2015 Canadian Chain Restaurant Industry Review · Now in its sixth year, the Canadian RestauRant investment summit has solidly established itself as the annual business conference

Research Partners

GE CapitalFranchise Finance

2015Canadian ChainRestaurantIndustry Review


2015Canadian ChainRestaurantIndustry Review1 Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Foodservice Industry Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Top-of-Mind: What CEOs Think . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185 Trends Impacting Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .246 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .307 Cost of Doing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .408 Top Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .629 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64

Research Partners

Insightful and Trustworthy Data to Help Grow our Businesses

Welcome to GE Capital’s sixth annual Canadian Chain Restaurant Industry Review . I am pleased to bring you this extensive research report on the state of chain foodservice in the country with the goal of providing insight into key factors affecting our Canadian industry.

The Review is a comprehensive analysis and factual overview of market shares, revenue trends, costs, consumer behaviour and the overall state of chain foodservice in Canada. These findings have implications for job growth, construction activity and other factors that will impact the economic health of Canada for 2015 and for several years to come . GE Capital wishes to thank fsSTRATEGY and The NPD Group for their great work at compiling and analyzing these results .

As our economy keeps on improving, the Review shows that Canadians continue to spend more and more at restaurants, with a year-over-year increase of 2% . In fact, we estimate that the Canadian foodservice industry sales will increase by 4 .0%, or approximately $2 .8 billion, to $74 .1 billion in 2015 .

I find this data very encouraging for the future of our industry. Reading through the Review will undoubtedly give you food for thought . Our market insights will also assist you in building forward-looking plans to help grow your business .

The Canadian chain foodservice industry has gotten stronger in the past years and it’s thanks to your passion and dedication . I wish you all continued success in your endeavours .

Ed KhediguianGE Capital, CanadaFranchise Finance


Preface1

2

GE Capital, Canada Franchise Finance

What we know can help you grow .

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. In the past 12 years, we’ve financed more than 750 restaurant customers with upwards of 1,525 property locations . That’s in excess of $1 .35 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, financing is just the start. 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 operational 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 .


1 | Preface

3

Now in its sixth 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.

RESTAURANTINVEST.CA RESTAURANTINVEST.CA RESTAURANTINVEST.CA RESTAURANTINVEST.CA

TOP NAME INDUSTRY SPEAKERS.SERIOUS NETWORKING.ThANK YOU fOR jOINING ThE DISCUSSION.

*Confirmed Sponsors as of APRIL 7, 2015

PARTNERS & SPONSORS

MAY 5+6, 2015hILTON TORONTO hOTEL

INTERNATIONALDesignlink

L A W Y E R S & T R A D E - M A R K A G E N T S

CCRestReview2015_CRIS_AD_r5.indd 1 2015-04-08 4:56 PM

fsSTRATEGY Inc . (“fsSTRATEGY”) and The NPD Group (“NPD”) are pleased to release this 2015 Canadian Chain Restaurant Review as part of the 2015 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 Restaurants Canada, formerly the Canadian Restaurant and Foodservices Association .

� C-Suite Survey conducted by fsSTRATEGY in January and February, 2015 and sent to over 100 CEOs and CFOs in the Canadian chain foodservice market .

� Detailed data from NPD’s 2020 Vision: The Future of QSR and Full Service Dining: How to Win Customers Back reports .

� Interviews with selected food grower associations, foodservice distributors and landlords .

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

� Secondary research data from other sources such as Statistics Canada, PKF Consulting, TD Economics, the Conference Board of Canada, Human Resources and Skills Development Canada, Canada Ministry of Labour, Ontario Energy Board, International Monetary Fund and RSMeans .

For further information, please contact:

Geoff Wilson or Jeff Dover Robert CarterfsSTRATEGY Inc . The NPD Group (Canada), Inc .gwilson@fsSTRATEGY .com robert .carter@npd .com [email protected] (647) 723-7767(416) 229-2290

Introduction2

5

2 | Introduction

FoodserviceIndustryProfile3.1 Canadian Foodservice Industry Sales3.2 Chain versus Independent Operator Sales 3.3 Provincial Sales Trends3.4 Same Store Sales Growth3.5 C-Suite Expectations for Sales and Traffic

3

6

3.1 Canadian Foodservice Industry Sales

Canadian foodservice industry sales represented approximately 4% of national gross domestic product in 2014 and industry sales are expected to increase by 4 .0% to $74 .1 billion in 2015 . The Canadian foodservice industry is divided into commercial and non-commercial sectors . Commercial foodservice includes full-service restaurants (“FSR”), quick-service restaurants (“QSR”), and drinking places . Chain foodservice sales reside in these three categories .

Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc . and Pannell Kerr Forster1 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 .

Historic Nominal Foodservice Sales by Sector ($millions)

2011 2012 2013 2014 2015 (Forecast)

(Millions) Change (Millions) Change (Millions) Change (Millions) Change (Millions) Change

Quick-Service Restaurants $21,962 .0 3 .5% $23,114 .4 5 .2% $24,137 .9 4 .4% $25,417 .2 5 .3% $26,459 .3 4 .1%

Full-Service Restaurants 21,486 .0 2 .6% 22,545 .2 4 .9% 23,722 .0 5 .2% 24,813 .2 4 .6% 25,780 .9 3 .9%

Contract and Social Caterers 4,213 .5 5 .4% 4,447 .2 5 .5% 4,600 .4 3 .4% 4,904 .0 6 .6% 5,168 .8 5 .4%

Drinking Places 2,362 .4 -4 .3% 2,338 .8 -1 .0% 2,311 .3 -1 .2% 2,329 .8 0 .8% 2,353 .1 1 .0%

Total Commercial $50,024.0 2.9% $52,445.6 4.8% $54,771.6 4.4% $57,464.2 4.9% $59,762.1 4.0%

Accommodation Foodservice $5,235 .0 0 .6% $5,456 .0 4 .2% $5,623 .0 3 .1% $5,890 .0 4 .7% $6,162 .0 4 .6%

Institutional Foodservice1 3,531 .8 2 .1% 3,668 .6 3 .9% 3,898 .5 6 .3% 3,985 .2 2 .2% 4,128 .7 3 .6%

Retail Foodservice2 1,270 .0 -1 .4% 1,227 .1 -3 .4% 1,351 .3 10 .1% 1,425 .6 5 .5% 1,485 .5 4 .2%

Other Foodservice3 2,304 .4 2 .2% 2,362 .0 2 .5% 2,416 .3 2 .3% 2,484 .0 2 .8% 2,558 .5 3 .0%

Total Non-Commercial $12,341.2 1.1% $12,713.7 3.0% $13,289.1 4.5% $13,784.8 3.7% $14,334.7 4.0%

Total Foodservice $62,365.2 2.5% $65,159.3 4.5% $68,060.7 4.5% $71,249.0 4.7% $74,096.8 4.0%

Menu Inflation 2 .9% 2 .5% 2 .3% 2 .1% 2 .4%

Real Growth -0 .4% 2 .0% 2 .2% 2 .6% 1 .6%

7

3 | Foodservice Industry Profile

As shown, commercial foodservice sales increased by 4 .9% in 2014 while non-commercial sales increased by 3.7%. Commercial foodservice sales are projected by Restaurants Canada to increase by 4 .0% to $59 .8 billion in 2015 .

Historical Foodservice Sales Total versus Commercial – 1998 through 2015 (Forecast)

Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc . and PKF Consulting

Total nominal foodservice sales are expected to increase from $39 .0 billion in 1998 to an estimated $74 .1 billion in 2015 . This represents a compound average growth rate of 3 .6% . Commercial sales (which include chain restaurant sales) represent 80 .7% of total foodservice sales, compared to 79 .5% in 1998 .

1998: Commercial Foodservice 79.5% of Total Foodservice2015: Commercial Foodservice 80.7% of Total Foodservice

3133

3536 37 38

4041

4345

47 4749

5052

5557

60

3941

4445

47 4750

5255

5759 59

6162

6568

7174

0

10

20

30

40

50

60

70

80

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-p

2015

-f

Billi

ons

of D

olla

rs

Commercial Foodservice Sales Total Foodservice Salesp = preliminary

f = forecast

8

2015 Canadian Chain Restaurant Industry Review

2015 Forecasted Share of Foodservice Sales by Sector ($millions)

Total Foodservice Commercial Foodservice

Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc . and PKF Consulting

Quick Service Restaurants (“QSRs”) and Full Service Restaurants (“FSRs”) generate relatively similar sales (about $26 billion each annually) and together represent 87 .4% of commercial foodservice sales and 70 .5% of total foodservice sales .

$57,762.1

$6,126.0 $4,128.7

$1,485.5 $2,558.5 $26,459.3

$25,780.9

$5,168.8 $2,353.1

Total Commercial

Accommodation foodserviceInstitutional foodservice

Retail foodservice

Other foodservice

Quick-service restaurants

Full-service restaurants

Contract and social caterers

Drinking places


9

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

100.0

102.3

99.4 100.3 100.3

102.7

105.6

108.7

101.5

97.396.1 95.9

98.1

101.7

104.2104.0 103.5

106.9 107.4

110.8

113.9

118.3

100.9

94.4

98.8

101.2

104.3106.3

111.2

99.0

95.5

90.1

83.9

81.178.9 78.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

2007 2008 2009 2010 2011 2012 2013 2014-p

Real Sales Index 2007 = 100

Growth trends vary by sector. The following graph compares the real sales indices (adjusted for inflation) (2007 real sales = 100) of various commercial foodservice sectors.

Real Sales Index by Industry Segment

Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc .

As shown, FSR real sales returned to pre-recession levels in 2013 and grew by 2014 to a level approximately 4% higher than 2007 . QSR real sales continue to increase and are now 18% greater than in 2007 .

Sales for drinking places continue to decline due largely to a reduction of the number of establishments classifying themselves as drinking places . Many such operations have been reclassified as FSRs.

Canada’s commercial foodservice industry grew by 2,343 units (2 .6%) in 2014 . The number of FSRs grew by 3 .8% in 2014 while real sales per unit dropped by 1 .3% resulting in real sales growth of 2 .5% . In contrast, the number of QSRs grew by 1 .7% and sales per unit grew by 2 .1%, resulting in sales growth of 3 .8% .

10


3.2 Chain versus Independent Operator Sales

The chart below graphically depicts the share of chain and independent restaurant expenditures in various regions of Canada for 2014 .

Chain versus Independent Restaurant Expenditures – 2014

Source: The NPD Group/CREST®

As shown, 63 .2% of the expenditure in restaurants in Canada is in branded local, regional, national and international chains . Quebec has the greatest percentage of independent restaurant expenditures with 44.6% of all restaurant sales in restaurants unaffiliated with chains (down from 48 .4% in 2013) .

69.9%55.4%

66.1% 63.2% 63.2%

30.1%44.6%

33.9% 36.8% 36.8%

0%

20%

40%

60%

80%

100%

Atlantic Quebec Ontario West Canada

Chain Restaurants Independent Restaurants

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3.3 Provincial Sales Trends

Canadian Commercial Foodservice Sales by Province – 2008 through 2015 – (Forecast)

Cana

da

New

foun

dlan

d an

d La

brad

or

Prin

ce E

dwar

d Is

land

Nov

a Sc

otia

New

Br

unsw

ick

Que

bec

Ont

ario

Man

itoba

Sask

atch

ewan

Albe

rta

Briti

sh

Colu

mbi

a

Revenues (thousands)

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 $50,023,975 $679,708 $187,481 $1,275,087 $962,206 $9,906,542 $19,159,000 $1,440,093 $1,506,167 $7,082,169 $7,662,998

2012 $52,445,642 $736,529 $192,728 $1,323,794 $973,567 $10,326,476 $20,104,382 $1,523,914 $1,620,784 $7,662,228 $7,819,284

2013 $54,771,603 $806,715 $199,626 $1,327,662 $972,541 $10,525,899 $20,962,919 $1,600,487 $1,715,724 $8,218,707 $8,272,371

2014-p $57,464,241 $822,849 $203,219 $1,371,475 $1,000,745 $10,504,847 $22,199,731 $1,686,913 $1,806,657 $8,810,454 $8,892,799

2015-f $59,762,178 $849,180 $209,316 $1,437,306 $1,023,762 $10,851,507 $23,132,120 $1,761,137 $1,884,344 $9,250,977 $9,239,618

Percent Change vs Previous Year

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 2 .9% 5 .5% 1 .8% 1 .8% -0 .7% 2 .0% 4 .2% 5 .1% 5 .4% 6 .3% -2 .3%

2012 4 .8% 8 .4% 2 .8% 3 .8% 1 .2% 4 .2% 4 .9% 5 .8% 7 .6% 8 .2% 2 .0%

2013 4 .4% 9 .5% 3 .6% 0 .3% -0 .1% 1 .9% 4 .3% 5 .0% 5 .9% 7 .3% 5 .8%

2014-p 4 .9% 2 .0% 1 .8% 3 .3% 2 .9% -0 .2% 5 .9% 5 .4% 5 .3% 7 .2% 7 .5%

2015-f 4 .0% 3 .2% 3 .0% 4 .8% 2 .3% 3 .3% 4 .2% 4 .4% 4 .3% 5 .0% 3 .9%

Source: Restaurants Canada, Statistics Canada, fsSTRATEGY Inc .

As shown, with 5.0% growth expected in 2015 Alberta is projected to be the fastest growing provincial market, followed by Nova Scotia (forecasted to grow by 4 .8%) . Ontario accounts for 38 .7% of total commercial foodservice sales .

12


As shown, Ontario and Quebec have the greatest commercial foodservice sales, driven primarily by larger populations . Commercial foodservice sales per capita in Saskatchewan, Ontario and Newfoundland and Labrador are similar to the national average . Alberta continues to have the greatest commercial foodservice sales per capita ($2,137) followed by British Columbia ($1,920) . Quebec has the lowest per capita commercial foodservice sales ($1,278) .

Source: Restaurants Canada, fsSTRATEGY Inc . and Statistics Canada

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

2014 Commercial Foodservice Sales and Commercial Foodservice per capita by Province

Sale

s in

Mill

ions

of D

olla

rs

822.8203.2

1,371.5 1,000.7

10,504.8

22,199.7

1,686.9 1,806.7

8,810.5 8,892.8

$1,561.45

$1,389.22

$1,454.89

$1,327.40

$1,278.79

$1,622.94

$1,315.80

$1,605.33

$2,137.58

$1,920.15

0

500

1,000

1,500

2,000

2,500

0

5,000

10,000

15,000

20,000

25,000

NL PE NS NB QC ON MB SK AB BC

National Commercial Foodservice Sales Per Capita

Per C

apita

Sal

es in

Dol

lars

2014 Commercial Foodservice Sales 2013 Commercial Foodservice Sales Per Capita

National Average Per Capita Spend

13


Same Store Sales Growth 2007 through 2014, Selected Publicly-Traded Restaurant Chains

3.1%

1.8%

-2.5%

1.2%

2.5%

1.3%

0.0%

1.5%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2007 2008 2009 2010 2011 2012 2013 2014

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

As the above tables demonstrate, SSSG declined significantly through the economic recession. A gradual recovery ensued in 2010 and 2011 . SSSG declined in 2012 and again in 2013 . In 2014, SSSG recovered for the chains in the sample; however, the range of SSSG performance varied in 2014 far more than it did in 2013 .

Same Store Sales Growth Percentage2007 2008 2009 2010 2011 2012 2013 2014

Minimum -3 .9% -1 .2% -6 .5% -1 .7% -0 .1% -1 .2% -3 .1% -5 .1%Average 3 .1% 1 .8% -2 .5% 1 .2% 2 .5% 1 .3% 0 .0% 1 .5%Maximum 5 .9% 7 .3% 2 .9% 4 .9% 4 .9% 3 .3% 2 .1% 6 .3%

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

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

Average Same Store Sales Growth 2007 through 2014, Selected Publicly-Traded Restaurant Chains

3.4 Same Store Sales Growth

Same Store Sales Growth (“SSSG”) is a measure of 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 2014 for the largest Canadian publicly-traded restaurant chains . Data from 2013 has been taken from either annual reports or Q3 reports as available by chain .

14


14

Same Store Sales Growth 2007 through 2014, Selected Publicly-Traded Restaurant Chains

15


16


Source: fsSTRATEGY Inc . C-Suite Survey

3.5 C-Suite Expectations for Sales and Traffic

Once again, fsSTRATEGY has completed a survey of Canadian foodservice executives to gain their insights on the state of the industry for the Canadian Restaurant Investment Summit and to capture opinions and industry forecasts from Canada’s industry leaders . Twenty-four or 22% of the brands that were invited to participate responded . Responses from the C-Suite survey have been included throughout this book .Respondents to the C-Suite Survey were asked how they expected industry sales and traffic to change in 2015 .

In 2015 Compared to 2014, Sales are Expected to: Decline more than 10% 0%Decline 7 .6% to 10% 0%Decline 5 .1% to 7 .5% 0%Decline 2 .6% to 5% 4%Decline 0 .1% to 2 .5% 8%Remain Flat 16%Increase 0 .1% to 2 .5% 52%Increase 2 .6% to 5% 20%Increase 5 .1% to 7 .5% 0%Increase 7 .6% to 10% 0%Increase more than 10% 0%

In 2015 Compared to 2014, Traffic is Expected to: Decline more than 10% 0%Decline 7 .6% to 10% 0%Decline 5 .1% to 7 .5% 0%Decline 2 .6% to 5% 0%Decline 0 .1% to 2 .5% 22%Remain Flat 35%Increase 0 .1% to 2 .5% 26%Increase 2 .6% to 5% 13%Increase 5 .1% to 7 .5% 4%Increase 7 .6% to 10% 0%Increase more than 10% 0%

Most respondents (52%) expect industry sales to increase by up to 2 .5% in 2015 with 20% expecting growth of between 2 .6% and 5% . These expectations represent increased optimism from last year’s study when 50% of respondents expected sales to increase by 0 .1% to 2 .5% and 14% expecting revenues to increase by 2.6% to 5% in 2014. Thirty-five percent of respondents expect industry traffic to remain flat in 2015 and 26% expect traffic to grow by up to 2.5%. Respondents to the 2015 survey were less optimistic than 2014 respondents with respect to industry traffic. Once again this year, the survey strongly suggests that revenue increases will depend on operators’ ability to increase average cheques .

17


Top-of-Mind:What CEOsThink4.1 Opportunities4.2 Challenges4.3 Biggest Changes4.4 Sustainability

4

18


4.1 OpportunitiesC-Suite Survey participants were asked to list the three greatest opportunities in the foodservice industry for 2015 . Responses were grouped into common categories .

Greatest Opportunities for the Foodservice Industry, 2015

Opportunity 2013 2014 2015 Change Menu - innovation, more choice, healthy options, improved ingredient quality, flavour 27% 27% 27% à

Concept - fast casual, premium, non-traditional, home meal replacement, retail grocery, differentiation, take-out, delivery 13% 17% 17% à

Competition - consolidation, leveraging competitor failures 15% 7% 12% á

Market Growth - sales, growth, increased traffic 6% 0% 8% á

Marketing - building loyalty/repeat business, social media 12% 7% 7% à

Economic Stability - oil/gas prices, changing Canadian dollar 2% 0% 7% á

Target market - millennials, day part growth, small markets 0% 7% 5% â

Beverage - bar and beverage programs, craft distilled spirits, happy hour 0% 10% 3% â

Location - suburban, strong regional economies, international 4% 10% 3% â

Financing - availability, low interest rates 2% 0% 3% á

Sustainability 0% 0% 3% á

Service consistency and quality 6% 5% 2% â

Technology 2% 2% 2% à

Cost Efficiencies 6% 0% 2% á

Catering and special events 0% 5% 0% â

Procurement - bulk purchasing initiatives 0% 2% 0% â

Facilities - smaller footprints, construction 6% 0% 0% à

Source: fsSTRATEGY Inc . 2015 C-Suite Survey

Consistent with 2014, menu innovation and refinement has remained as the single largest opportunity and concept refinement has remained as the second largest. Taking advantage of industry consolidation and competitor failures as well as driving market growth are perceived as more significant opportunities in 2015 than in 2014. Not surprisingly, the economy is of more concern to industry executives than in previous years in light of falling oil and gas prices and the decline in the value of the Canadian dollar . Also, marketing initiatives focused on building loyalty and repeat business, including social media, remain important to C-Suite executives . Opportunities for the industry according to industry leaders appear to be more strategic than tactical in 2015 .

19

4 | Top-of-Mind What CEOs Think

4.2 ChallengesSurvey participants were asked to list the three greatest challenges in the foodservice industry for 2015 . Responses were grouped into common categories .

Greatest Challenges for the Foodservice Industry, 2015

Challenge 2013 2014 2015 Change2014/2015

Operating costs 33% 50% 29% â

Cost of goods sold 9% 17% 17% à

Labour costs, productivity 12% 26% 17% â

Rent 3% 5% 2% â

General 8% 2% 2% à

Economy - US dollar, availability of financing 11% 9% 15% á

Competition - more dense, growing 9% 7% 7% à

Labour Issues - availability, quality 3% 0% 7% á

Human resources - retention and availability 0% 3% 5% á

Sales 2% 7% 4% â

Sites - finding sites 0% 17% 2% â

Government Policy 3% 0% 2% á

Availability of franchisees 0% 3% 0% â

Service - improving quality 1% 2% 0% â

Nutritional information requirements 0% 2% 0% â

Competition from the United States 2% 0% 0% à

Food Safety 2% 0% 0% à


Similar to 2014, operating costs continue to be the single greatest challenge for the survey participants . In 2015, cost of goods sold was mentioned by the same number of respondents as in 2014 . The rising cost of proteins was cited frequently by respondents . In 2015, labour costs and productivity were mentioned as challenges by fewer respondents than in 2014 .

20


4.3 Biggest Changes

4 .3 .1 Short-Term Changes

C-Suite Survey participants were asked what they thought would be the biggest short-term changes in the foodservice industry .

In 2014, participants suggested short-term changes would include intensifying competition, industry consolidation, improving consumer confidence, higher value expectations, independent restaurants growth of market share, labour shortages, tightened regulation and rising real estate costs .

This year, participants continued the themes of intensifying competition and industry consolidation . Competition is expected to continue to grow within Canada as Canadian chains battle for market share as well as from US chains entering Canada, in particular from fast casual brands . Participants believe even more mergers, acquisitions and closures will occur in the chain restaurant industry in Canada . A shakeout in the gourmet burger sector was predicted by one participant . Economic uncertainty, the potential for a decline in consumer spending, and price pressure and greater frequency of discounting by operators to increase traffic is expected. Continuing challenges with labour and greater demand for healthy options were also highlighted by participants .

4 .3 .2 Long-Term Changes

C-Suite Survey participants were asked what they thought would be the biggest long-term changes in the foodservice industry . In 2014, participants suggested long-term changes would include contraction and redefinition, concept changes, demographic changes, growing population ethnicity, labour shortages and rising labour costs .This year, participants reiterated their belief that the industry can expect more consolidation over the long-term, suggesting that there are too many chains offering the same products and experiences. Operators foresaw the closures of weaker chains as well as increased competition from global competitors . Participants also continue to expect more concept changes and the expansion of fast casual dining . One participant suggested the industry should expect continuing increases in consumer demand for healthier dining options . Rising commodity costs and changing demographics are expected to lead to lower spending per capita in restaurants .Finally, government intervention on menus and food traceability are also expected to be long-term issues for our industry .

21


22


4.4 Sustainability

fsSTRATEGY asked C-Suite Survey participants to provide their views on sustainable foodservice .

Participants were asked to rate the current level of importance that sustainability has for their chain .

Importance of Environmental SustainabilityVery Important 13%Important 42%Somewhat Important 13%Neither Important nor Unimportant 33%Somewhat Unimportant 0%Unimportant 0%Highly Unimportant 0%Source: fsSTRATEGY Inc . 2015 C-Suite Survey

Fifty-five percent of respondents indicated that environmental sustainability was important or very important to their chain . A further 33% indicated environmental sustainability was neither important nor unimportant . Comparison to responses from 2014 indicates the level of importance of sustainability is gradually increasing in the foodservice industry . In 2014, 60% of respondents indicated that sustainability had some level of importance to their chains . In 2015, sustainability increased to 68% .

Respondents that ranked environmental sustainability important or very important were asked to indicate which of the following contributed to that level of importance .

Sustainability ContributionsSustainable facilities design 69%Sustainable operating practices 62%Use of local food 54%Certified sustainable food/suppliers 54%Use of hormone and antibiotic free proteins 46%Use of organic food 23%


Of those that ranked sustainability important or very important, 69% of the respondents indicated that sustainable foodservice facilities design contributed to their rating, 62% indicated that sustainable operating practices (e.g., recycling, composting, refillable consumer beverage and/or food containers) contributed to their rating and 54% indicated the use of local food and hormone and antibiotic free proteins contributed to their rating . The use of organic food ranked much lower .

23


TrendsImpactingRestaurants5.1 Key Consumer Profiles5.2 Key Foodservice Industry Trends5.3 Looking Ahead

5

24


5.1 Key Consumer Profiles

5.1.1 Commercial Restaurant Traffic by Age Group

The overall commercial foodservice market in Canada continued to face challenges during 2014 . A key issue facing the industry is the declining use of restaurants by Canadians on a daily basis . Today, 45% of Canadians go out to a restaurant daily, which remained at the same level of 2013 . As a result, customer traffic through the 72,000+ restaurant doors in Canada declined slightly. Clearly, restaurants struggled to increase customer counts . Canadians remained concerned about the stalled economy and future job creation, resulting in a negative impact on customers’ decisions to eat out of home more frequently .

A key strategy for many restaurants across Canada is to focus on attracting Millennials, 18-34 year olds . As shown below, Millennials’ use of restaurants is generally higher than other age groups . As well, Millennials were the only age group to increase the number of visits per capita to restaurants in 2014 . The average Millennial now eats out of home 235 times a year .

5.1.2 Commercial Restaurant Traffic by Household Income

As economic concerns continue to weigh on the minds of Canadians, all income groups declined in their use of restaurants in 2014 . As shown in the following table, the sharpest decline in restaurant use was by households with incomes between $55,000 and over $100K, representing a decline of 13 to 14 visits per year in 2014 compared to 2013 .



190157

229201

165183146

235185 164

TotalConsumers

Under 18 18-34 35-54 55+

YE Nov'13YE Nov'14

16%% Share of Traffic 30% 32% 22%

190 203 205 214 226 225 235183 202 203 206 213 222 222

TotalConsumers Under $25k $25k-$45k $45k-$55k $55k-$70k $70k-$100k $100k +

12%% Share of Traffic 19% 10% 14% 22% 23%

YE Nov'13YE Nov'14

Commercial Restaurants – Traffic per Capita – 2014 and 2013

Commercial Restaurants – Traffic per Capita by Household Income (Consumers 13 Years of Age and Older)

25

5 .1 .3 Percentage Restaurant Sales Growth Quarter over Quarter

Total Restaurants – Percentage Growth in Sales Year-Over-Year

5.2 Key Foodservice Industry Trends

With a compound annual traffic growth rate of just over 1% since 2008 and no traffic growth in 2014, the Canadian foodservice industry has not yet fully recovered from the economic downturn which started in 2008 . As Canadians eat out less, the battle for growth across all restaurant market segments continues. The emphasis for restaurant operators in this flat market must remain on growing customer traffic by stealing customers from their competitors.

How Canadians use restaurants is continuing to shift . Dayparts such as the morning meal continue to be popular while supper is less popular compared to five years ago. Quicker meal occasions from QSR and Home Meal Replacement (HMR) are stealing customer traffic from FSRs.

The QSR segment, with 65% share of the 6 .6 billion annual customer visits to restaurants, continued to outperform the overall market. Customer traffic at QSRs outpaced all other segments with gains of over 1% . Spending at QSRs also outpaced the overall market . Sales growth at QSRs increased by over 4%, primarily driven by average eater cheque gains, which resulted from increased spending at the morning meal . A strong focus on menu and beverage innovation from the leading QSR chains was effective in driving customer traffic and increasing spending.

Within the FSR segment, market conditions continued to be difficult. Customer traffic declined by 1% while sales growth was flat. The main challenge was attracting customers out for supper. The dinner meal occasion accounted for 47% of all FSR traffic; the volume of customer traffic at dinner declined by 4% in this period, while evening snack (after dinner, mainly bar occasions) declined by 7% . The only bright spot in the FSR segment was lunch. Lunch accounted for 31% of customer traffic and the volume of customers visiting this daypart increased by 3% in the past year .

4%5% 5%

4% 3%1% 2%

4%

2%

0%

3% 2%4%

SON'11 DJF'12 MAM'12 JJA'12 SON'12 DJF'13 MAM'13 JJA'13 SON'13 DJF'14 MAM'14 JJA'14 SON'14

Source: The NPD Group /CREST®

From the perspective of overall spending at restaurants, growth has remained positive . On average, quarter over quarter spending growth has been on the plus side for the past three years . Consumer spending at restaurants in the September-to-November quarter rose by 4%, which was the greatest growth rate noted over the past four quarters . Sustained spending growth is supported by increases in menu inflation rate, which is roughly 2%, as well as slight gains through consumers selecting higher priced menu items and therefore increasing average eater cheques .

26


5 | Trends Impacting Restaurants



DollarsTraffic

QSR

Family/Midscale

Casual Dining

Fine Dining

Prepared Food from Retail

PCYA = Percent Change vs. Year Ago

74

22

20

47

111

10

13

65

-3%

1%

0%0%

-3%

PCYAPCYA

4%

4%

-1%

1%

0%

GrowthRate

2014 2009Traffic Volume (Millions)

Total Market QSR FSR HMR Convenience

1% 1% -1% 1% -4%

6.4 6.6

4.34.1

1.62 1.58

0.47 0.500.3 0.2

Home Meal Replacement (“HMR”) has been one of the better performing restaurant segments of the Canadian foodservice industry over the past five years. HMR is competing head to head with QSR, a top-of-mind destination for 40% of HMR buyers. While customer traffic at HMR outlets posted an increase of 1%, sales growth increased by 8%, primarily driven by average eater cheque gains . Grocery Stores are excelling at maximizing consumer spending per visit on main meals (lunch and supper), which represents half of total HMR traffic.

Convenience undoubtedly plays a key role in Canadians’ eating habits . QSR operators and grocery stores are well-positioned to cater to this customer need. Other traffic drivers that are important to influencing customer preferences for restaurant dining include treating oneself and food quality/variety . Many QSR operators have been placing an emphasis on indulgent/craveable menu items to attract visits in the latest year .

27

Restaurant Market Segments – Share of Traffic and Dollar Sales

All Segments Remain Flat to Declining in the Past Five Years

2012 Average After-Tax Income (000s), by Economic Family Type

Economic families, two persons or

more

Elderly families (2)

Non-elderly families (3)

Married couples

Two-parent families with

children

Married couples with

other relatives

Lone-parent families

Unattached individuals

83

64

8779

96

118

47

32

Source: Statistics Canada

28

Population Projection, by Visible Minority Group

Chinese

South Asian

Black

Filipino

Latin American

Southeast Asian

Arab

West Asian

Korean

Japanese

Other visible minorities2006 2031


5.3 Looking Ahead

5 .3 .1 Population trends

Canada’s population is expected to become increasingly diverse . Almost a third of the population is forecasted to be part of a visible minority by 2031 . The youngest generations in particular will drive growth for the Canadian foodservice industry for years to come . Young and multicultural Asians in particular are making up a growing share of the youngest generations .

29

5 | Trends Impacting Restaurants

5 .3 .2 Excerpts from “2020 Vision: The Future of QSR” – NPD’s seven-year forecast for the Canadian QSR market and Full Service Dining: How to Win Customers Back

Published in 2014, the 2020 Vision: The Future of QSR report forecasts consumer information on food & beverage categories and visit situations and how QSR in Canada will evolve between now and the year 2020 . The Canadian QSR segment is worth $24 billion, with a total of 36,420 restaurant units across Canada . However, the segment is expected to grow at a modest rate of less than 1% per year to the year 2020 . This means growth will be derived from stealing customer visits from competition . There will be winners and losers; operators that remain relevant by giving consumers what they want can win the battle for market share . This requires staying on top of restaurant trends and understanding what is resonating most positively with consumers . Areas of growth for the QSR market through 2020 will come from off-premise occasions, mainly carry out and drive through, while lunch is expected to be the most challenged daypart .

In 2014, Canadians spent $23 billion at 26,988 FSR units in Canada . With the emergence of Fast Casual, along with upgrades in food and restaurant ambiance among leading QSR operators, the gap between QSR and FSR is becoming smaller . It is important for FSR operators to set themselves apart and determine which situational dining types to focus on . Hanging out with friends, date and special occasions and family meals with kids are examples of situational dining types that receive more traffic at FSR . With the FSR segment not seeing any growth, operators must understand what customers want from their FSR experience and identify drivers to improve revisit intent . According to NPD’s Full Service Dining: How to Win Customers Back report, food experience is a key differentiator on which FSR operators need to focus to sustain visits in this segment . Great tasting food should be a high priority for any FSR operator and beverages at FSR present an opportunity for operators to drive higher satisfaction . Alternatively, free Wi-Fi and attractive servers are low priority attributes in driving traffic for FSR operators.

Through NPD’s CREST consumer panel, which tracks the ongoing satisfaction levels of Canadian restaurant consumers, various customer satisfaction attributes surrounding service, food, beverages, price/value and environment are scored based on customers’ experiences . Looking at Top 2 Box score (those that rated having an Excellent/Very Good experience), QSR has made significant inroads in increasing satisfaction for value for money over the last three years, reaching 56% . Conversely, value for money at FSR is 61%, which has remained relatively flat year over year since 2008, while value for money at Fast Casual is 52%, steadily declining since 2011 .

Building satisfying dining experiences should be a key focus for all operators, particularly for FSR restaurants to win customers back . Happy customers are 3 .5 times more likely to revisit a restaurant than unhappy customers .

Finance 6.1 The Economy6.2 Global Financial Markets6.3 Financial Markets in Canada6.4 Total Financeable Debt Market Size and Loan Volumes

6

30


6.1 The Economy

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

The table illustrates a relationship between real foodservice sales, real GDP and real disposable income . A moderate correlation exists between changes in real GDP and real foodservice sales and between real disposable income and real foodservice sales . Comparing 1991 and 2009 suggests that real disposable income could have a shielding effect on foodservice sales during times of recession. In 1991, both GDP and disposable income declined simultaneously, and foodservice sales fell by 15% . Despite a greater decrease than GDP in 2009 (compared to 1991), real disposable income still increased slightly and the decrease in foodservice sales was less than 5% .

Total Foodservice Real Growth versus Real Disposable Income Growth and Real GDP Growth

Source: Statistics Canada, Restaurants Canada and TD Economics

-

-

-

-

-20.0%

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Real Foodservice Sales-Total Real Disposable Income Real GDP

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31

6 | Finance

6.2 Global Financial Markets

For 2015, the views on the global economy outlook vary . On one hand, the US economy’s recovery is entrenched, business investment is increasing, the labour market is improving and US dollar continues to appreciate . On the other hand, the bulk of the Eurozone is lost in stagnation with declining unemployment, a weakening Euro and increasing fiscal pressures, particularly in Italy and France. Dramatic shifts in currencies and the price of oil are creating concerns about global growth . Volatility spiked in mid-October 2014 to the highest levels seen in three years .

The US dollar has recorded important gains against the euro, the yen, the Canadian dollar and a number of other currencies . GE Capital believes that the strong US dollar cycle has another two to three years to go. Weak global growth, low inflation dynamics, improved US competitiveness, the energy boom and lower production costs are all expected to boost the US dollar further .

The growing importance of liquidity of financial markets will continue to drive swings in asset and commodity prices . In 2014, commodities underperformed with the large drop in oil price that has already negatively impacted growth in some countries . Although the oil price outlook is arguably the most complicated to decipher, oil prices are likely to stay lower for some time .

Monetary policy responses diverged in developed and emerging markets in 2014 . The US Federal Reserve ended quantitative easing (QE) in October 2014 and is expected to begin hiking rates sometime in the second half of the year . In September 2014, the European Central Bank (ECB) cut its base rate, announced and asset-purchases program and is gearing up its monetary support to purchase government bonds in 2015 .

The global equities market continues to recover; 2014 was another year of above-average returns for the US stock market. The best performers in the last 12 months were US and Japan. Despite the flat growth of the Japanese economy, the pro-spending government policy — which also calls for major reforms to Japan’s highly regulated economy — boosted stock prices in 2014 but also pushed the yen down . Emerging markets continue to lose ground especially Brazil . For 2015, the positive view toward the US equity market will increase investors’ confidence but we expect an increase in price volatility. The following chart shows the current trends of the main stock markets by region .

32


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All Commodities Food Industrial Materials Crude Oil

Commodity Prices, IMF IndicesJanuary 2005 = 100

International Stock Market Trends

North AmericaLatin AmericaEuropeAsia Pacific

Dow Jones US

MexBol Mexico

S&P US

FTSEUK

DAX Germany

NIKKEIJapan

AX 20 Australia

Hang Seng China

BOVESPA Brazil

CAC 40 France

IBEXSpain

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l-14

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Inde

x ( J

an 2

011

= 10

0)

MIBItaly

Source: GE Market Intelligence Network

In the commodities market, prices fell by 12% in January and 36% year over year, mainly as a result of a sharp decline in oil prices . Non-fuel prices fell 3 .2%, with declines in both metals and agriculture, partly reflecting appreciation of the US dollar. Many commodity markets are in surplus, particularly in industrial sectors, and lower prices have led to reductions in capital expenditures which are expected to result in lower production .

Commodity Prices (International Monetary Fund Index)

Source: International Monetary Fund

33

6 | Finance

Commodities Percentage Change Year-Over-Year

Source: GE Capital

Current low oil prices is the result of expanding tight oil supply and the resumption of Libyan exports at a time of growing concerns about global oil demand . But the sharp and rapid price movement surprised most observers, especially given the high level of geopolitical tensions and the rising dollar appreciation . The Energy Information Administration (“EIA”) expects Brent crude oil price to average $57 .56 per barrel in 2015 and $75 per barrel in 2016 .

Commodities percentage change year over year-60%

-40%

-20%

0%

20%

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80%

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01Ju

l-01

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Crude Oil Prices (Price per Barrel) Since 2000

Source: GE Capital & EIA

$US Dollars

Brent Crude Oil Price Per Barrel

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34


6.3 Financial Markets in Canada

Analysis

The strong US economy will continue to benefit Canada’s near-term economic outlook and the stability of its financial markets. Canadian exports have surged in recent months, households continue to spend at a steady rate, the unemployment rate is decreasing and business confidence is up. However, in much of the rest of the world, the pace of the recovery is disappointing and downside risks are substantial .

The Eurozone is now expected to post only lacklustre growth, fiscal pressures will continue and significant concerns of deflation exist. The Russia-Ukraine crisis has eroded business confidence across much of Northern and Eastern Europe at a time when Europe’s increasing weakness weighs on the global recovery . The fall in the oil prices also aggravated Russia’s economic outlook, which has already been suffering from geopolitical tensions, international sanctions and the consequent collapse of domestic business and consumer confidence. But the weakness has not been limited to Europe . Japan, the world’s third-leading economic power, is struggling to regain its footing following a substantial increase in the national sales tax implemented by Prime Minister Shinzō Abe in April.

Low oil prices are weakening investments in Canada, especially in industries and provinces dependent on oil revenues. Lower investments and corporate profits will lead to poor employment growth but lower gasoline prices will support a positive increase in household disposable income .

The Bank of Canada unexpectedly cut the interest rate by 25 points in mid-January as a result of the negative impact of lower oil prices on inflation. The decline in energy prices will continue pressuring the inflation rate to run at over 2.0%. GE Capital expects that rates would remain the same until the second half of 2016 .

The drop in oil prices and the cut in Canadian interest rates have weakened the Canadian dollar considerably . While the Bank of Canada cut the interest rate in January, the Federal Reserve is likely to raise rates in late 2015 . The increase in US rates will likely limit the degree of Canadian dollar depreciation to about 3% per annum in 2015 and 2016, resulting in year-end values of 85 US cents and 82 US cents respectively .

Forecast

Despite the slow growth of the Canadian economy early in the year in 2014, GDP recovered in the second quarter and continued to grow at an above-potential rate in the third and fourth quarter . Growth of 2.5% at the end of 2014 is expected as net exports provided a significant lift where non-energy commodities exports made large contributions including transportation equipment and industrial machinery .

35

6 | Finance

In 2015, the exports of non-energy commodities will continue to grow supported by a weak Canadian dollar, solid demand south of the border and lower gas prices at the pumps . However, global oil supply will outstrip demand by a wide margin which will sustain low oil prices over the forecast horizon . As a consequence, business investment will remain weak, led by a sharp contraction in construction and non-residential structures .

Despite the decrease in unemployment rate to 6 .6% from 7 .0% in 2014, wage growth did not catch up with the general improvement in the labour market . The industrial composite average weekly wage grew at an average annual rate of 2% which was the same as the inflation rate. In 2015, we expect labour market conditions will continue to improve, putting upward pressure on wages and providing consumers with means to spend .

GE Capital expects modest 2% growth in Canada GDP for 2015 based on low oil prices, stable consumer spending and a weak Canadian dollar that will boost Canadian exports . The US GDP growth in 2015 is expected to be 2 .8% supported by increased business investment, falling unemployment, rising consumer sentiment and declining gas prices .

36


Canada—GDP Growth

Source: GE Capital

In January 2015, all government bonds yields on 10-year treasuries decreased . The US 10 –year yield decreased 25 points from September 2014 as a response to the potential rise in the short-term rate by the Federal Reserve . Economies around the globe hold more than $7-trillion in debt from the euro zone, Switzerland and Japan that carries a negative yield putting persistent downward pressure on government borrowing costs .The factors influencing policy interest rates in 2015 for G5 countries will be:

� easing of monetary policy by central banks in Europe to encourage investors; � potential increase in inflation in the US; � policy clarity; and � oil prices .

Canada: GDP Growth (%YOY) -6.0%

-4.0%

-2.0%

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6.0%

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37

6 | Finance

6.4 Total Financeable Debt Market Size and Loan Volumes

The following charts summarize total financial debt in the Canadian restaurant industry by transaction type and segment type as prepared by GE Capital. GE Capital estimates assume a total financeable debt of $5.6 billion. Financeable debt is used for refinancing/renovations, acquisitions and new builds.

Total Financeable Debt by Transaction Type ($millions)

Source: GE Capital

$5,605.9

$2,007.7 $1,055.9

$600.9$568.2

$565.9$289.6

$276.5 $109.4 $67.4 $64.3

Snack BroadMenuQSR

Casual Family Premium Pizza Deli Chicken FastCasual

AsianTotalMarket

G5 Average Policy Interest Rates

Source: GE Capital

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

0%

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38


Respondents to the C-Suite Survey were asked if their companies transacted any sales or acquisitions of businesses in 2014 and if so what the multiples on those transactions (X times EBITDA) were .

Nature and Extent of Sale and Acquisition Transactions by C-Suite Survey Participants

Total Financeable Debt by Transaction Type ($millions)

Source: GE Capital

$5,605.9

$3,308.8

$1,636.4

$660.7

Total Market Renovations Acquisiton New Build

Percentage of Respondents Conducting Transactions

2012 2013 2014Yes 25% 16% 29%No 75% 84% 71%

Transaction Multiples (Number of times EBITDA)2012 2013 2014

Minimum 1 .5 3 .5 3 .0Maximum 5 .0 4 .5 8 .0Average 3 .6 4 .0 5 .1

Source: fsSTRATEGY Inc . C-Suite Survey

As shown, 29% of C-Suite Survey participants conducted sale or acquisition transactions in 2014 . Of companies that conducted sales or acquisitions in 2014, the average transaction multiple was 5 .1 times EBITDA . Transaction multiples appear to have grown over the past two years, perhaps driven by the pace of consolidation and restructuring of the industry referred to by participants in their identification of the greatest changes they have expected in the past two years.

39

6 | Finance

Cost ofDoing Business 7.1 Cost of Sales7.2 Labour Costs7.3 Rental and Occupancy Costs7.4 Other Operating Costs 7.5 CAPEX

7

40


7.1 Cost of Sales

Restaurant Canada’s 2014 Operations Report indicates that cost of goods sold represented 35 .6% of foodservice revenues in 2012 (the most recent year for which data is available) .

Historical Average Cost of Goods Sold as a Percentage of Revenues

Cost of goods sold as a percentage of revenues dropped to near 2008 levels, indicating that foodservice operators were able to increase menu prices to absorb increased input costs . Cost of goods sold as a percentage of revenue has been relatively constant over the past several years .

35.4%

35.7%

35.5%

35.8%

36.0% 36.0%

35.6%

34.0%

34.5%

35.0%

35.5%

36.0%

36.5%

37.0%

2006 2007 2008 2009 2010 2011 2012

Cost of Sales

Perc

enta

ge o

f Sal

es

Source: Restaurants Canada “2014 Operations Report”

41

7 | Cost of Doing Business

The following chart tracks consumer price indices for various core ingredients classifications.

Consumer Price Indices

Meats; vegetables and vegetable preparations; and fish, seafood and other marine products have increased in price at a greater rate than general inflation. Meat and fish, seafood and other marine products experienced the greatest price increases, both rising by 8% in 2014 . Vegetables and vegetable preparation prices grew by 4 .3% . Prices for alcoholic beverages purchased from stores; vegetables and vegetable preparations; and fish, seafood and other marine products have historically increased at a rate below general inflation.

The following chart compares menu price inflation (represented by the consumer price index for food purchased in restaurants) to producer price indices for: meat, fish and dairy; beverages; and fruit, vegetables and feed .

80

90

100

110

120

130

140

150

160

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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 Index2002 = 100

108.1108.2

112.0 114.6118.4 119.1

125.4

132.0

134.8

145.6

99.9 98.5100.8

101.3

108.6 108.7 109.0111.8

114.3

123.4

112.2 116.5120.4

125.0

129.1 130.3133.6 134.8 134.3 134.0

109.8 114.1117.6

135.2137.9 138.8

146.0

150.4152.2 151.4

90.2

95.092.0

100.3

110.2 109.3

117.1113.3

117.4

122.5

106.6 106.9109.2 109.8

111.7 111.2110.6 111.8 113.3

115.2

107.7109.5 111.9

115.7114.4

116.5119.9

121.7 122.8125.2


42


Menu Inflation versus Producer Price Indices

As shown, prices for food purchased from restaurants have increased consistently since 2005 . While industrial product prices for meat, fruit, vegetables and feed have been consistently greater than food purchased from restaurants, the price for meat has increased by 25 .5% increase since 2010 with more than half the increase occurring in 2014 .

The following chart compares menu inflation (represented by the consumer price indices for food from FSR, food from QSR and served alcohol) to general inflation (represented by the consumer price index for all items) .


PPI= Producer Price Index2002 = 100

97 96.1

100.2 99.9 100.5 100.0

103.8

107.1

111.0

125.5

85.887.4 91.2

98.699.7

108.8

112.3 112.2111.0

89.390.7

92.9

95.4 98.6

100.0101.9

104.4 104.5 104.9

80

85

90

95

100

105

110

115

120

125

130

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

IPPI - Meat IPPI - Fruit, Vegetables and Feed IPPI - Beverages

CPI - Food from Restaurants IPPI - Dairy

43


Menu Inflation versus General Inflation

As shown, prices for food and alcohol purchased in restaurants have increased at a greater rate and with less variability, than general inflation. Furthermore, unlike general inflation, menu prices did not decline during the 2009 recession . FSR food prices have increased at a greater rate than QSR food prices since 2002 .

Respondents of the C-Suite Survey were asked how they expected cost of sales as a percentage of revenues to change in 2015 .


108.6

111.8

114.7

117.8

121.8

124.9

128.4

131.7

133.7

136.6

107.3

109.4

112.9

115.2

119.4

121.9

125.5128.0

130.1

132.0131.3

107.7

109.5

111.9

115.7114.4

116.5

119.9

121.7122.8

125.2

105

110

115

120

125

130

135

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

CPI - Food from Full-Service Restaurants CPI - Food from Quick-Serivce Restaurants

CPI - Served Alcohol CPI - All Items

CPI = Consumer Price Index 2002 = 100

44


45

In 2015 Compared to 2014, Cost 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 4%Decline 0 .1% to 0 .5% points 0%Remain flat 4%Increase 0 .1% to 0 .5% points 38%Increase 0 .6% to 1% points 25%Increase 1 .1% to 1 .5% points 8%Increase 1 .6% to 2% points 17%Increase more than 2% points 4%Source: fsSTRATEGY Inc . 2015 C-Suite Survey

The majority of respondents (92%) expect cost of sales as a percentage of revenues to increase in 2015 . Thirty-eight percent of respondents expect cost of sales to increase by 0 .1% to 0 .5% and 25% expect cost of sales to increase by 0 .6% to 1 .0% . Respondents believe increases will be lower in 2015 than they anticipated in 2014 .

fsSTRATEGY interviewed grower associations and government agencies to understand the factors influencing foodservice cost of sales. Findings of this analysis included:

� Foodservice demand remained constant in 2014 . Demand should be constant in 2015, with possible reduction in demand in Western Canada, primarily in Alberta and Saskatchewan, as a result of layoffs in the oil patch. Disposable income and consumer confidence drive demand for foodservice and the Bank of Canada feels our economy is not robust .

� Real growth in Canadian food production has not kept up with population growth over the last two years, resulting in increased food imports . This should be resolved in 2015 . Typically, an 18-month lag occurs between a drop in the Canadian dollar and an increase in Canadian food production capacity leading to a righting of the trade balance . As production ramps up, Canadians should benefit from lower food prices.

� Food prices have not increased as much as input costs to produce the food . Retailers and the foodservice industry have pushed back on pricing . However, prices for some products have increased significantly. In 2014, retail beef prices were up 16%, veal up 15% to 25%, pork was up 20% and poultry up 1 .7% . Beef prices are at all-time highs as a result of strong global demand and cattle supply is low . It will take at least another year for supply to increase and for prices to normalize (beef is a two-year cycle). The relatively low beef supply is affecting the availability and price of veal products as well . Feed prices, a bellwether for beef production, are relatively low so supply should increase .


46


� Factors affecting food growers and processors that could affect food prices to restaurants include: � The perception of growers by consumers and consumer efforts to influence growing

practices (e .g ., humane, local, non-GMO, etc .) may have an impact on food costs . � Canada has seen many high-profile plant closures due to non-competitiveness (e.g., Heinz

in Leamington, Ontario; a McCain plant in PEI) . � As a result of the drop in oil prices, input costs for growers should be lower . Canada can

expect lower cost access to US food products as well . Further, the lower Canadian dollar has resulted in stability for Ontario grown products .

� Health Canada and the Canadian Food Inspection Agency are modernizing regulations, which will likely result in greater costs for processors .

� The Government’s decisions with respect to the Temporary Foreign Worker program may have an impact on food costs. Seafood, meat and bakery processors don’t benefit as much as growers from such programs and have challenges with absorbing labour cost increases . If the program is cancelled, growers could experience similar challenges with rising labour costs . Labour cost is a key issue for many growers and processors .

� The development of food hubs, many of which have processing facilities (e .g ., packaging) may enable foodservice operators to purchase local foods more effectively.

fsSTRATEGY also interviewed foodservice distributors to understand the factors influencing foodservice cost of sales . Findings of this analysis included:

� Foodservice distributors report demand in 2014 grew by 1% to 2% . Smaller chains are experiencing more challenges than the larger chains. Demand is expected to remain flat in the coming 12 months .

� In 2013, Distributors were expecting an increase in cross border shopping as a result of the high Canadian dollar. This year, distributors are worrying about the low Canadian dollar and the effect on the cost of food products from the United States .

� In 2014, prices were somewhat steady, expected price increases did not materialize . Various members of the supply chain are supporting the growth of the foodservice industry by absorbing cost increases . In the coming 12 months, distributors are mixed on price increases . Some expect prices to remain flat or below inflation, some expect prices to increase at inflation while others expect prices to increase at a somewhat greater rate (up to 3%) .

47

� Distributors suggest that a number of issues will affect the foodservice industry in 2015. These include:

� Prices for beef and pork products as well as chicken wings increased due to relatively short supply .

� Some significant increases in prices of commodities such as meat, coffee and oil. � The availability of local food products has increased and will continue to grow . � Pressure on supply management is increasing as a result of the Canada-Europe Free Trade

Agreement and lobbying efforts. For the first time ever, dairy producers reduced prices (down 1 .5% in 2014) . This pressure is expected to continue .

� Distributors in Ontario are concerned over the potential impact of a carbon tax on delivery costs .

� Chicken quotas (supply management) are currently insufficient to meet demand for fresh product . Chicken from the US is available but the exchange rate is making US product very expensive .

� Distributors are experiencing labour challenges, especially with drivers . Parking initiatives are also affecting delivery costs – the recent ticketing initiative during rush hours in Toronto has affected distributors.

48

Perc

enta

ge o

f Sal

es

Salaries and Wages

31.5%

33.6%

34.8%

33.9% 33.9%33.6% 33.7%

29%

30%

31%

32%

33%

34%

35%

36%

2006 2007 2008 2009 2010 2011 2012

Historical Average Labour Cost as a Percentage of Revenues

Source: Restaurants Canada, 2014

Operations Report

7.2 Labour Costs

Restaurants Canada’s 2014 Operations Report indicates that salaries and wages represented 33 .7% of foodservice revenues in 2012 (the most recent year for which data is available) .

Salaries and wages as a percentage of revenues were relatively stable between 2009 and 2012 .By the end of 2015, provincial and territorial minimum wages for adult workers will have increased by 19% since 2009 .

Provincial and Territorial Minimum Wage Rates (Year End 2015)

Briti

sh

Colu

mbi

a1

Albe

rta2

Yuko

n3

PEI4

New

Bru

nsw

ick

Nor

thw

est

Terr

itor

ies

Sask

atch

ewan

Que

bec5

Man

itoba

Nov

a Sc

otia

6

New

foun

dlan

d

Ont

ario

7

Nun

avut

Adult Workers $10 .45 $10 .20 $10 .86 $10 .50 $10 .30 $12 .50 $10 .20 $10 .55 $10 .70 $10 .60 $10 .50 $11 .25 $11 .00

Liquor Servers/Workers Receiving Gratuities 9 .20 9 .20 8 .90 9 .80

First Job/Entry Level 10 .10

Students (Under 18) 10 .45

THIS TABLE IS CURRENT AS AT March 19, 2015Source: Human Resources and Skills Development Canada1 British Columbia rates in effect commencing September 1, 20152 Alberta’s minimum wage will be adjusted annually every April3 Yukon Territory increases minimum wage every April 1 based on the Consumer Price Index4 PEI rate in effect commencing July 1, 2015

5 Quebec rate in effect May 1, 20156 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). Rates in effect April 1, 2015.7 Ontario rates in effect commencing October 1, 2015

49


By the end of 2015, the Northwest Territories will have the greatest adult minimum wage at $12 .50 per hour and Saskatchewan will have the lowest adult minimum wage at $10 .20 per 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

Jurisdic-tion

Current 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Alberta $10.20 01-Sep-07$8 .00

01-Apr-08$8 .40

01-Apr-09$8 .80

01-Sep-11$9 .40

01-Sep-12$9 .75

01-Sep-13$9 .95

01-Sep-14$10 .20

British Colum-

bia$10.25

01-May-11

$8 .7501-Nov-

11$9 .50

01-May-12

$10 .25

01-Sep-15$10 .45

Mani-toba $10.70 01-Apr-06

$7 .6001-Apr-07

$8 .0001-Apr-08

$8 .50

01-May-09

$8 .7501-Oct-09

$9 .00

01-Oct-10$9 .50

01-Oct-11$10 .00

01-Oct-12$10 .25

01-Oct-13$10 .45

01-Oct-14$10 .70

New Bruns-wick

$10.30

01-Jan-06$6 .50

01-Jul-06$6 .70

05-Jan-07$7 .00

01-Jul-07$7 .25

31-Mar-08

$7 .75

15-Apr-09$8 .00

01-Sep-09$8 .25

01-Apr-10$8 .50

01-Sep-10$9 .00

01-Apr-11$9 .50

01-Apr-12$10 .00

31-Dec-14

$10 .30

New-found-

land and Labrador

$10.25

01-Jan-06$6 .50

01-Jun-06$6 .75

01-Jan-07$7 .00

01-Oct-07$7 .50

01-Apr-08$8 .00

01-Jan-09$8 .50

01-Jul-09$9 .00

01-Jan-10$9 .50

01-Jul-10$10 .00

01-Oct-14$10 .25

01-Oct-15$10 .50

North-west Ter-

ritories$10.00 01-Apr-10

$9 .0001-Apr-11

$10 .0001-Jun-15

$12 .50

Nova Scotia $10.40 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-10$9 .65

01-Oct-11$10 .00

01-Apr-12$10 .15

01-Apr-13$10 .30

01-Apr-14$10 .40

01-Apr-15$10 .60

Nunavut $11.00 05-Sep-08$10 .00

01-Jan-11$11 .00

Ontario $11.00 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

01-Jun-14$11 .00

01-Oct-15$11 .25

Prince Edward Island

$10.20 01-Apr-06$7 .15

01-Apr-07$7 .50

01-May-08

$7 .7501-Oct-08

$8 .00

01-Jun-09$8 .20

01-Oct-09$8 .40

01-Jun-10$8 .70

01-Oct-10$9 .00

01-Jun-11$9 .30

01-Oct-11$9 .60

01-Apr-12$10 .00

01-Jun-14$10 .20

01-Oct-14$10 .35

01-Jul-15$10 .50

Quebec $10.3501-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

01-May-13

$10 .15

01-May-14

$10 .35

01-May-15

$10 .55

Sas-katch-ewan

$10.2001-Mar-

06$7 .55

01-Mar-07

$7 .95

01-Jan-08$8 .25

01-May-08

$8 .60

01-May-09

$9 .25

01-Sep-11$9 .50

01-Dec-12

$10 .00

01-Oct-14$10 .20

Yukon $10.7201-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

01-Apr-12$9 .27

01-May-12

$10 .30

01-Apr-13$10 .54

01-Apr-14$10 .72

01-Apr-15$10 .86

Source: Canada Ministry of Labour

50


Source: Canada Ministry of Labour

Employment Indices—All Industries, Foodservice and Employees per Foodservice Location

Source: Labour Force Survey, Statistics Canada

As shown, employment in the commercial foodservice industry has grown at a faster rate than national employment .

The average number of employees per location increased significantly from 8.4 in 2003 to 11.8 in 2012 before declining to 11 .0 in 2014 . The number of commercial foodservice locations has increase 2 .6% since 2013 while the number of employees per operation has remained fairly static since 2013 .

104.1105.4

107.2109.7

111.2

109.4110.9

112.6114.0

115.7116.4

101.4103.4

108.7 109.7

112.0

109.5

113.1

118.9

121.9

118.9123.0

127.5

98.6102.5

111.0

117.5

124.9126.3

129.7

134.3

138.8

128.8 129.7

90

100

110

120

130

140

150

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2002 = 100

Employment Index - All Industries Employment Index - Commercial Foodservice

Commercial Foodservice Employees per Location

51


Source: Restaurants Canada,

2014 Operations Report

52


Respondents to the C-Suite Survey were asked how they expected labour cost as a percentage of revenues to change in 2015 .

In 2015 Compared to 2014, Labour Costs are Expected to: Decline more than 2% points 0%Decline 1 .6% to 2% points 4%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 17%Increase 0 .1% to 0 .5% points 38%Increase 0 .6% to 1% points 17%Increase 1 .1% to 1 .5% points 21%Increase 1 .6% to 2% points 4%Increase more than 2% points 0%Source: fsSTRATEGY Inc . 2015 C-Suite Survey

Most respondents (80%) expect labour cost as a percentage of revenues to increase in 2015 . Thirty-eight percent of respondents expect labour cost as a percentage of revenues to increase by 0 .1% to 0 .5% of revenue, 17% expect labour cost as a percentage of revenues to increase by 0 .6% to 1 .0% while 25% of respondents expect labour to increase by more than 1 .1% . Compared to 2014, respondents believe labour cost increases will be lower in 2015 .

Rental and leasing

Perc

enta

ge o

f Sal

es

6.8%

7.0%

7.2% 7.2%

7.6%7.7%

7.6%

6.2%

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

7.6%

7.8%

2006 2007 2008 2009 2010 2011 2012

7.3 Rental and Occupancy Costs

Restaurants Canada’s 2014 Operations Report indicates that rental and leasing costs accounted for 7 .6% of foodservice revenues in 2012 (the most recent year for which data is available) .

Historical Average Rental and Leasing Cost as a Percentage of Revenues

Rental and leasing costs as a percentage of revenues were relatively stable between 2010 and 2012 .

Respondents to the C-Suite Survey were asked how they expected rent and occupancy cost as a percentage of revenues to change in 2015 .

53

In 2015 Compared to 2014, Rent & Occupancy Costs 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 4%Decline 0 .1% to 0 .5% points 4%Remain flat 17%Increase 0 .1% to 0 .5% points 26%Increase 0 .6% to 1% points 13%Increase 1 .1% to 1 .5% points 4%Increase 1 .6% to 2% points 17%Increase more than 2% points 13%


53


7.4 Other Operating CostsOther operating costs include utilities (including telephone), repair and maintenance, advertising and promotion, depreciation and other operating costs . Restaurants Canada’s 2014 Operations Report indicates that total other operating costs represented 18 .9% of foodservice sales in 2012, the most recent year for which data is available . The following table shows the average other operating costs as a percentage of revenues for the most recent five year period (2008 to 2012).

Respondents’ expectations on how rent and occupancy costs were anticipated to change as a percentage of revenues varied . Seventy-three percent of respondents believe rents will increase in 2015 with 13% of respondents expecting rents to increase by more than two percentage points . Overall, respondents believe rent and occupancy costs will increase more in 2015 than they did in 2014 .

fsSTRATEGY interviewed landlords to understand the factors affecting rental trends and expenses for restaurants in Canada . Findings from these interviews included:

� Supply and demand for restaurant space has been stable over the past 12 months and is expected to remain consistent with inflation in the coming 12 months. Competition is fierce for “A” restaurant locations and operators are more patient about waiting for the right location . Great locations are in demand . Overall vacancy has been about 3%, which is essentially no vacancy .

� Supply will remain high with changes in power centres and malls. Many landlords specifically mentioned the re-purposing of spaces vacated by Sears and Target as high quality space . Lots of new space will open in the Calgary area in 2016 and 2017 and is leasing now .

� Where deals have favoured landlords in the past three or four years, the market is becoming more balanced . Flexibility for negotiation by tenants is increasing .

� Foodservice rents have been relatively stable in the past 12 months and are expected to continue to be stable over the next 12 months .

� Some factors that could affect foodservice rents include: � In Calgary, the City is limiting the number of drive through restaurants, which is adversely

affected the demand for QSR sites. � Personal disposable incomes affect restaurant revenues. Some concern exists among

landlords about the balance between leasing rates and tenant sales .

54


50.0

60.0

70.0

80.0

90.0

100.0

110.0

2006 2007 2008 2009 2010 2011 2012Repair and maintenance Utilities including telephone Advertising and promotion

Depreciation Other Total Other Operating Costs

2006=100

100.0

104.0 104.0 104.0 104.0

100.0 100.0 103.6

100.0 100.0 100.0 96.4 96.4 96.4

100.0 100.0 100.0 100.0 100.0 100.0 103.4 103.4

106.9

100.0 103.4

78.2

67.3 67.3

60.9

69.1 71.8

89.5

84.5 84.5 81.8

84.1 85.9

Historical Average Other Operating Costs as a Percentage of Revenues

Historical Average Other Operating Costs as a Percentage of Revenues

2007 2008 2009 2010 2011 2012

Repair and Maintenance 2 .6% 2 .6% 2 .6% 2 .6% 2 .5% 2 .5%Utilities Including Telephone 2 .9% 2 .8% 2 .8% 2 .8% 2 .7% 2 .7%Advertising and Promotion 2 .7% 2 .8% 2 .8% 2 .8% 2 .8% 2 .8%Depreciation 2 .9% 2 .9% 3 .0% 3 .1% 2 .9% 3 .0%Other 8 .6% 7 .0% 7 .4% 6 .7% 7 .6% 7 .9%

Total Other Operating Costs 19.7% 18.1% 18.6% 18.0% 18.5% 18.9%

Source: Restaurants Canada, Statistics Canada

As shown, other expenses as a percentage of revenues increased between 2010 and 2012 (the most recent year for which data is available) . The following chart tracks growth trends of various other operating costs as indices between 2008 and 2012 .

Source: fsSTRATEGY Inc . based on data from Restaurants Canada and Statistics Canada

55

100.0

85.4

99.1

58.3

45.340.2

31.536.7

44.3

100.0

90.9

101.8105.5

116.4

129.1134.5

150.9

160.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

2006 2007 2008 2009 2010 2011 2012 2013 2014

2006=100

Natural Gas Electricity

Energy Commodity Price Indices

Source: fsSTRATEGY Inc . based on data from the Ontario Energy Board

As shown, natural gas prices, which had declined steadily since 2008 increased by 5 .2 index points in 2013 and by another 7.6 index points in 2014. Electricity prices continue to increase significantly, growing by 9 .1 index points in 2014 .Respondents to the C-Suite Survey were asked how they expected other operating costs as a percentage of revenues to change in 2015 .

As shown, other operating costs (including repair and maintenance, utilities including telephone, advertising and promotion and depreciation) have been relatively consistent as a percentage of revenue over the last several years . Other operating costs (which include such items as commissions paid to non-employees: professional and business services fees; subcontract expenses; charges for services provided by corporate office; office supplies; insurance; travel, meals and entertainment; property and businesses taxes, licenses and permits; royalties, rights, licensing and franchise fees; delivery, warehousing, postage and courier; financial service fees; interest expense; bad debts; and all other expenses) had decreased as a percentage of revenues to2010 but have since shown slight increases . The following graph compares commodity prices for natural gas and electricity .

56


57

In 2015 Compared to 2014, Other Operating Costs 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 9%Remain flat 13%Increase 0 .1% to 0 .5% points 39%Increase 0 .6% to 1% points 26%Increase 1 .1% to 1 .5% points 4%Increase 1 .6% to 2% points 9%Increase more than 2% points 0%Source: fsSTRATEGY Inc . 2014 C-Suite Survey

As shown, most (78%) of respondents expect other operating costs as a percentage of revenues will increase in 2015, with 9% of respondents expecting an increase of between 1 .6% and 2 .0% . At the same time, 13% of respondents expect other operating costs to remain flat and 9% of respondents believe other operating costs will decline by 0 .1% to 0 .5% points in the next 12 months .


7.5 CAPEXCapital expenditure (“CAPEX”) in the accommodation and foodservice sector was approximately $3 .4 billion in 2014, down $276 .3 million from 2013 . Approximately $2 .2 billion (65%) of CAPEX was spent on construction projects. The following chart compares capital expenditure and construction expenditure in the accommodation and foodservice sector for the last ten years .

Mill

ions

of D

olla

rs

Total Capital Expenditure Capital Expenditures for Construction

Capital Expenditure on Equipment and Machinery

$2,640.2 $2,604.1

$2,911.3

$3,288.0

$4,032.8

$3,320.9

$3,688.8 $3,687.3 $3,672.9

$3,396.6

$1,508.6

$1,786.2 $1,853.2

$2,278.3

$2,732.6

$2,220.4 $2,256.7 $2,256.7 $2,281.4 $2,192.7

$1,131.6

$817.9

$1,058.1 $1,009.7

$1,300.2$1,100.4

$1,432.1 $1,381.6 $1,391.5$1,204.0

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

As shown, the 2009 recession had a significant impact on capital expenditure. Expenditures on equipment and machinery were affected less by the 2009 recession than construction and recovered to pre-recession levels within two years, and declined in 2014 by 13% . Construction expenditures have yet to return to pre-recession levels and actually decreased slightly in 2014 over the previous year .


Capital Expenditure in the Accommodation and Foodservice Sector

58


As shown, construction costs declined significantly in 2009, most likely due to competitive pricing efforts to capture declining demand during the recession. Since 2009, prices have increased, albeit at a slower rate than pre-recession . The 2014 non-residential price index was 154 .5, 1 .4 index points below the peak in 2008 and 2 .2 index points greater than 2013 .

2002 = 100

117.0

126.5

138.7

155.9

142.0

141.4 146.6

150.7152.3

154.5

100

110

120

130

140

150

160

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Construction Price Index: Total Non-Residential

The following chart illustrates the changes to non-residential construction price indices over the most recent eight years .


Non-Residential Construction Price Index

59


The following chart compares average construction cost indices for major Canadian cities against a 30-city United States average .

RSMeans Construction Cost Indices by Major Canadian City

Toronto Calgary Montreal Vancouver Winnipeg 30 City US Average

140

150

160

170

180

190

200

210

220

230

240

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e

1993 30 City US Average = 100

162.6

170.6

187.7

194.6

205.6

200.7

209.6

216.6

220.9

227.4229.4

154.4

163.6

183.1

190.2

205.4

200.6

212.6

219.1

222.7

228.2 230.3

149.2

158.6

181.7

186.7

198.8

193.9

202.1

209.6

214.5

219.8221.4

159.4

169.3

180.6

184.9

199.6

192.7

207.1

214.0216.2 218.8

219.7

146.9

155.9

170.1

174.4

188.5

182.9

192.6

200.7 200.2202.9

205.8

146.7

156.2

165.0

171.0

182.5 181.6

185.7

194.0196.9

203.0

206.7

Source: RSMeans Square Foot Costs 2015 . Copyright RSMeans, Norwell, MA 781-422-5000; All rights reserved

Construction cost growth is expected to slow for major Canadian cities in 2015 relative to the 30-city US average . The estimated average percentage increase in construction cost indices reported by RSMeans for the five major Canadian Cities shown above is 0.9%. This forecasted construction price increase is significantly lower than the average growth of 2.4% realized in 2014 and the estimated growth of 1 .8% in 2015 for the 30-city US average . In 2015, Montreal construction costs are expected to exceed that of Vancouver, while Winnipeg (having the lowest construction cost index of the major Canadian Cities) is expected to drop below the 30-city US average index value for the first time in ten years . At least part of this decline in index growth may be attributed to the weakening Canadian dollar .

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Respondents to the C-Suite Survey were asked to provide the average cost per square foot to construct a new unit excluding base building cost and land purchases .

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C-Suite – Building Cost per Square FootService Style Minimum Maximum AverageFull Service Restaurants $140 $700 $354Quick Service Restaurants $195 $500 $298Fast Casual Restaurants $250 $280 $265


As shown, building costs range from $140 to $700 per square foot (clearly concept dependent), with the averages being $354 per square foot for FSRs, $298 per square foot for QSRs and $265 per square foot for Fast Casual Restaurants .Respondents to the C-Suite Survey were also asked how they expected building costs for new units to change in 2015 .

In 2015 Compared to 2014, the Cost to Build New Units is Expected to: Decline more than 10% 0%Decline 7 .6% to 10% 0%Decline 5 .1% to 7 .5% 0%Decline 2 .6% to 5% 9%Decline 0 .1% to 2 .5% 5%Remain Flat 41%Increase 0 .1% to 2 .5% 0%Increase 2 .6% to 5% 27%Increase 5 .1% to 7 .5% 0%Increase 7 .6% to 10% 5%Increase more than 10% 14%Source: fsSTRATEGY Inc . 2015 C-Suite Survey

As shown, 41% of respondents the cost to construct a new unit to remain flat in 2015, while 45% expect an increase in building costs . Fourteen percent of respondents expect the cost to build a new unit to increase by over 10% in 2015 . Respondents’ reasons for why they expect the construction cost of a new unit to increase included:

� labour; � general inflation; � cost of building materials; � the weak Canadian dollar; and � demand continues to exceed supply .

Top Chains 8

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During the past 12 months, there were 71,663 commercial restaurant units across Canada, with 52 new chain stores opened. While commercial unit growth stayed flat, chain stores appeared to do a better job at attracting customers compared to independents. Many Independent restaurants are at risk of going out of business in 2015 . In 2014, 905 independent restaurants closed over the year (four out of ten closed in Ontario) . Manitoba, Newfoundland, PEI and Yukon were the only provinces in which overall openings outnumbered closings .

Growth Opportunities: Fast Casual Segment in CanadaFast Casual is the fastest growing segment of the Canadian market . The desire for customization, for food prepared fresh right in front of you with the toppings of your choosing, and the halo effect of health and wellness around Fast Casual is propelling the category . Customers are willing to pay a bit more for a better quick-service meal without the added pressure to tip . The emerging fast casual segment in Canada continued to experience strong growth on the year. Although fast casual represents just 1% of the 6.6 billion restaurant visits made annually by Canadians, according to NPD’s 2020 Vision: The Future of QSR report, it is projected to grow by 5% to 7% per year until 2020 . Fast casual unit counts are also expected to double by 2020 . The quality and innovation of menu offerings combined with the explosion of unit counts will drive Fast Casual growth.

Top Growing and Declining Restaurant CategoriesTop Growing Categories Top Declining CategoriesMidscale Diner Hot DogQSR Other Ethnic Ice CreamCasual Spanish Bakery/SandwichYogourt Biscuit/BunMidscale Barbeque Cafeteria

Top Three Growing ChainsStarbucksTim HortonsThai Express

8 | Top Chains

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Notes About 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 9

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fsSTRATEGY is an alliance of senior consultants focusing on business strategy support - research, analysis, innovation and implementation - for the foodservice industry. Our team has extensive consulting experience in foodservice across Canada. We also offer international experience, having worked in the United States, Australia, South America, Africa 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 provides market information and business solutions that drive better decision-making and better results. The world’s leading brands rely on us to help them get the right products in the right places for the right people. Practice areas include automotive, beauty, consumer electronics, entertainment, fashion, food / foodservice, home, luxury, mobile, office supplies, sports, technology, toys, and video games. For more information, visit npdgroup.ca and npdgroupblog.com. Follow us on Twitter: @NPDCanada

Documents

2015 Canadian Chain Restaurant Industry Review · Now in its sixth year, the Canadian RestauRant investment summit has solidly established itself as the annual business conference