The crisis cannot be understated these days for the restaurant and foodservice industry.

In fact, a submission by Restaurants Canada for the 2024-2025 federal budget tells it all in just the name of the report: Surviving Inflation: Restaurants Teetering at the Edge. 

And indeed they are.

“One-third of restaurants in Canada are operating at a loss due to the high costs of food, a lack of available labour, and new rules are making it harder every day to eke out a profit,” said Kelly Higginson, President and CEO, Restaurants Canada.

Here are some disturbing numbers the industry faces today:

• Four-in-10 Restaurants Canada members expect profit margins to be worse in 2023 than 2022;
• Eight-in-10 foodservice companies report lower profits in 2023 than 2019 and 70 per cent of Canadians are visiting full-service restaurants less frequently;
• 300 restaurants declared bankruptcy in the first five months of 2023, 89 per cent more than in 2022;
• Eight in 10 restaurant companies reported lower profits in 2023 than in 2019;
• Half of restaurants and food service companies report operating at a loss or just breaking even as food costs continue to grow; and
• Before the pandemic, only seven per cent of the industry was operating at a loss compared to 33 per cent today, and only five per cent reported “just breaking even” compared to 18 per cent today.

Canada’s foodservice sector is struggling and Restaurants Canada says urgent changes are needed to help restaurant businesses survive and thrive over the months ahead.

Higginson said it’s never been more difficult to be a restaurant owner in Canada.

“And they have been in this position for three years. The volatility, the lack of stability, the lack of predictability. If you don’t have predictability and stability and it’s all about volatility, it makes running a business almost impossible,” she said.

“The profitability levels are really challenging . . . That really impacts where I’m concerned about is this refinancing piece of the Canada Emergency Business Account (CEBA) plan.”

“Pre-pandemic we were at 12 per cent of our operators who were operating at a loss or barely breaking even and now we’re at 51 per cent. There’s a direct correlation to the volatility that they’ve experienced with all the lockdowns and other challenges that came throughout the pandemic but also with the extraordinary levels of inflation. It’s everything that comes into their restaurants. Utilities are six to eight per cent. We’ve got vegetables up to nine per cent, dairy over six per cent. Beef has gone up 11 per cent. The list goes on and on. So something they were paying $5 for before the pandemic, they’re now paying $9, they’re now paying $12.

“So these are really challenging parts of running the business and the part of it that makes me the most concerned and really lose sleep at night. “

The overall industry contributes $100 billion annually to the Canadian economy. It is the fourth largest employer in the country with more than 1.1 million employees from coast to coast to coast.

Higginson said restaurants are absorbing a large portion of the increasing costs.

“There is really only so much you can charge someone for a blueberry muffin, right? There’s only so much you can charge somebody for an avocado sandwich. They understand that there is a ceiling and they’re trying to balance that,” she said. “That’s a really tough position for these operators because the way you find out that people think that your prices have gone up too much is they just don’t come back. The seats are empty.”

The number of bankruptcies this year doesn’t count the number of restaurants that simply closed their doors and stopped operating. 

“We are suffering significantly. It’s a $100 billion industry and the fourth largest private employer. We matter to the communities, to Canadian customers. We serve 22 million customers a day. So in the daily lives of our customers, we matter to their day to day and we also matter to the Canadian economy,” said Higginson. 

In mid September, Prime Minister Justin Trudeau extended deadlines for CEBA loan repayments, providing an additional year for term loan repayment, and additional flexibilities for loan holders looking to benefit from partial loan forgiveness of up to 33 per cent.

The repayment deadline for CEBA loans to qualify for partial loan forgiveness of up to 33 per cent is being extended from December 31, 2023, to January 18, 2024. The government said repayment on or before the new deadline (or March 28, 2024 if a refinancing application is submitted prior to January 18, 2024 at the financial institution that provided their CEBA loan), will result in loan forgiveness of $10,000 for a $40,000 loan and $20,000 for a $60,000 loan.

But the Canadian Federation of Independent Business (CFIB) said it is disappointed with the announcement.

“The government has failed to address the most critical issue on outstanding CEBA loans – the loss of the $20,000 forgivable portion for those unable to repay the loans by year end. The extension of the forgivable deadline by a few weeks will be of very little value to the thousands of small business owners who just don’t have money to repay now,” said Dan Kelly, President and CEO of the CFIB. “According to CFIB’s latest data, 69% of small businesses that accessed the loan have not yet been able to repay any of it. Only 18% have repaid their loan in full as of September.”

Higginson said many restaurants incurred a lot of debt over the last couple of years just to keep their businesses going.

“That’s a pretty concerning process to go through . . . If I was to look at the numbers, I’m very concerned. I’m incredibly concerned when I look at the numbers that are struggling with profitability. I’ve got 85 per cent of table service restaurants that have an outstanding CEBA loan and 66 per cent of foodservice companies say that they are in debt due to rising costs, inflation and COVID. Those percentages are really concerning for us.”

In its submission to the federal government, Restaurants Canada made the following recommendations:

• Lower Federal Small Business Tax Rate from nine per cent  to eight per cent. With the razor-thin profit margins many restaurants faced pre-pandemic, exacerbated by added inflationary pressures, transportation taxes and business loan repayment, many restaurants have little to no capital to reinvest in their operations. Lowering the small business tax rate will allow them to pay off outstanding debt, invest in automation and energy saving equipment, expand employee benefits and invest in training and retention;
• Index Passive Investment Income Threshold to Inflation. In 2018, the federal budget set limits on the amount of passive income that can be kept in a business before higher taxes kick in at $50,000. This limit has not increased since 2019, even as inflation has increased by 15.4 per cent in the same time. This has limited the capacity for foodservice businesses to invest in growing their operations. Indexing the passive investment threshold to inflation will encourage restaurateurs to make investments in technology, sustainability and benefits and professional development for their employees;
• Allow Restaurant Meals to be an Entirely Deductible Business Expense. Though the sector has rebounded somewhat since the sharp decreases in traffic over the course of the pandemic, continued work-from-home and hybrid work options have led to lingering effects. Allowing restaurant meals to be a deductible business expense would further incentivize business owners and their employees to hold meetings or events in restaurants, which would further increase patronage and traffic for other businesses in downtown cores and community hubs across Canada;
• Permanently Maintain Cap on Alcohol Excise Tax Escalator. Alcohol excise duties in Canada are automatically indexed to inflation at the start of each fiscal year. In the context of current and unprecedented inflationary pressures, this was projected to equate to
   6.3 per cent for 2023, which would result in a $750 million hit to the food service – an average of $36,000 per restaurant. However, the 2023 federal budget recognized the challenging inflationary context and capped annual excise tax increases to two per cent. Though this measure was lauded across food and beverage industries, the cap is set to expire in April 2024. The removal of this vital measure would leave the sector vulnerable to unpredictable year-over-year increases in 2024-25 and beyond. We recommend keeping the alcohol excise duty at the two per cent cap for the immediate future;

• Support Alignment on Recycling and Packaging Initiatives. Restaurants have been working to proactively meet evolving single-use packaging legislation in the transition to a circular economy. However, they require clear timelines, viable alternatives, and cross- sector consistency to do so. The federal government can play a leadership role in helping the sector source viable, cost-effective alternatives to traditional plastic products. Similarly, there is a lack of jurisdictional harmonization when it comes to sustainability legislation, with many provinces and municipalities lacking a framework for best practices.m It is imperative that government work with provinces and territories to develop consistent guidelines that promote harmonization of packaging, labeling, and recycling legislation and support businesses adjusting to these changes. Doing so will help to ensure businesses operating in multiple jurisdictions are not unnecessarily duplicating overhead costs as they adapt to regionalized rules;
• Creating Jobs and Streamlining Pathways to Employment. Accounting for one of every six vacancies, the foodservice and accommodation sector has one of the highest vacancy rates of any Canadian industry with nearly 100,000 empty jobs. Staff shortages have limited restaurant capacity, driving many even further into debt as they struggle to recoup their bottom line. Notably, the sector is also the largest employer of immigrants and newcomers to Canada. As such, the restaurant sector is uniquely positioned to support Canada in achieving its population growth targets through expanded immigration policies and programs, while helping small businesses from coast to coast to keep their lights on;
• Create a New Temporary Foreign Worker Program Stream for the Food Sector. One key mechanism to augment workforce capacity is the Temporary Foreign Worker Program (TFWP), which ensures employers can quickly bring in workers to fill short-term labor market gaps. However, program capacity is limited, and it does not include food-sector specific streams despite the industry’s unique needs and historic vacancies. One model of a sector specific TFWP stream is in the agriculture industry. To be eligible for the Agriculture Stream, employers must be hiring for production in specific commodity sectors with activity that relates to on-farm primary agriculture. Creation of a similar model in the foodservices industry would address key and sector-specific labour demands;
• Expedite Implementation of the Trusted Employer Program. Budget 2022 invested $29.3 million over three years to introduce a Trusted Employer Model that reduces red tape for employers meeting the highest standards of living and working conditions. In June 2023, the Standing Committee on Agriculture and Agri-Food released its Grocery Affordability Report which included a recommendation that the Government expedite the implementation timeline for the Trusted Employer Program. Accelerating implementation of the program ahead of the 2025 deadline would be a significant and meaningful step towards relieving current administrative burdens, addressing pressing labor shortages, and strengthening the sector;
• Provide a Temporary Reprieve on the Labour Market Information Assessment. With nearly 100,000 job vacancies across the restaurant sector, many employers are turning to foreign workers to fill growing labour shortages. When undertaking the process of hiring foreign workers, employers must first complete a Labour Market Information Assessment (LMIA), which confirms the need to hire a foreign worker while also highlighting the lack of domestic workers to fill the role. The prospective foreign worker is unable to apply for a work permit until their employer’s LMIA application is approved. Against a backdrop of historic job vacancies, the LMIA only contributes to red tape and makes it more challenging for employers to acquire the staff necessary to keep their operations running. As such, we recommend that the LMIA requirement be waived for employers in the restaurant industry for a period of six months, allowing them to address critical upfront labour shortages while seeking out ways to sustainably augment capacity in the long term.