P i s t a c h i o

Ontario Budget Aligned to Industry Needs

Published in Ontario Restaurant News, June 2008

With the repeated refrain of a slower economy to the south, a dollar that’s too strong and fuel costs raising the price of everything, Ontario watched as a dark cloud of downturn threatened to form overhead in 2007.

It was a trying year. The province was pounded hard by trouble in manufacturing, where 64,000 jobs disappeared. Manufacturing’s output is in decline for the third year in a row. Inside that sector, the auto industry was the worst hit, despite the opening of a new Toyota plant in Woodstock and 2,000 new jobs. Construction remains strong, but finance-related sectors are weakening. Still, most sectors are adding jobs.

The province’s Real GDP rose 1.8 per cent in 2007, half the national average. Employment grew 1.6 per cent, and disposable income was up 4.6 per cent. Ontario wasn’t a top performer, but it also wasn’t the worst.

Hospitality fared respectably well, with a nominal change in commercial foodservice sales, down just 0.5 per cent. The province’s per capita commercial sales increased 2.2 per cent, and its year-over-year growth in total commercial sales was 3.0 per cent, well below 2006, but on par with the national average.

Tourism has a $4.9 billion travel deficit. “That’s how much Ontarions are spending on travel outside the province,” explains Tony Elenis, President of the Ontario Restaurant, Hotel and Motel Association. “The industry is not strong, and it’s not a bright picture for 2008.”

“It’s going to be another soft year, the fifth in a row,” concurs Bruce Gravel, President of the Ontario Accommodation Association.

There were dramatic drops in visitors to Ontario, but Ottawa and Toronto have shown growth, which Elenis attributes to the fact that the cities have “corporate buoyancy,” another way of saying business travel has helped to build their numbers. Conversely, Windsor, Niagara, London and Northern Ontario are suffering vacancy rates of 47 to 52 per cent.

Many insiders are saying the industry hasn’t properly recovered from its trials of 2001-2003.

Number One Pressure Point

Add to this a rise in the minimum wage — which most provinces are facing this year, in some cases more than once — and out come the industry’s consternation and scenarios of financial ruin.

“It’s the number one pressure point, in the business,” stresses Elenis, who estimates that wage increases will lower margins by about two to three per cent.

Statistics Canada says that the average pre-tax profit margin in the Ontario foodservice industry is just 2.9% of operating revenue.

“It doesn’t make sense if the top line is not happening,” he says.

“We recognize that people need fair wages,” says Grace Cerniuk, Resorts of Ontario President. She believes that to respond to the wage hike alone, the industry will need to increase its occupancy by at least another six per cent.

“I‘ve been fielding a lot of calls from members telling me how much more they’re paying out because of the minimum wage hike,” says Elaine Flis, CRFA Vice-President for Ontario. “In one case, it was $7,000.”

Flis said that, unlike other industries, foodservice can’t automate to offset the rise in wages. “We’re a people business,” she said. “We can’t replace the dining room host with a machine.”

Reiterating the opinion of her peers, Flis is convinced the wage rise is going to lead to layoffs and reduced revenue.

It was here that the new provincial budget waded in, managing to calm the waters a bit.

Job Action with $1.5 billion

The industry’s labour-skills shortage finally got some deserved attention in the new budget: $1.5 billion to be spent over three years in the Skills to Job Action Plan, which the government says will “put Ontarions into well-paying jobs and into long-term training for new job opportunities.”

Part of the plan is the Second Career Strategy, which has $355 million to spend over three years to help 20,000 unemployed workers make the transition to new careers and well-paying jobs in growing areas of the economy.

The government offers the following example: the strategy would provide $25,000 towards tuition and living allowance for a manufacturing worker who wants to move to a skilled-trades job and attend a four-semester, two-year Mechanical Technician program at a college.

Although it’s great news for casualties of the manufacturing sector, it may not provide an ideal fit for hospitality.

Instead, foodservice can pin some of its hopes for an improved labour situation on the $75 million allotted over the next three years to expand the number of apprentices. The figure will rise to $50 million annually by 2011 – 2012. The goal is to reach 32,500 new apprentices per year.

The Apprenticeship Enhancement Fund provides $45 million over three years to buy state-of-the-art equipment essential for technical training.

The government is investing $160 million over 2007-08 to help newcomers settle, improve their language skills and find jobs through training programs.

To support foodservice from an agricultural standpoint, the government will spend $56 million over four years for the Pick Ontario Freshness strategy and the Ontario Farmers’ Markets Initiative. The University of Guelph will get $56 million in 2007-08 for research, animal health and the Ontario Veterinary College. The Vineland Research and Innovation Centre will receive $12.5 million.

Pocket Money

For the individual, and all measures that could put additional money into the pockets of future customers, Ontario follows the federal budget’s lead in offering tax-free savings. For homeowners, the land transfer tax refund program for first time buyers has been extended to include all existing homes. Low- and middle-income seniors will get property tax grants of up to $500 per year.

No major corporate tax cuts were offered, but there will be another $750 million over four years in business tax relief, including eliminating capital tax on manufacturing and resource companies, retroactive to January, 2007.

The retail sales tax exemption is extended for two more years, which will benefit tourism because destination-marketing fees are eligible.

The small business deduction threshold rises to $500,000 from $400,000, and capital tax rates for all businesses drops 21 per cent, both retroactive to January 1, 2007.

The budget had tourism’s number, too.

“The government clearly has tourism on its radar, and the dollars are aligned with the needs of our industry,” said Elenis.

The budget’s marquee item for tourism is The Competitiveness Study, an $8 million project led by former finance minister Greg Sorbera to look into ways to stimulate business in tourism.

The study will determine what the industry is doing well now, identify the best prospects and best practices globally, and then create a plan to make tourism a major contributor to the province’s economy.

“It’s very ambitious, both in scope and speed,” says Gravel, who points out that all consultations with the industry will be completed by October, and the study is scheduled to be presented to the industry on January 15, 2009, “just in time for consideration in the spring budget,” said Gravel, adding that he would have like to see more marketing dollars for tourism.

“There are huge challenges in the sector, gas prices in particular, and we need to redirect our marketing to new and different markets,” he added.

Local Food Travels Well

Gravel emphasizes two domestic trends worth noting, curiously not unique to Ontario alone.

First, there is an increase in domestic tourism, both intra- and inter-provincially, reported by the Atlantic provinces as well, although the largest share of Ontarions traveling outside the province are visiting warm destinations during winter months.

Second, culinary tourism is on the rise, with culinary attractions to be found throughout the province, adding the idea of local food to travel.

The budget continues to exempt the room service tax for another year. “I’d like to see that continue,” says Elenis.

An audible sigh of relief followed the announcement that Ontario would not be harmonizing sales tax.

“Hitting food under $4, this tax touches more transactions than ever before,” says Flis. Everything from a coffee and muffin to the $2 and $3 “snack” sandwiches from quick-serve restaurants would cost more. “This really highlights what’s missing in the harmonization issue,” she added.

For Flis, the budget’s modernizing regulation is exciting news, beginning with an aggressive can-and-trade initiative for government regulations, so that when a new one is enacted, others must be eliminated.

“This is going to be an enormous help in cutting red tap and reducing administration,” says Flis, who would have liked to see more reduction in business taxes.

On the other hand, she is very optimistic about how the industry is working closely with government. “There’s a recognition that the industry needs to be consulted more, and we’ve identified a few MPPs who are championing the causes of the foodservice sector,” declares Flis.