Saturday, 6 January 2018

Educating Kathleen Wyne - Ontario's new minimum wage - a disaster in the making

I have been watching the latest commentaries concerning the new minimum wage in Ontario which is being increased from $11.60 to $14 immediately, and then to $15.  An increase of $3.40/hour, or 29.31% ($3.40 divided by $11.60).  For the sake of this commentary I will round it of at 30%.

I used to be a small business owner (+/-20 employees) so I know how difficult it is to stay profitable and taking home less than some of my employees (or nothing at all) when times are tough.

Franchisees have been accused of being wealthy and greedy.  Wealth and greed are distinctly different.  Wealth is the accumulation of money and possessions over the course of time.   A smart, frugal, generous person of limited means can attain considerable wealth over time (and purchase a TH franchise).  Nothing wrong with that!  Greed is an attitude of the heart. A poor person can be as greedy as a rich person. We read in Luke 21:1-3 Jesus saw the rich putting their gifts into the temple treasury. He also saw a poor widow put in two very small copper coins. “Truly I tell you,” he said, “this poor widow has put in more than all the others. Desiring to remain profitable is a good, biblical principle, pursuit of great wealth is not.

The media and the Wynne government have been taking Tim Horton's franchisees to task for reducing employee benefits.  Even the parent company of Tim Hortons has had a poke at the franchisees. Who is telling the truth? Why not let the numbers speak for themselves?

Let's examine a Tim Horton's store that is open 24-hours per day, averages 12 employees per shift (which can vary between 5 and 20 depending on the time of day and size of store) and is open 363 days per year.  What is the actual cost to the franchisee in increased wages?  $3.40 per hour X 24-hours per day X 363 days X 12 employees = $355,449.60  Then one must add to that the employer's portion of EI which is $355,449.60 X 2.324%  = $8,260.66.  And then employer CPP contribution of 4.95% which is an additional $17,594.75.  And then there's vacation pay of 4%, an additional $14,217.98, and on top of that Employers' Health Tax of of 1.95% = $6,931.26, and on top of that Workmen's Compensation of 1.72% = $6,113.73. Which brings the franchisee's total increase in labour costs to $408,567.98.  In reality the employer is paying out a total of $17.24 per hour for each employee making $15 per hour.

According to the GWNFA (franchisee association) it will cost $6,968.26 extra per full-time employee, working 40-hours per week.

Should an employer make a profit?  Of course, if not why be in business?  A reasonable return on investment is typically around 10% depending on risk factor.  It costs $+/- $500,000 for a 20-year franchise agreement (plus 8.5% of gross sales), plus the cost of building the store - approximately $1.2-million with associated lease costs (or 8.5% of gross sales).  So, a reasonable return on investment should be approximately $150,000 per year.  This is the benefit of investing which is completely different from an owner's/manager's salary.

Tim Horton's franchisees must be 'hands-on'.  One cannot buy a franchise and then run it from their condo in Florida!  The typical salary for a General Manager in a business with one-hundred employees is $90k to $110k although this number is lower in the restaurant business.

Based on court documents in 2011 it was revealed the average Tim Hortons franchise owner received $265,558 before taxes and interest (this number can vary dramatically based on province and location).

Labour constitutes 40% of overhead for a typical franchise.  Without adjusting prices the percentage will increase to 52% with a $15 minimum wage.

According to my math (please correct me if I'm wrong) there are limited options:

1. Run the business at a loss ($408,567.98 minus current profit estimates of $265,558 = negative $170,272.95)

2. Increase retail prices by 12% to cover the increased cost.  Talk about inflation!

3.  Increase same store sales by $1,021,420 to cover the increased labour costs.

4.  Lay off 30% of the employees (decreasing customer service, increasing unemployment, etc., etc.)

5.  Tim Hortons head office absorbs the cost on behalf of the franchisees.  Never going to happen.

6.  Roll back the minimum wage.  The horse has already left the barn.

7.  A mixture of the above.

In light of the above, it is profoundly unfair to criticize Tim Hortons franchisees for taking necessary steps to stay in business and protect their investment.

And, obviously, the same difficulties confront all small business owners.  It is my personal belief that Canadian unemployment will be back above 7% before the end of the year.  We can but watch and see.

If you find any errors in the above numbers please advise and I will amend accordingly.

The background of buying a Tim Horton's Franchise (copied directly from their website):

"Franchise Cost: $480,000 to $510,000* plus all applicable taxes (this includes a drive-thru). Additional Working Capital: (start-up costs) $50,000 (unencumbered). At least $153,000 of the franchise cost must be unencumbered (cash or liquid assets) in addition to the $50,000 working capital that must also be unencumbered. The remaining amount may be financed through various lending programs offered by the chartered banks, providing, of course, the candidate meets the normal borrowing requirements.

The specific cost of a Tim Hortons license will depend upon the Tim Hortons building size and the required furnishings and equipment to be installed. The cost of a Tim Hortons license may exceed $510,000 in certain locations due to higher development costs.

Included in the cost of a franchise is the following:

  • All equipment, furniture, display equipment and signage.
  • Seven (7) week training program in the Oakville, Ontario, at Tim Hortons University.
  • A Restaurant opening crew/Manager of Operations Standards (MOS) to assist the opening of the Tim Hortons Restaurant (for a maximum period of two weeks).
  • The use of all Tim Hortons Manuals.
  • Right to use trademarks and trade names
  • Support from head office personnel who have vast knowledge in the food service
  • business

Not included in the cost of the franchise:

  • The building (responsibility of the TDL Group)
  • The property that the Restaurant is built (responsibility of the TDL Group)
  • The term of the License agreement is usually 10 years and usually with options to renew for up to a further period of 10 years.

For mutual success and satisfaction, we must ensure that every Franchisee possesses the necessary skills, commitment level, dedication, work ethic, character and strong people skills. There are a number of qualifications we look for in an applicant such as:

  • All partners meet the initial investment requirements and are willing to commit to the Business full time
  • Willing to divest of businesses which are direct competition to the Tim Hortons business
  • Prior management experience, preferably in food service and/or restaurant operations
  • Strong communication skills and leadership qualities
  • Keen understanding on how to recruit, train and manage staff
  • Solid business acumen
  • Two Partners who will be hands-on operators, willing to commit to the demands of the restaurant full time

We consider any proposed partnership and evaluate accordingly. Our goal is to ensure we have the best franchisees in our restaurants, and recommend giving careful consideration to who your potential partner will be as Tim Hortons franchise agreements are typically 10 years in length with an option to renew for an additional 10 years. We evaluate criteria in any partnership such as: time you have known one another, previous business experience together, proven experience working in a non-business setting, and other factors.

On-going payments include:

  • A weekly royalty fee of 4.5% of gross sales for the term of the license
  • A monthly rental that is the greater of a fixed minimum rent or 8.5% of monthly gross sales
  • A monthly advertising levy of 4% of gross sales for the term of the license