Predicting the Economic Impact on Canada's Foodservice Industry
Federal Finance Department officials predict that if a flu pandemic spreads to Canada, it could carve as much as $14 billion out of the country's economy and there would be a 1.2% cut to GDP, slicing growth in half. (1)
Lost productivity from a pandemic is estimated to cost between $5 billion and $38 billion.
An aggregate analysis by federal finance department officials of the economic impact of a pandemic based on an analysis of past pandemics, including the severe "Spanish flu” in 1918, and the less severe "Asian flu” in 1957 and the "Hong Kong flu” in 1968, as well as SARS in 2003, indicates little long-term economic impact. According to their analysis, advanced market economies, such as Canada's, are resilient to many natural shocks. People adapt to the shock and shift spending across sectors and across time allowing the economy as a whole to recover quickly. While most sectors rebound rapidly, others, such as tourism, suffer more lasting effects. Finance officials report that SARS had no impact on Canada-wide foodservice and drinking place output; however, it is recognized that certain sectors of the foodservice industry, in certain regions of the country, were significantly impacted.
The Congressional Budget Office (CBO)(2) in the United States recently attempted to estimate the impact of a pandemic on demand in different industries in the U.S. The CBO estimates a decline in demand of 80% in the arts/entertainment sector, including foodservice, over a three-month period in the case of a severe pandemic (i.e. a particularly virulent strain of flu similar to the 1918 Spanish flu) and a decline in demand of 20% in the case of a mild pandemic (i.e. resembling the outbreaks of 1957 and 1968). In contrast the CBO estimates declines of 10% for most other sectors in their severe scenario and 3% in their mild scenario.
The tourism industry was the hardest hit by the 2003 SARS outbreak in Toronto. The industry lost more than $500 million and 28,000 jobs.(3) At least four major Toronto conventions were cancelled and restaurant visits declined sharply. The effects on tourism and travel lingered long beyond the last SARS case, despite a $10-million federal government mass-media campaign to promote Toronto, Ontario and Canadian tourism in the U.S. and Europe. The number of non-residents entering Canada fell 13.4% in 2003 from a year earlier, and was down nearly 20% during the peak SARS period. The number of visitors has never recovered from that episode, with non-resident travelers actually dropping a further 0.4% in 2004.(4) However, it is acknowledged that the decline can also be attributed to the start of the Iraq war, and a strengthening of the Canadian dollar.
While Asian restaurants and restaurants dependent on tourism suffered the worst declines during SARS, an analysis of the SARS outbreak provides insight into the impact on different sectors of the foodservice industry. Restaurants and bars posted a national decline of 0.3% in April 2003 (compared to April 2002) when the first wave of SARS occurred in Toronto, compared with a 0.7% decline in September 2001, when the 9/11 terror attacks occurred. Ontario total restaurant receipts declined 1.6% in April 2003, with losses at full-service restaurants (-3.9%), food service contractors, including those serving airlines (-9.2%), social and mobile caterers (-4.5%) and drinking places (-2.6%). In contrast, limited-service restaurant receipts grew modestly (0.5%).(5)
The restaurant industry was affected by reductions in travel to Toronto and by Toronto residents avoiding public places. However, some substitutions occurred, as companies offering take-out and delivery services were busier than usual, with consumers trying to stay away from crowds to avoid the possibility of contracting SARS. Retail sales at grocery stores were up 1.4% in April 2003, partially reflecting Torontonians' aversion to public places, including restaurants.(6)
It is possible to drill down further using information provided by Moneris Solutions, a processor of merchant debt and credit card transactions. Retail transaction volumes in the city fell 4.4% in April 2003 compared with the previous month, while grocery stores saw a spike in volume. Transaction volumes at hotels slipped by 16.1% and restaurants by 10% in the Greater Toronto Area. However, in eastern Toronto and Markham, where there are large Asian populations, volumes plunged by 25.9% and 16.3% respectively. In contrast, grocery store transaction volumes jumped 9.9% and increased by 44% in Markham alone.(7)
Employee absenteeism, supply chain problems and loss of customers will have serious financial implications for foodservice businesses during a pandemic. Operators should anticipate that their productivity and revenue will decrease dramatically while operating costs remain constant or even increase during a pandemic. For small businesses it will not take long for financial reserves to drop and for credit to become less available. Foodservice operators may also lose market share to competitors who are better prepared and can remain operational. It may be difficult to get these customers back when the crisis is over.
1. The Economic Impact of An Influenza Pandemic, Department of Finance, Economic Analysis and Forecasting Division, February 24, 2006
2. A Potential Influenza Pandemic: Possible Macroeconomic Effects and Policy Issues, Congressional Budget Office (CBO), December 2005
3. An Investor’s Guide to Avian Flu Special Report, BMO Nesbitt Burns Research,August 2005
4. International Travel Survey, Statistics Canada
5. Monthly Restaurants, Caterers and Taverns Survey, Statistics Canada
6. Monthly Retail Trade Survey, Statistics Canada
7. “SARS Cuts Retail Volume 4% in Toronto”, National Post, May 10, 2003