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The ORHMA has drafted the following policy paper that has been sent to all Provincial Party Leaders to compliment our Election Campaign Priorities which were sent previously to all three party leaders and made available to all hospitality operators to use in their meetings with local political candidates. The issues and recommendations addressed in this paper have been a component of ORHMA’s ongoing discussions with Ontario’s Provincial and Municipal Governments and serve as a way of advancing success to Ontario’s Hospitality Industry.
» The Current State of the Hospitality Industry in Ontario
The ORHMA is very cognizant of the fiscal pressures facing the Province of Ontario and we are providing you background on the state of the Hospitality Industry as it needs support in order to be in a position to contribute back to the overall growth of Ontario’s economy. This industry has the advantageous potential to open more businesses, create more jobs and in turn contribute to the vitality of every local economy and the overall GDP of the province. The hospitality industry has experienced tremendous pressures throughout the past decade due to a number of events and measures, such as 9/11 and the subsequent border issues, SARS, fluctuating value of the American dollar, and dramatic regulatory and expense impediments.
Moreover, tightening credit lending practices by financial institutions has led to an inability within the industry to make enhancements to existing infrastructure or to build new product. Although the industry has faced adversity and an array of pressures and challenges over the past decade some business segments in certain areas of the province are starting to see an upward trend in their operations but there is still a long way to go to return to the numbers of a decade ago.
The ORHMA has drafted this paper addressing the current state of the industry including the hurdles and priority concerns. The background offered contains recommendations to stimulate the hospitality industry leading to direct improvement of an operator’s bottom line, allowing growth in jobs and in turn ensuring a return of investment back to government.
» Economic Impacts of the Hospitality Industry
Ontario’s Hospitality industry is one of the most dynamic and competitive sectors of the provincial economy, generating over $23 billion in sales and contributing 4.3% of the GDP. It is made up of over 30,000 commercial units and over 3,000 accommodation properties with 60% representation by independent operators. Many of these operations are small businesses located in rural and suburban areas and include large and small communities. Success in the industry translates to success in every part of the province. The hospitality industry contributes over $9 billion in tax revenue to all three levels of government. Its workforce is made up of over 400,000 employees representing 6% of Ontario’s workforce and it is the 4th largest employer and the largest employer of youth.
» Foodservice Sector - In recent years, the food service sector in Ontario has been experiencing difficulties and has passed through disquieting times. The industry is totally reliant on consumer confidence and disposable income and both indicators have been sluggish for over ten years.
In October 2008 we saw consumer confidence in Ontario plummet to a record drop of 16.6 points settling at 67.9 and as of August 2011 this still has not rebounded, in fact falling to 67.8 . This economic indicator is a strong predicament of restaurant performance and it is forecasted to trend low moving into 2012. In the same period stated here , Ontario is at the bottom of the list against the national rate of 74.7.
Domestic and global uncertainties, coupled with Ontario’s Harmonized Sales Tax have been the drivers behind consumer worries. All facets of the hospitality sector are the first to enter a recession and the last to come out. This means the sector stays in a recession longer than any other industry and with the recent economic uncertainty; foodservice establishments have a long road ahead before they see a recovery.
In tough economic times, revenue growth in the foodservice sector does not necessarily flow thru to the bottom line. Recent declines and sluggish growth to the top line have been disturbing but this is not the only strain to a typical food service operation. Regulatory burden, rising energy costs, escalating food commodities and labour cost increases have added impediments to an operators’ success. The sector operates with razor thin margins, highly susceptible to many factors including government decisions.
The most recent Commercial Foodservice statistics from Statistics Canada support the bleak picture of the industry in Ontario:
• Loss of 10,000 jobs since 2008
• Pre-recession profit margins in Ontario foodservice operations were consistently lower than
any other province and the national average:
• In 2006 Ontario had 3.2% profit margin, whereas the national average was 4.4% growth
• In 2007 Ontario had 2.6% profit margin, whereas the national average was 4.0% growth
• In 2008 Ontario had 2.9% profit margin, whereas the national average was 4.3% growth
• In 2009 Ontario had 3.4% profit margin, whereas the national average was 4.5% growth
» Accommodations Sector - Tourism is a very competitive global business. With one click of the mouse, a prospective traveler has access to the myriad of world destinations and the province of Ontario is merely only one such destination. The global regions that have consistently invested in tourism are profiting from their efforts. Before the latest global recession, global tourism grew more than any other industry, while Canada’s and Ontario’s share continued to decline. Ontario’s shortfall in international tourist travel is the largest of any province and the results have been extremely damaging to the hospitality industry in this province. There have been only modest opportunities to replace the revenue losses. According to Statistics Canada the province of Ontario dropped over ten million or 50% of international visitors from 2000 to 2010 mainly as a result of a major drop-off in same day traffic. Although overnight traffic has not been impacted as significantly as same day, many destinations report a drop in U.S. overnight traffic that has negatively impacted the local businesses. Significant declines are being seen in leisure travel resulting in a dramatic impact on the make up of the accommodation supply sector and independent business. Hotels both brand and non brand are struggling to return to the occupancy and average rate performance achieved in the year of 2000 and continue to operate with record setting declining margins. Occupancy performance finished at 61.1% in 2010 a far cry from 67.2% reached in 2000 while in the same period the average hotel rate has decreased by over $5. While operating costs continue to increase, profitability is significantly weakened. According to Statistics Canada, hotel profit margins have declined on average from 14.7% in 2000 down to 9% in 2008.
In 2000 Canada was the 7th most popular destination in the world with a travel deficit of just over $1 billion. This number measures the difference between what Canadians spend abroad and what visitors spend here in Canada. Today the national travel deficit is at $13 billion. Between 2002 and 2009, almost all countries posted international tourist arrival gains except Canada. Restoring Canada back to the top 10 in foreign arrivals would bring 5.7 million more visitors, $5.2 billion in revenue and 46,900 more jobs. It would generate $1.5 billion in new taxes. Much of this success will be passed to the province of Ontario which operates with a travel deficit that continues to grow and is currently edging at the $3 billion mark.
International Tourism Arrivals - Canada’s position has steadily declined as a travel destination among the top 15 Countries: 1950 – 2nd place, 1970 - 2nd place, 2000 - 7th place, 2007 - 14th place.
The Canada-USA border restrictions in place since 2001 significantly diminished tourism visitations from the USA. We are now faced with the subsequent challenge to replace the void left by the decline in travel from the USA, even with new growth contributions from European and emerging nations. Improvements to security structures have eased border congestion but the compliance with the Western Hemisphere Travel Initiative (WHTI) passport requirement remains a major impediment. The average USA citizen is not familiar with and not interested in obtaining a passport. This prevents growth to the much needed hotel leisure segment.
Canada is a “Fly-to” destination and our airport cost structure is a barrier to success. Exceedingly high airport rents, fuel taxes and security fees have dropped Canada down to 125th position from 109th for aviation cost structure based on the World Economic Forum Travel and Tourism Competitiveness Report. In addition, potential visitation opportunities from tapping into emerging markets such as Russia, India, China and Mexico are limited due to the existing Visa system. Enhancements to the Visa system are required in order to stimulate travel and tourism to Canada from these emerging nations.
Ontario has enormous opportunity to stimulate tourism and the industry recommendations contained in the 2009 competiveness study are the solutions. Ontario’s tourism product in the most part is entering its mature stage of its life cycle and needs refreshing. Other recommendations from the report include proper signage to guide visitors and the establishment of efficient express transportation systems, which are lacking both in major cities and across the province. None of the industry recommendations have yet to be implemented.
» What Does Ontario Need to do to Stimulate Revenue Growth in the Accommodations Sector?
» Border Issues - The factors stated above are heavily influenced by federal policies, but with the province of Ontario having so much to gain from improved travel access, the provincial government needs to be more assertive on the forefront of these tourism issues and exert pressure on the federal government to accelerate their work with settling the immigration issues and opening up the borders. The European Union has a vast history of conflicts between countries yet they operate with open borders while on this side of the ocean , two neighbors operating under the largest bilateral trade agreement in the world have unprecedented restrictions for visitor crossings. This is not acceptable! Ontario needs to shift from standing on the sidelines to being a major involved player.
» Investment Strategy - The Ontario government does not have a meaningful investment strategy to stimulate economic growth in the Hospitality Industry. We need a dedicated investment team which is accountable for tourism development with accountability and empowerment that break down barriers between all three levels of government. In addition there is an urgent need for a loan program to be formed in order to encourage investment and support competiveness.
» Promoting Ontario - A yield management approach to focus and attract segments with higher spend must guide tourism sales and marketing campaigns. At the same time theme programs and events need to be developed to capitalize on need and shoulder periods. This must not only be a private sector objective but leadership and activity is required from the public sector to reach out and capture global opportunities.
» Funding Destinations - The industry once had access through the Destination Marketing Fund (DMF). DMF was a solution to an industry problem of being able to promote a specific destination, using designated funds generated solely for that purpose. The program initiated in Toronto in 2004 followed by Ottawa and then followed by many jurisdictions across Ontario.
Several other jurisdictions were ready to implement the DMF model but it was shut down on July 1st 2010 due to the implementation of the Harmonized Sales Tax (HST).
The ORHMA is pleased that the government offered the three year transitional funding support to the previous DMF jurisdictions. The legislated option to add an additional levy (or fee ) on a guest room rate to generate promotional funding is welcomed by some accommodation operators but many more are reluctant due to the potential higher extended tax rate having demand shortfall fears. The ORHMA believes that destination funding has merit as it fosters reinvestment within the local industry. The provincial government needs to re-focus on this issue in order for a levy (or fee) to be adopted throughout the industry. Accommodation operators are reluctant to add a levy (or fee) unless the funding directly benefits their local destination. This trepidation is valid given the size of most Regional Tourism Organizations (RTO’s). Notably, the ORHMA has called for a reduction in the 13% HST charged on guest rooms in order to offer the hotel operator a competitive advantage in charging the levy (or fee).
» No More Analysis and Studies - Just Implement - Industry recommendations are defined in the 2009 Discovering Ontario blue print paper. These recommendations are the solutions the industry needs. We do not need to complete any more studies – we need to execute and implement the recommendations put forth by the industry for the industry.
» What Does Ontario need to do to Stimulate Expense Line Success in the Hospitality Industry?
Just Implement - Industry recommendations are defined in the 2009 Discovering Ontario blue print paper. These recommendations are the solutions the industry needs. We do not need to complete any more studies – we need to execute and implement the recommendations put forth by the industry for the industry.
» Regulatory Burden - Foodservices and accommodations are highly regulated industries and even though there are government plans in place and an apparent openness to doing something about it, regulations are still continuously being added. Businesses do not need another policy, another binder or another poster on the wall every time a new regulation comes into effect. While most regulations come about as the result of good intentions, they are not always considered from a small business point of view. As a sector poised to contribute to the economy of every community in Ontario, the hospitality industry is in need of a government that considers the affect that regulatory burden has on business when introducing new policy initiatives.
The goal must not be only the reduction of regulations. Reducing the number of regulations does not lessen the operator’s burden. Emphasis must be placed on streamlining the work and time expected from the operator in implementation and in maintaining compliance.
» Energy Costs - Among commercial and institutional sectors, hospitality ranks as one of the most energy intensive with corresponding high energy costs. Even with energy management in place small business restaurants have relatively high energy intensities. According to the Ontario Power Authority, refrigeration, cooking and baking, air conditioning and lighting generate 86% of restaurants total energy consumption with an overall intensity of 1.68 GJ/m2. This includes all purchased energy such as electricity, gasoline, fuel oil, diesel fuel, propane, and natural gas expenses.
The Government of Ontario is encouraging electricity users to reduce consumption during peak periods by escalating prices, persuading (some may say forcing) businesses to reduce demand. Unfortunately, despite energy conscious efforts and actions taken, food service and accommodation operators do not have the privilege and opportunity to reduce demand. The hospitality industry operates at full throttle during peak times, quite simply servicing the public of Ontario and accommodating the people behind business growth and development in Ontario. The hospitality operators in Ontario have no choice but to pay the peak energy prices since they cannot take advantage of Time Of Use reduced rate periods. In fact, business is slower during the off peak price periods. The industry needs support in the form of regulations or rebates that reflect the unique process of business.
» Direct Food Cost - Canada has not remained immune to the skyrocketing food prices affecting much of the world and the impact is now felt here. While some industries benefit from demand, the food service sector is on the receiving end seeing pricing power evaporate. This translates into a very dangerous economic model. Predominantly the price hikes hit grain crops increasing by over 60% in 2011 over prior year in a food category that make up a huge portion of the total purchases of a typical food service operation. These products are widely used in food preparation and are kitchen staples not only in raw forms but compose the main ingredients of baked goods, pastries, pastas, breads and frying oils. Total food prices are showing a year over year increase of 37%. Not everyone at the processing level has passed through the complete input cost increases and the full effect is now taking place. This is will maintain upward pressure on food prices, impacting not only grain but protein (beef, pork, chicken etc.) Statistics Canada reported the June 2011 CPI for food purchased from restaurants jumped by 5.8% as compared to 2.8% for food purchased from stores and a twelve month trend of 4.8% for restaurants versus 3.3% from stores while total CPI came at 3.1%. With an average operation achieving a direct food cost of 35% these recent price hike trends will have a tremendous impact and force extreme measures.
» Direct Labour Cost - The labour expense in an average restaurant operation represents 33% of all expenses. Since many expense lines are fixed and this sector operates on slim margins, the control of labour costs is critical to being competitive and to the survival of an operation. Seven consecutive years of increases to the minimum wage severely damaged the prosperity of the entire industry. The ORHMA along with other industry associations spoke loud and clear on this without much success. Click here for ORHMA’s minimum wage correspondence. The food service sector is employing over 170,000 young-people between the ages of 15 and 24 representing over 45% of food service jobs compared to 15% in the Canadian labour force. Of those employees 40% of those are earning minimum wage and working part-time.
» Rigid Price Elasticity - Foodservice employers cannot absorb the cost of continued increases to the expense lines during these difficult times and at the same time cannot simply pass it along to the customer. Besieged by rising labour, food and energy costs, restaurant operators continually battle with the threat of margin shrinkage. The rise of these expenses exerts upward pressure on food prices and menu-price hikes are inevitable as operators consider the potential fallout of asking customers to bear some of the increased costs.
The challenge in food service operations is how to deal with rising expenses without passing too much of the cost onto the consumer. The food services sector is a very competitive business and price hikes are not easily accepted by the consumer. The success of a restaurant is mostly based on delivering the value message. Once prices are raised the best outcome for an operator is to expect transactions remain flat. Restaurant menu prices in Ontario have only registered a 2.8% price increase limiting gains in profitability.
» Unfairness in Taxation of Food - While food purchased from retail stores is tax exempt, the foodservice industry continues to be charged at 13% HST even though retail stores have the largest share in profit and in growth. While restaurant sales growth is facing challenging times, retail share growth is showing significant growth.
» Unfairness in Purchasing Beverage Alcohol - The licensee industry is the largest buyer of products purchased from LCBO and The Beer Store yet there is absolutely no break in pricing. A few years ago the ORHMA challenged the LCBO’s, 12% gallonage fee calling it illegal. The LCBO removed it and added a 6% mark up fee which has stayed to this day. Today licensees pay the same price as consumers for beverage alcohol being bought from the LCBO and pay more than $10 for a case of beer being purchased from The Beer Store while being restricted to promotional discounts being offered to the public. The government must not look the other way and pay attention to this unfair and uncompetitive practice that, if fixed, can support the turn around of straggling businesses. Moreover, the province of Ontario is losing out to potential investment from the USA and a new trend in domestic investment moving south of the border for the reason of non competitive and non modernized alcohol pricing policies alone.
Beverage Alcohol is a highly regulated product and all too often it seems that the notion of “social responsibility” is overemphasized and used only to benefit government price advantages such as in the HST alcohol product hikes. Let’s be realistic!
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