Oh Canada!

QSR MAGAZINE | ISSUE 61 | MARCH 2004 | BY WENDY CUTHBERT

Think our neighbor to the north is just an extension of the U.S.? Think expanding there will be a breeze? Think again.

Frostbite isn't a hazard one usually associates with expansion. 

But that's the term some insiders use to describe the perils facing U.S. companies ill-fated enough to simply consider Canada the 51st state. 

Nancy Evans, senior vice president of Environics Communications in Toronto, says that U.S. companies risk frostbite-an unanticipated halt in the momentum to which they are generally accustomed-when they don't take into account the differences in the Canadian marketplace. The idea that, since the two countries share so much in common, it must be relatively simple to make that leap into the Canadian market, is a common misconception, she says. But it's also a dangerous one. "If you make the assumption that because Canadians, for the most part, look like American consumers and that there's a large English-speaking population and so on, they must act the same way and have the same values, that's a risk," says Evans. "Research shows that the Canadian marketplace is not only different but it's getting more different."

Obviously, Canada has its own distinct political system, regulatory environment, and geography. Understanding the different structural environment-the taxes, language laws, labor principles, and so on-is simply the price of admission, says Evans. Any chain worth its weight in soft drinks wouldn't dream of entering a market blind. 

But Canadians and Americans also have very different attitudes-and this can be trickier to appreciate. Environics Research has been compiling social value measurements, benchmarking the disparity in Canadian and American values, for just under a decade. And rather than becoming more alike-as one might expect considering the proximity and shared culture of the two countries-the firm's findings indicate that there's a widening gap between the values of each country. 

This isn't surprising to anyone who's been following the news. Canada has caused more than a few tongues wagging in the U.S. with its opposition to the war in Iraq, its passing of same-sex marriage laws, and its movement towards the decriminalization of marijuana. 

This is all very interesting-and good fodder for radio phone-in types-but what does it have to do with quick-serve? 

Plenty. These rancor-raising issues underscore some very real value differences between Canadians and Americans. And these values trickle down to consumer attitudes towards everything from advertising to labor regulation. A particularly potent, and oft-noted, demonstration of the different value systems between the two countries, for example, is the fact that the first unionized McDonald's and Starbucks outlets were in Canada. 

Procuring the Canadian seal of approval is also all that much easier with the right development partners. 

Still don't believe that the differences are all that significant-or have any impact on a chain's expansion efforts? Consider one of the Environics statements to which respondents were asked to agree or disagree: Do you believe that a widely advertised product is probably a good product? In 1992, 17 percent of Canadians agreed with the statement, compared to 34 percent of Americans. In 2000, the Canadian number remained unchanged, while American endorsement grew-to 44 percent. "The 27-point gap is more than just culturally interesting," says Evans. "It exposes fundamentally different views on advertising." Further, she says it suggests that massive ad spending does not necessarily translate into brand trust as easily in Canada as it might in the U.S. These views need to be taken into account when a U.S. chain is in the planning stages of its Canadian marketing strategy, she says. 

Overall, she says that research indicates that Canadians are more skeptical of traditional authority-be it government or corporate-than Americans. They're also more confident of personal decisions, which runs counter to the stereotypical image of the "meek and mild" Canadian. 

It also sets up some U.S. quick-serves, accustomed to a certain brand cache, to fail miserably in the market. "Sometimes there's a bit of arrogance in their own brand," says Lorraine Doherty, senior vice president of Weber Shandwick Worldwide, a public relations firm in Toronto, whose client list includes McDonald's. "Sometimes they have a bit of a hump to get over." 

The education process that chains need to run through might include such idiosyncrasies as the fact that, according to Doherty, Canadian quick-serve consumers apparently put more stock into a restaurant's cleanliness than their American counterparts. Further, they're much more interested in being able to trace the origins of what they eat. "Canadians want to know where it's from," she says. "They might not be very blatant about it, but if you get bad press about purchasing your tomatoes from X country, the consumer will find out [and potentially act on it]."

Doherty says the U.S. chains that perform best in Canada are those that are willing to forgo the flag-waving and become active participants in their host country. "As much as we like the offering, we are very turned off by American rah-rah-rah," she says. "If we feel that they haven't become Canadianized to some extent, we don't tend to purchase from them."

Developing a relationship with Canadian consumers is indeed key, says Environics' Evans. A majority (66 percent) of Canadians believe that big business must strike a fair balance between profit and the public interest, according to research. "If you want to start developing a relationship with Canadian consumers, I think you have to look at things like your corporate philanthropy program and your corporate citizenship program," she says. "It's also one of the best ways to get your feet wet in understanding the Canadian environment."

Procuring the Canadian seal of approval is also all that much easier with the right partners. Roly Morris, president and CEO of KremeKo Inc., the Canadian area developer for Krispy Kreme in all provinces but British Columbia, says that his experience introducing Starbucks to the Toronto market in the early 1990s was a lesson in just how much currency homegrown talent has for Canadians. 

A little background: When Starbucks first launched in the Toronto market, Morris was based in Vancouver. While this might not seem like such a big deal, the fact that Starbucks' biggest rival, Second Cup, was a well-known Canadian company that just happened to be based in Toronto meant that the U.S. brand was tainted with the outsider label. "[Second Cup] had a visible, charismatic leader and they played that very well," says Morris. "We were very much an American firm with a branch in Canada." This time around, for Krispy Kreme,

Morris played his hand differently. "I moved to Toronto and part of the reason was so that I was the local guy this time," he says. He also went to great pains to make sure the press understood that, though selling an American brand, the Krispy Kreme chain in Canada is majority-owned, managed, and controlled by a group of Canadians, he says. "We were able to play that strategy, if you will, where it got played against us eight years ago." It also avoided getting into a slinging match with Canadian doughnut giant Tim Hortons by stressing its respect for that brand-which enjoys iconic status in Canada-while downplaying any competition issues. "They have 2,300 stores from coast-to-coast," he says. "We will have 40, not from coast-to-coast. It's a very different experience."

 
It's not always the cultural differences that prevent U.S. chains from surviving in the Canadian marketplace. "There are massive differences [between the two markets], and that's borne out by the amount of U.S. companies that come here and go bankrupt so quickly," says Doug Fisher, president of FHG International, a Toronto foodservice, franchise, and hospitality consulting firm. Bumpy on-ramps for chains such as TGI Fridays (only five units since 1995), KooKooRoo (it went beak up in Canada), Big Apple Bagel, and, most recently, Boston Market (which closed its two test locations in the Toronto area in late October) change and even shatter development plans. Ben & Jerry's, meanwhile, recently announced that it will be entering the Canadian market with its scoop shops-but this isn't its first time, according to Fisher. "They've come in a few times and gone broke."

Fisher says that the differences between the two markets can be subtle, revolving around such particulars as taste (Americans like sweeter and saltier foods) and price-value relationships (a medium-sized fries in the U.S. is bigger than in Canada.) 

Differences can also be dramatic, however. A chain had better create a new site selection formula for Canada, for example, because the urban-suburban breakdown is completely different, Fisher says. "We're more urban-oriented." Even simple measurements-an Imperial gallon is not an American gallon, for example-can make for some costly mistakes or watered-down recipes if not factored in right from the beginning. 

And then there's the cost of doing business. The power of Canada's marketing boards-dairy and chicken come to mind-makes for fixed pricing costs that are far higher than those found in the U.S. In addition, higher tax structures, rent, and labor costs all add up to a much more expensive environment in which to do business, Fisher says. "All this cuts into what little margin there is in restaurants." Where restaurants in the U.S. boast an average 20 percent operating profit, Canada's make just under 10 percent, he says. That doesn't leave a lot of room for error. "The margins become so tight here that you make a few little mistakes and you're in big trouble," he says. 

That's not to say a U.S. chain always has to completely back down from the 49th parallel. Sometimes it's simply a matter of paring down its grand expansion plans. "I think you rarely see a large dramatic mistake where someone takes a step into the market and has to retreat," says Environics' Evans. "I think it's more a situation of how quickly an organization is able to grow in the market and how rapidly they are able to gain that foothold."

The chains that have succeeded in the face of all these challenges have re-worked their formulas and their marketing for the Canadian market. 

That's what Nick-N-Willy's has been trying to do since it decided to move into Canada a little over a year ago. Richard Weil, president of the Lone Tree, Colorado-based fast-casual pizza chain, says that, competent partners aside, the increased costs can nevertheless shock. Cheese, for example, costs twice as much in Canada as it does in the U.S. Because of this difference, the chain had to increase its prices by 25 percent across the menuboard to make up the difference. So far, the company has one unit open in Vancouver and is currently in the process of selling the idea to other franchisees across the country. 

Reminiscent of Morris' Starbucks-to-Krispy Kreme learning curve, Nick-N-Willy's Canadian partner also has experience with a successful U.S. brand in the Canadian marketplace. Scott Moradian, president and CEO of Nick-N-Willy's Canada Franchise Corp. in Vancouver, was responsible for bringing Quiznos to Canada in 1996, finally selling it back to the corporate office in December 2002. 

He, too, says that lessons were learned from his first experience introducing a U.S. brand to Canada. By being through it once, he was more prepared for the challenges, he says. Dealing with suppliers, contractors, lawyers, and the like has gone far smoother on the second run, he says. "This time around, it's easier." 

Turning the Tables 
How many people would you prefer to reach-30 million or 300 million? 

That's the question that excites George Kottas, director of business development for Mega Wraps in Toronto. The wraps chain, which boasts 100 units across Canada, began pursuing a U.S. presence in the spring of 2002. And it's already sold 50 of its 76 available areas to area developers. "Almost every major city in the U.S. is opening a Mega Wraps," he says. In order to saturate the market, agreements are in place to open a minimum number of stores a year-five for the first year, then eight, 12, 16, and 20. "That will help us get the brand out there within a couple of years," he says. The "flooding the market" strategy is key because the chain intends to become the number one wraps company in North America-and it knows how important it is to be first out of the gate. Advertising only starts once an area gets to a certain saturation point. 

By the end of 2004, Kottas expects 20-25 stores in the U.S. and, by the end of this year, the number should be up to 200. By 2010, the company's plan is to have 10,000 units across North America. 

No one could knock Kottas for outright ambition. But, while there are definitely cost benefits to operating in the U.S., the size-and clutter-makes it a difficult sell, even for experienced hands. Cara Operations' Second Cup, for example, which once had ambitious plans of its own for U.S. expansion, says that its U.S. plans are now on hold. 

Tim Hortons, meanwhile, is making strides-but it's not a fast process, by any stretch. After merging with Wendy's Restaurants International in 1995, the doughnut chain began its entrance into the U.S. market, focusing at first on Ohio and Michigan. The challenge, according to Diane Slopek-Weber, manager of corporate communications, is introducing a brand with iconic recognition in Canada to an audience that doesn't even know what Tim's serves. "We have to start from scratch when we open up in new markets," she says. Only in a well-saturated market can the chain use its Canadian advertising. Mostly, however, it relies on the new-market tagline: "Coffee you can count on." 

So far, the company has over 160 units in the U.S. "It takes time to get that loyalty," Slopek-Webersays.