Is This a Game Changer for Canadian Fast Food?

Canadian fast food operators have to deal with the shut down of the Temporary Foreign Workers Program. Will this affect investors?

The Motley Fool

Late on Thursday night, Employment Minister Jason Kenney announced that the federal government would immediately end the Temporary Foreign Workers Program (TFWP), which enabled Canadian fast food restaurants to recruit employees from across the globe. Restaurants immediately fired back, warning Ottawa that closure of the program would result in decreases in operating hours, longer lines, and even some locations shutting down.

There have been many criticisms of the TFWP. Critics insist the program takes away jobs from lower income Canadians, folks who strain public assistance programs while unemployed. Abuses of the program have been widely reported as well. McDonald’s (NYSE:MCD) was recently in the spotlight because a franchisee in Victoria was accused of abusing the program.

To its credit, McDonald’s immediately launched an investigation into the accused franchisee’s operations, and announced the company would stop using the TFWP. It still wasn’t enough for Ottawa, which probably assumed there were many more abuses of the program that weren’t getting reported.

I lived in rural Alberta in 2005, when the price of oil skyrocketed and energy companies couldn’t pull it out of the ground fast enough. Wages increased 20-30% almost overnight. Some of the better fast food employees saw the opportunity and jumped to the higher wages and better opportunities of the oil patch. Fast food employers first adjusted exactly how you’d expect — they increased their wages and tried to hire new people.

Some of these people worked out, but most didn’t. With no other options, employers turned to the TFWP to plug those labor gaps. And for the most part, the program has been pretty successful. Thousands of immigrants have used the program to get into the country permanently. Temporary workers have turned into Canadian citizens who pay taxes and contribute to society.

But how will this change in the program affect the fast food business in Canada?

Out of 90,000 Tim Hortons (TSX: THI)(NYSE: THI) employees, only 4,500 are temporary, 5% of the company’s workforce. Considering how much turnover is in fast food anyway, this shouldn’t be such a big deal. In Alberta, A&W Royalty Fund (TSX: AW.UN) franchisees have been heavy users of the program in the past, but management has yet to publicly give any hint on how franchisee operations may be affected.

Restaurants aren’t that dependent on the program these days. Sure, your local fast food joint probably still employs quite a few recent immigrants, but the flow of workers coming into the country has certainly decreased since the peak. Like in any profession, existing workers will quit one company and move to another, possibly for a promotion or just for a change. In the short term, closure of the TFWP won’t be a big deal.

But what about longer term? As the Canadian economy grows, so do labor needs in every sector. And because of low wages and social stigma, fast food isn’t a ideal place to work. Canada could be setting itself up for another labor shortage during the next boom.

Shares in MTY Food Group (TSX: MTY) have been among the best performers on the TSX over the last decade, thanks to an aggressive expansion plan. Will this cause Chairman and CEO Stanley Ma to pause, or will he continue to keep swallowing up his smaller competitors?

Foolish bottom line

From an operational standpoint, this is a problem, but not a huge one. Fast food operators may need to pay a little more or offer low cost fringe benefits like free meals to attract staff. The bigger issue is sentiment. Operators liked knowing that the option of hiring foreign workers was there, like an insurance policy.

This just might be enough to discourage a prospective franchisee from purchasing a Tim Hortons or an A&W franchise. And that, ultimately, is the risk for investors. It’s hard to grow a business without staff.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stock mentioned in this article. The Motley Fool owns shares of McDonald's. MTY Food Group is a recommendation of Stock Advisor Canada.

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