With new U.S. tariffs now in place and Canada having announced its retaliatory response, the economic consequences of the trade dispute are becoming clearer, says Chris Elliott, Chief Economist and Vice President of Research for Restaurants Canada.
“For Canada’s restaurant industry, the impact will come not only from tariffs on products operators purchase, but through their effects on supply chains, costs, employment and consumer confidence,” wrote Elliott in a commentary posted on the organization’s website.
“The new 50% U.S. tariff applies to approximately $28 billion of Canadian goods, representing roughly 5% of Canada’s annual exports to the U.S. TD Economics estimates the new tariffs could reduce Canadian GDP growth by 0.3 to 0.6 percentage points over the next year. The effects could be significant for the industries and communities directly targeted.
“Canada’s proposed retaliatory tariffs, scheduled to take effect September 8, create a second channel through which the dispute can affect Canadian businesses. For restaurants, the good news is that the proposed measures avoid many of the priority food products identified by Restaurants Canada for the federal government, particularly fresh produce. However, some food inputs, food-grade packaging, restaurant equipment and other operating supplies remain exposed.”
He said the industry is already operating with little capacity to absorb additional costs.
“Restaurants operate on thin margins and purchase products through highly integrated North American supply chains. The proposed retaliatory tariffs will increase the cost of certain food and beverage products, restaurant equipment, replacement parts, packaging and other operating supplies,” said Elliott.
“But the size of the impact will depend on more than the tariff rate itself. It will also depend on whether restaurants and their suppliers can realistically substitute Canadian or other international products at comparable volumes, specifications and prices.
“Restaurants already source approximately 68% of their food and beverage purchases domestically, rising above 80% in important categories such as dairy, cheese, chicken and beef. But Canada does not produce every product, specification or volume restaurants require year-round. Where sufficient Canadian supply exists, tariffs can encourage substitution toward domestic products. Where it does not, operators may need to turn to suppliers in other countries.”
That shift is not necessarily cost-free, he added.
“If many businesses move away from U.S. supply at the same time, demand for alternative products increases, which can put additional pressure on both supply and prices. The economic question is therefore not simply whether an alternative product exists, but whether sufficient supply exists at the volume, specification and price required by Canadian businesses,” explained Elliott.
“Food-grade packaging and restaurant equipment illustrate the challenge. Both rely on highly integrated North American supply chains, and operators cannot necessarily switch quickly to Canadian or other international suppliers. Specialized commercial equipment and replacement parts can be particularly difficult to substitute when operators rely on established supply and servicing networks. Tariffs on components such as steel and other parts can also increase the cost of equipment manufactured or assembled in Canada.”
He said restaurants have limited room to absorb additional costs. Any additional cost pressure comes at a difficult time for restaurant operators.
“Restaurants Canada research shows that 41% of operators are now operating at a loss or barely breaking even, compared with 12% in 2019,” said Elliott. “Restaurants spend approximately 34% of their revenue on food, compared with an average pre-tax profit margin of only about 4%. These economics leave relatively little room to absorb another significant increase in input costs.
“Restaurants Canada research shows operators are already using a wide range of strategies to manage rising expenses. Eight in 10 have increased menu prices, 60% have shopped around for other suppliers and 45% have negotiated with existing suppliers. Nearly two-thirds have reduced staffing levels.
“At the same time, operators have limited ability to simply pass higher costs along to consumers. Restaurants Canada research shows consumers are increasingly sensitive to menu prices, with some purchasing fewer items or shifting toward lower-cost options.”
Elliott’s full commentary can be found here.
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