

35%

2005 2006 2007 2008 2009

Perc

enta

ge o

f Sal

es

Salaries and Wages


46 47


As shown, operators are not able to increase menu prices sufficiently to maintain previous labour to sales ratios. This is due in large part to increased minimum wages in many provinces. On average, provincial and territorial minimum wages increased by almost 21% between 2005 and 2009, and 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.

Provincial and Territorial Minimum Wage RatesYu

kon1

Albe

rta2

Sask

atch

ewan

Que

bec

PEI

New

Bru

nsw

ick

Nor

thw

est T

erri

tori

es

Man

itoba

Nov

a Sc

otia

3

New

foun

dlan

d

Briti

sh C

olum

bia

Ont

ario

Nun

avut

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

Liquor Servers/Workers Receiving Gratuities $8.35 $9.00 $8.90

First Job/Entry Level $9.50

Students (Under 18) $9.60

Homeworkers (overrides student wage)

$11.28

Source: Human Resources and Skills Development Canada

1 Alberta’s minimum wage will be adjusted annually every April

2 Yukon Territory increases minimum wage every April 1 based on the Consumer Price Index

3 Nova Scotia’s entry level minimum wage is for inexperienced workers (less than three months employed in the type of worked

they are hired to do); minimum wage will increase to $10.15 on April 1, 2012

As shown, Nunavut has the highest adult minimum wage at $11.00 per hour while the Yukon Territory has the lowest adult minimum wage at $9.00 an hour.

Some provinces have experienced considerable increases in minimum wage in recent years as shown in the table below.

Current and Dates of Changes in Minimum Wage by Province

Jurisdiction Current 2005 2006 2007 2008 2009 2010 2011 2012

Alberta $9.40 01-Sep-05$7.00

01-Sep-07$8.00

01-Apr-08$8.40

01-Apr-09$8.80

01-Sep-11$9.40

British Columbia $10.25 01-May-11

$8.7501-May-12

$10.2501-Nov-11

$9.50

Manitoba $10.00 01-Apr-05$7.25

01-Apr-06$7.60

01-Apr-07$8.00

01-Apr-08$8.50

01-May-09$8.75

01-Oct-10$9.50

01-Oct-11$10.00

01-Oct-09$9.00

New Brunswick $10.00 01-Jan-05

$6.3001-Jan-06

$6.50 05-Jan-07

$7.00 31-Mar-08

$7.75 15-Apr-09

$8.00 01-Apr-10

$8.50 01-Apr-11

$9.50 01-Apr-12

$10.00 01-Jul-06

$6.7001-Jul-07

$7.2501-Sep-09

$8.2501-Sep-10

$9.00Newfoundland and Labrador $10.00 01-Jun-05

$6.2501-Jan-06

$6.5001-Jan-07

$7.0001-Apr-08

$8.0001-Jan-09

$8.5001-Jan-10

$9.5001-Jun-06

$6.7501-Oct-07

$7.5001-Jul-09

$9.0001-Jul-10

$10.00Northwest Territories $10.00 01-Apr-10

$9.0001-Apr-11

$10.00

Nova Scotia $10.00 01-Oct-05 $6.80

01-Apr-06 $7.15

01-May-07 $7.60

01-May-08 $8.10

01-Apr-09 $8.60

01-Apr-10 $9.20

01-Oct-11 $10.00

01-Oct-10 $9.65

Nunavut $11.00 05-Sep-08 $10.00

01-Jan-11 $11.00

Ontario $10.25 01-Feb-05 $7.45

01-Feb-06 $7.75

01-Feb-07 $8.00

31-Mar-08 $8.75

31-Mar-09 $9.50

31-Mar-10 $10.25

Prince Edward Island

$10.00 01-Jan-05 $6.80

01-Apr-06 $7.15

01-Apr-07 $7.50

01-May-08 $7.75

01-Jun-09 $8.20

01-Jun-10 $8.70

01-Jun-11 $9.30

01-Apr-12 $10.00

01-Oct-08 $8.00

01-Oct-09 $8.40

01-Oct-10 $9.00

01-Oct-11 $9.60

Quebec $9.90 01-May-05 $7.60

01-May-06 $7.75

01-May-07 $8.00

01-May-08 $8.50

01-May-10 $9.50

01-May-11 $9.65

01-May-12 $9.90

Saskatchewan $9.50 01-Sep-05 $7.05

01-Mar-06 $7.55

01-Mar-07 $7.95

01-Jan-08 $8.25

01-May-09 $9.25

01-Sep-11 $9.50

01-May-08 $8.60

Yukon $9.00 01-May-06 $8.25

01-Apr-07 $8.37

01-Apr-08 $8.58

01-Apr-09 $8.89

01-Apr-10 $8.93

01-Apr-11 $9.00

Source: www.labour.gc.ca

48 49


Source: Labour Force Survey, Statistics Canada

98 9798

100 102103

105

107

110

10099

100101

104106

110110

115116

98

102

110

116

122 124 124

127

80

85

90

95

100

105

110

115

120

125

130

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Employment Index - All Industries Employment Index - Foodservice Employees per FS Location

2002 = 100

Employment Indices

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.

C-Suite survey respondents were asked how labour cost as a percentage of sales were expected to change in 2012 compared to 2011.

C-Suite Survey – Labour Cost

In 2012, Labour as a Percent of Sales are Expected to: Decline more than 2% points 0%Decline 1.6% to 2% points 0%Decline 1.1% to 1.5% points 0%Decline 0.6% to 1% points 0%Decline 0.1% to 0.5% points 0%Remain flat 15%Increase 0.1% to 0.5% points 25%Increase 0.6% to 1% points 10%Increase 1.1% to 1.5% points 15%Increase 1.6% to 2% points 15%Increase more than 2% points 10%Not sure 10%


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% expect an increase of between one and two percentage points.

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5.3 Rental and Occupancy Costs

The following graph illustrates average rental and leasing cost as a percentage of sales for the most recent five year period available (2005 to 2009).

Rental and Leasing Cost as a Percentage of Sales


7.0%

6.8%

7.0%

7.2% 7.2%

6.6%

6.8%

7.0%

7.2%

7.4%

2005 2006 2007 2008 2009

Perc

enta

ge o

f Sal

es

Rental and leasing

C-Suite Survey – Rental and Leasing Cost

In 2012, Labour as a Percent of Sales are Expected to: Decline more than 2% points 0%Decline 1.6% to 2% points 0%Decline 1.1% to 1.5% points 0%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%Increase 0.6% to 1% points 20%Increase 1.1% to 1.5% points 15%Increase 1.6% to 2% points 10%Increase more than 2% points 10%Not sure 10%


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 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 amenity for various properties (e.g., office towers, shopping centres). As a result, market rents for foodservices are generally relatively low compared to retail operations.

A significant amount of recycled restaurant space has become available. As such properties require 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 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.

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5.4 Other Operating Costs

The CRFA operations report classifies other operating costs as utilities including telephone, repair and maintenance, advertising and promotion, depreciation and other operating costs as a percentage of sales. The following table illustrates average other operating costs as a percentage of sales for the most recent 5 year period available (2005 to 2009).

Historical Other Operating Costs as a Percentage of Sales

2005 2006 2007 2008 2009

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%Advertising and Promotion 2.8% 2.8% 2.7% 2.8% 2.8%Depreciation 2.8% 2.9% 2.9% 2.9% 3.0%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%


60

70

80

90

100

110

120

2005 2006 2007 2008 2009

Repair and maintenance Utilities including telephone Advertising and promotion

Depreciation Other Total Other Operating Costs

2005=100

As shown, other operating costs as a percentage of sales have decreased between 2005 and 2009. The following graph the figures above as indices to illustrate differing trends between the different types of “other” 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.

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100

73

62

70

46

33

100

91

102 106

116

129

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011

Natural Gas Electricity

2006=100

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 stable cost ratios. This is true for utility costs as a percentage of sales, which remained relatively flat 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.

Energy Commodity Price Indices

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.

C-Suite survey respondents were asked how other operating costs as a percentage of sales were expected to change in 2012 compared to 2011.

C-Suite Survey – Rental and Leasing Cost

In 2012, Other Operating Costs as a Percent of Sales are Expected to: Decline more than 2% points 0%Decline 1.6% to 2% points 0%Decline 1.1% to 1.5% points 0%Decline 0.6% to 1% points 0%Decline 0.1% to 0.5% points 0%Remain flat 15%Increase 0.1% to 0.5% points 45%Increase 0.6% to 1% points 15%Increase 1.1% to 1.5% points 10%Increase 1.6% to 2% points 10%Increase more than 2% points 0%Not sure 5%


As shown, most (45%) respondents expect that other operating costs as a percentage of sales will increase by 0.5 percentage points or less in 2012, compared to 2011.

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5.5 Capital Expenditures

The following table shows capital expenditures (“CAPEX”) for construction in the accommodation and food services sector for 2007 to 2011.

Construction Capital Expenditures for Accommodation and Food Services

The graph below illustrates construction price inflation using the construction price index for non-residential buildings.

$1,853

$2,278

$2,733

$2,220

$1,942

$1,000

$1,400

$1,800

$2,200

$2,600

$3,000

2007 2008 2009 2010 2011

Accommodation and Food Services Construction CAPEX

Millions of Dollars


As shown, construction peaked in 2009 as pre-recession projects were completed, but investment in construction has since dropped to $1.9 billion from a peak of $2.7 billion in 2009.

Construction CAPEX for Accommodation and Food Services

125

137

151

142 141

147

100

110

120

130

140

150

160

2006 2007 2008 2009 2010 2011

Construction Price Index: Total Non-Residential

2002 = 100


Construction prices dropped in 2009 in response to decreased demand. Prices remained relatively low in 2010 but are seen increasing again in 2011 – albeit at a slower rate than pre-recession.

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Source: RSMeans Square Foot Costs 2012. Copyright RSMeans, Norwell, MA 781-422-5000; All rights reserved

As shown, major Canadian cities are more costly to build in than the 30 city American average. Toronto has historically been the most expensive in which to build; however, since 2009 building costs in Calgary have surpassed those of Toronto. Winnipeg is the least expensive of the sample of Canadian cities for construction.

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 that period.

The table below compares construction prices for major Canadian cities using RSMeans historical cost indices. The indices track against a 1993, 30 city United States average.

RSMeans Construction Cost Indices by Major Canadian City

C-Suite survey respondents were asked to provide the cost per square foot to build a new unit (excluding base building cost and land purchases).

C-Suite Survey – Building Cost per Square Foot

Average Min MaxQuick Service $249.29 $200.00 $400.00Full Service 261.00 170.00 400.00All 258.93 170.00 400.00


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 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 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 2012 compared to 2011.

C-Suite Survey – CAPEXIn 2012, The Cost of Building New Units is Expected to:Decline more than 10% points 0%Decline 7.6% to 10% points 0%Decline 5.1% to 7.5% points 0%Decline 2.6% to 5% points 5%Decline 0.1% to 2.5% points 0%Remain Flat 15%Increase 0.1% to 2.5% points 40%Increase 2.6% to 5% points 20%Increase 5.1% to 7.5% points 0%Increase 7.6% to 10% points 0%Increase more than 10% points 0%Not sure 20%Source: fsSTRATEGY Inc. C-Suite Survey

As shown, most (40%) respondents expect that the cost of building new units will increase by up to 2.5 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.

140

150

160

170

180

190

200

210

220

230

2005 2006 2007 2008 2009 2010 2011 2012e

Toronto Calgary Montreal Vancouver Winnipeg 30 City US Average

1993 30 City US Average = 100

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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:

� Top three fastest growing restaurant categories: QSR Yogurt, QSR Mexican and Casual Asian � Only two provinces had a net increase in restaurant units during 2011: Manitoba and Alberta � 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:

� Service type (Quick Service or Full Service) � Segment � Brand � Chain versus Independent

� Cuisine � Sales range � System size

ReCount® Restaurant Census Trends

6

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2012 Canadian Chain Restaurant Industry Review 6 | ReCount® Restaurant Census Trends

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.

Notes 7

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2012 Canadian Chain Restaurant Industry Review

fsSTRATEGY is an alliance of senior consultants focusing on business strategy support-research, analysis, design and implementation-for the foodservice industry. Our team has extensive consulting experience in foodservice across Canada. We also off er international experience, having worked in the United States, Australia, South America, Africa, Asia and Europe. Our team is unique in that we provide service to all foodservice sectors (restaurants, attractions, hotels and resorts, gaming establishments and institutions) and all levels of the foodservice supply chain (growers, processors, distributors and operators).

The NPD Group has more than 25 years of experience providing reliable and comprehensive consumer-based market information to leaders in the foodservice industry. With information available for Canada, United States, Europe, Asia, and Australia, NPD provides the latest information about restaurant concepts, menu activity, and food trends that drive greater sales. NPD’s client development experts add unique insights and perspectives. Powered by CREST®, NPD is the leading source for market information within the foodservice industry. For more information, visit www.npd.com or contact Jim Harnden [email protected].


2012Canadian ChainRestaurantIndustry Review

Research Partners

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