The tomato basil bread is soft and fresh. Nestled inside is smoked turkey, Gouda, tomato, lettuce. Close your eyes and you can imagine that this sandwich was served on a wooden cutting board by a craggy-faced artisan in some Old World country kitchen. But it’s wasn’t. It was served at an American fast-food joint in downtown Toronto.
Panera Bread, known for its fresh ingredients and bakery goods, has grown from 242 locations and $200 million in revenue in 2000, to more than 1,500 locations and revenues of more than $1.82 billion as of last year. Its first Canadian location opened in Toronto four years ago, and there are now four around the city. Panera is on the front lines of the next major battle for your fast-food dollars.
American chain restaurants are eyeing Canada’s stable economy, growing sales and relatively similar consumers, and scurrying over the border to cash in on what they see as an underdeveloped market. According to research firm NPD Group, the U.S. food service industry has seen its restaurant traffic decline over the past decade, making the 2% boost Canada saw over that same period look downright delicious. Thanks to those dismal American numbers, many U.S.-based brands have been aggressively expanding into the land of double-doubles and poutine, including Denver, Colo.–based chains Chipotle Mexican Grill and Smashburger; Minneapolis, Minn.–based Buffalo Wild Wings; Arizona’s P.F. Chang’s; and Carl’s Jr. from California.
Washington, D.C.–based Five Guys, for one tasty example, first expanded its insanely popular burger and fries franchise to Alberta in 2010. It now boasts 40 locations in six provinces, with more on the way.
Canada’s sales growth is attracting Americans, but it also makes the fast-food landscape highly competitive. Canadian brands were already locked in a street fight for consumers’ attention. With the influx of all these new American chains, it’s only going to get nastier. The signs of mounting competition are everywhere: McDonald’s, Wendy’s and A&W have revamped their stores with flat-screen TVs, fireplaces and plush couches. Harvey’s has added pulled pork to its list of burger toppings, and Tim Hortons has put panini sandwiches atop its lineup.
But while American retail giants like Walmart and Target strike fear in the hearts of their Canadian counterparts, the invading horde of U.S. fast-food chains will find that succeeding in Canada is harder than they think. Already some American heavyweights—anyone remember Dunkin’ Donuts?—have been soundly beaten by the Canucks. The Americans may have plenty of artillery, but the Canadians know the battlefield.
Diners have probably noticed the new American entrants into Canada aren’t the typical heat-lamps-and-uncomfortable-plastic-chairs fast-food joints, but a premium breed of restaurant called “fast casual.” One of the most rapidly growing segments in the United States over the past few years, fast casual is industry-speak for fancier decor, fresher food and slightly higher prices. The segment’s impact is increasingly hitting Canadian appetites. It’s affordable enough to steal consumers away from the usual suspects, while offering enough artisanal this and organic that to attract the higher-rent clientele pushed to pinch its pennies in recent years.
Canada is an easy target for American brands. Most of us live within 250 km of the border, and we have a (mostly) shared language and consumer culture. But much like our general approach to health care, guns and hockey, we do have our differences when it comes to eating out. Here, 48% of the population goes to a restaurant of some kind every single day (compared to the States’ 44%), whether it’s diving into hare stew at Montreal’s famed Joe Beef or picking up a coffee and muffin at Tims drive-through. The restaurant ownership mix in Canada is about 62% independent and 38% chain, a stat that’s essentially flipped south of the border. When Americans see the portion of the market controlled by Mom and Pop Canuck, they start to drool at the prospect of using their deep pockets and finely tuned operations to muscle the independents out of the market. “If you’re an independent and you’re not firing on all cylinders— innovation, quality and customer service—you’re not going to be able to compete with the American chain operators,” says Robert Carter, executive director of NPD Group’s food-service research in Canada. He adds that the high percentage of independent restaurants in Canada leaves plenty of room for chain concept development.
Chipotle Mexican Grill has been called the Apple of fast food, not only for its fiercely loyal customers, but also its supply-chain prowess. Both Chipotle and Panera have established innovative food systems, applying haute cuisine tactics such as sous-vide cooking to mass-market food preparation in order to cook high-quality meat very precisely before shipping to various outposts.
After surrounding Toronto with three suburban locales starting in 2008, Panera Bread opened its downtown location just off Yonge-Dundas Square in January. The neighbourhood is a microcosm of the larger American invasion. Across the street from Panera, a Five Guys neon sign lights up over its new almost-open restaurant. Just two doors down is Chipotle, which landed here in 2008 and now has four Toronto locations.
“Having these American brands coming in is just making the fight for a piece of the pie that much more competitive,” says Alex Rechichi, president and CEO of Mississauga, Ont.–based Extreme Brandz, which owns Extreme Pita and Mucho Burrito. “Not just from a consumer standpoint, but in terms of labour and real estate.”
But it’s not all deep-fried dreams for American chains that head north. In 2007, Moe’s Southwest Grill, with more than 350 U.S. locations, opened its first Canadian restaurant in Toronto and signed a 40-store development deal. Today, the company’s website lists zero locations here, and Yelp.ca is littered with notices of closure for its Canadian locations, with little explanation.
Similarly, Krispy Kreme Donuts first arrived here in blaze of glazed glory in 2001, but the long lineups soon ceased, and by 2005 its Canadian franchisee was put in bankruptcy protection. The chain understood Canadians’ love of doughnuts, but misjudged the market in other ways. They had burnt, watery coffee and pushed doughnuts by the dozen. But Canadians buy more coffee in restaurants than anyone in the world, except for Italians, and were more interested in buying single doughnuts. Krispy Kreme had opened 18 locations with plans for 32, but today only three remain.
Another American doughnut disaster is Dunkin’ Donuts. Back in 1996, the powerhouse chain from the northeastern U.S. had a stranglehold on Quebec coffee drinkers with 210 locations across the province, compared to only 60 Tim Hortons locations there. But Timmys began a rapid expansion strategy that caught Dunkin’s U.S. headquarters off-guard. By 2008, Dunkin’ was down to 41 locations, and this past June, a Quebec judge ordered the chain’s Canadian parent company to pay its franchisees $16.4 million for “failure to protect its brand” between 1995 and 2005. Today, there are only seven Dunkin’ Donuts in Quebec.
William Blair & Co. analyst Sharon Zackfia says the biggest mistake U.S. companies can make—whether retail or restaurant—is coming into Canada thinking it’s the 51st state. “The companies that have a better chance of doing well are growing slowly and gradually, to learn as they go along,”she says.
Canadians put an emphasis on quality, says Jeff Branton, Canadian general manager for CKE Restaurants, the parent company of Carl’s Jr. When the burger chain opened its first Canadian location in Kelowna, B.C., in 2011, it found Canadians gravitated to premium products like the guacamole bacon burger over a plain ol’ cheeseburger. Starting in B.C. made sense, given the 70-year-old brand’s deep California roots, but it also hired a research firm to help it get the lay of the land. Branton says they’ve managed to plow a middle ground between the golden arches and the high-end burger joints popping up across the country like Smashburger and Canada’s Hero Certified Burgers, both of which boast better-quality meat, artisan buns and top-shelf toppings like peameal bacon and Gorgonzola cheese. “We’re able to deliver both the quality and the value at the same time,” says Branton. “There’s no one out there doing a $6 burger with portobello mushrooms and toppings like that at such a competitive price.”
Another big difference between the Canadian and U.S. fast-food market is the time of day that diners actually visit restaurants. Canadians lean more toward breakfast, while Americans are more likely to go out for lunch. It’s not much, but it’s those key menu changes that can hurt an incoming American brand if missed. There are also discounts and portion size. Carter says many U.S. brands use discounts and bargains to lure in customers, a tactic that just doesn’t have the same effect here. These subtle variations between Canadian and American consumers can give homegrown brands an edge over the new challengers. “Restaurant concepts that have been developed here are really strong,” says Carter. “We have a lot of really strong regional chains, so from that standpoint Canadian brands are very well-positioned against any threat coming in from the U.S.”
In other words, Five Guys may be good, but they’re up against the likes of Vera’s Burger Shack in Vancouver and Toronto’s Hero Certified Burgers, among others across the country. Knowing the Canadian market from the inside has helped Extreme Brandz’ Rechichi grow his fast casual Mexican chain Mucho Burrito into a nationwide 70-location powerhouse in just six years, including three locations in the U.S., while Chipotle has stalled at four restaurants in Toronto only. He says his knowledge and contacts in Canadian food real estate, built over the past 15 years as he expanded Extreme Pita to almost 300 locations, gave his brand a head start. “Another component they often underestimate is the higher cost of labour and food, which make margins here lower,” says Rechichi. That can have a significant effect on U.S. chains whose success has been built on value pricing and huge portions.
As the fast casual competition heats up, the race to find what’s next is on. Darren Tristiano, executive vice-president of research firm Technomic, says that based on strong regional data in the U.S., the next big chains to hit Canada will be high-quality sandwich shops, like Florida-based Firehouse Subs, and Italian concepts like Los Angeles-based 800 Degrees pizza and Piada, which hails from Columbus, Ohio. Extreme Brandz’s Rechichi hopes to get a jump on the trend with a new Italian fast casual concept called Via Cibo. It was two years in the making, and debuts next March in Toronto.
The invasion won’t necessarily go only one way. Tristiano sees at least one area where Canadian brands could take the fight south of the border. “The one thing we haven’t seen in the U.S. yet is a poutinerie,” he says, citing the need for a restaurant that specializes in mixtures of french fries, gravy and cheese curds. “Look at the success Smoke’s is having up here. That could be an opportunity for a Canadian brand to come down to the U.S. with some great Canadian comfort food.”