Compliance assessment report Cactus Holdings Ltd. (M&M Meat Shops – Store #427)

5.1.1 Objective 1: Description of process and methodology used to determine that subsidy is passed to consumers

Observations:

• The Recipient ships eligible products from its warehouse in Yellowknife, Northwest Territories to communities in the Northwest Territories and Nunavut (see Appendix A for list of eligible communities). The majority of shipments are for meats, fruits and vegetables, as well as some ready-made ("combination") foods such as premade lasagnas.  The majority of goods shipped qualify for the level 1 subsidy although there are some level 2 subsidy goods, as well as some ineligible goods. Through enquiry with Recipient representatives, we understand that none of the customers are related parties.
• Orders are submitted by individuals – there are some ‘group' orders (i.e. for school programs or for use in community cooking classes).  Orders are mainly submitted by email (the occasional order is submitted by fax or over the phone). The order is filled with goods from the store (more is ordered if necessary), so shipments are made to the various communities on a continuous basis.
• Shipping costs are based on kilograms shipped. Each community has a pre-determined freight rate (which is paid by the customer), and this rate is shown on the order form. The rates are revised approximately every 6 months (in general, they have increased since the inception of the program due to rising fuel costs).
• First Air is used for most of the shipments (Buffalo and Air Tindi are also used for areas which are not serviced by First Air).
  • We were informed that Canadian North was used at the beginning of the program, but the rates were too expensive (i.e. First Air costs are less).
  • Based upon enquiry with the Recipient, while rates were negotiated with all airlines (First Air, Air Tindi, Buffalo, and Canadian North) to provide the goods; no official quotes were received from any airlines.
  • We reviewed the costs of cargo shipments for various airlines shipping out of Yellowknife based on information publicly available on the airlines' websites, where available, and compared the shipping costs to the freight rates charged by the Recipient to NNC customers.  We noted that based on the information available, the shipping rates negotiated by the Recipient with First Air are lower than all other airlines where price data was available.
  • The food items are shipped as cargo on passenger flights into the community; most communities are not road-accessible for all or most of the year; even with winter roads, the perishability of the goods makes it difficult to send goods (and maintain the same quality) using any other method than air.
• The prices to the end consumer in the communities are the same prices charged to individuals who would purchase the items directly from the store.
  • The prices for goods are posted online, as well as in flyers.
  • The people in the eligible communities are also eligible for the sale prices and any special offers available in the flyers/in-store; any coupons are also honored.
• As a franchise, the prices are set by the head office (local staff cannot change the prices of goods in the store, and cannot control the margins earned).
• For people in eligible communities, the price of the goods is the same as the price in the store, plus the shipping costs, less the subsidy.  Management advised us that the owners of the franchise do not set the prices in-store. The franchise sets them.

5.1.2 Objective 2: Examination of Recipients’ pricing / invoicing practices in relation to the subsidy, e.g. profit margins on subsidized products vs. unsubsidized products

Observations:

• Flyers are sent via email on a regular basis to customers in eligible communities. Prices are also available on the M&M website.
• In-store staff will fill the order once received. Typically the order can be filled with goods on hand; depending on the volume ordered, additional stock can be ordered from the warehouse to fill the order.
• Prices to the communities are consistent with prices in the store. Additionally, the communities are eligible for sale prices, coupons, special offers, etc. that are offered in the flyers (the same as people who physically come into the store).
• The order forms include the standard shipping rates for the particular community. The end customer is also responsible for paying the shipping charges.
• Customers must pay for their order, including the shipping charges, prior to an order being filled and sent. Most payments are done online (via credit card, or Electronic Fund Transfer).
• For each order a reconciliation template is used to convert the information in the order form into information that can be inputted into the NNC template. This reconciliation breaks down the orders into main categories (chicken, beef, pre-made meals, etc.) and calculates the total weight and calculates the subsidy.
• The order is processed through the till and a receipt is generated (in place of an invoice). The receipt also shows the shipping and subsidy (level 1 and level 2) for each order.
• The franchise co-owner reviews these at the end of every month to ensure they are accurate, as staff is often responsible for filling the individual order forms. Any errors noted are identified and corrected for the claim submission.
• The store does sell and ship to "ineligible customers" (such as mining or oil companies); however, the subsidy is not applied. They would pay full prices, and will often arrange their own shipping.
• The eligible goods are distinguished on both the order forms and the reconciliations (there is a column that shows the subsidy level – either 1, 2 or "C" for cargo (ineligible)) so that customers are aware, as well as the calculation of the subsidy is done correctly.

M&M generally receives new items in the spring and fall – based on experience with the Program, they are aware of items that would definitely be considered ineligible (such as any breaded items) – however, if there are items that are up for debate, the co-owner will communicate with Crawford representatives to get an assessment of the eligibility (a "pre-approval")

• If a new item is considered eligible, the new item will be added to the reconciliation and order form accordingly.
• The order forms, as well as the reconciliations (developed by M&M) are ‘locked' – meaning that the underlying formulas (which include the rates) cannot be altered.
• We reviewed on a sample basis, the sales orders placed for the period under assessment; we did not identify any overly large orders that would suggest bulk orders that are being placed for corporate/ineligible customers.

5.1.3 Objective 3: Demonstrate that the Recipient is calculating profit margins on the product "landed" cost of a product. For the purpose of this analysis, 'landed’ cost includes product cost + shipping + overhead

Observations:

• Prices for products are set by the head office (M&M Meat Shops Store #427 is just one franchise location); the franchisee does not have any input into prices charged.
• All goods are purchased from M&M's warehouse in Calgary (all products are branded and must come from the same source); this is the cost that the Yellowknife franchisee pays. The profit margin would be the selling price, less the cost (which incorporates shipping cost). The calculation of the end sales price (and thus any profit) to the final consumer would therefore be:
  • Cost of Goods (purchased from head office) + shipping + handling fee – subsidy
• As detailed in section 5.1.1, the same prices are charged to Nutrition North Canada (NNC) customers that are charged to the actual in-store customers.
  • Prices of the goods remain stable throughout the year – they are generally reviewed every 6 months. Sometimes, prices of the goods may be altered due to specific economic conditions or availability.
  • In other cases, the size of the goods may be adjusted (for example, the price of a bag of frozen vegetables may remain stable over time, but the weight of the bag may be changed).
  • The administrative fees are automatically calculated by the Crawford software (Crawford Class Action Administration Database System, or "CAADS"), based on the terms and conditions of the funding agreement (a different amount of administrative fees are calculated depending on the dollar value of the monthly claim as per the Agreement).
• The only difference between sales to in-store customers versus sales that are air shipped to customers is that M&M charges a "handling" fee as follows:
  • Orders less than $75 = $15 handling fee
  • $76-$150 = $20 handling fee
  • Orders greater than $150 = $25 handling fee

We noted as part of our sample testing that this handling fee is applied to all orders which are air-shipped to communities (whether eligible for the NNC subsidy or not); and therefore, is not exclusively related to the NNC program.

5.1.4 Objective 4: Confirmation from the Recipient that profit margins were analyzed / examined and there is evidence that profit margins are not eroding the subsidy

Observations:

• See process at Sections 5.1.1 and 5.1.2 related to the profit margin process.
• The Recipient has established processes and procedures which allow the subsidy to be passed on to the end consumer.
• For the sample of items tested, the subsidy is fully applied to the freight charges; as such, the subsidy is not eroded.

5.2.1 Objective 1: Ensure that the Recipient has established a process to identify the amount of price reduction associated with the subsidy

Observations:

• The Recipient receives personal orders from individual members of eligible communities. Orders are primarily submitted online (via email).
• The Recipient has standardized order forms and subsidy calculation forms which are used to fill NNC orders. The store's cash register was also programmed to be able to specifically indicate the total level 1 and level 2 subsidies. 
• The eligibility of each individual product for the NNC subsidy is indicated directly on the order form, so the customer is informed at the time of the order.
• When the order is filled, the customer is also provided with copies of the NNC subsidy calculation and cash register receipt (summarizing the total purchase, including freight, subsidies, and handling fees), which clearly indicate the rates used and provide the calculation of the subsidy.
• The Recipient has also developed a standard letter that is provided to all new customers, which confirms that the store is a registered Southern Supplier in the NNC program, and provides a link to the Nutrition North website for additional information.
• The letter also provides details on the NNC program overall, as well as how the program is specifically administered by the store (providing details on ordering, payments, and how the subsidy is calculated).
• Additionally, the Recipient provides store flyers to the eligible communities served and includes information about the NNC Program on social media (Facebook). The Recipient has also advertised their involvement in the NNC program in community newspapers.
• At the onset of the NNC program, AANDC provided the Recipient with a small number of informational pamphlets (approximately 50).
• All of these pamphlets were included with NNC customer orders that were fulfilled by the Recipient. No other communication material, to be provided to customers, has been subsequently developed by AANDC.

5.2.2 Objective 2: Ensure that subsidy rates are included on cash receipts and proper in-store signage is displayed

Observations:

• The Recipient has developed a standardized order form which customers use to submit their food orders. The order form lists the name of each product, the weight, the regular price and the associated subsidy level for each product.
• The subsidy level is indicated as "1" for products eligible for the level 1 (higher) subsidy, "2" for products eligible for the level 2 (lower) subsidy, and "C" for cargo products (products that are not eligible for a subsidy).  This legend is clearly written on the order form.
• From the order form, the data is inputted into a reconciliation form, which summarizes the weight of the level 1, level 2 and cargo products ordered. 
• The reconciliation form also clearly indicates the level 1 and level 2 subsidy rates for the specific destination, as well as the freight rate.
• The form shows the total weight, rates, and calculation of the subsidy (note that that the form is subsequently used by the Recipient to populate the monthly claim submitted to NNC), and a copy is also provided to the customer to show the reconciliation of the subsidy and freight on their order.
• Finally, the customer also receives a cash register receipt which summarizes the total cost of their order. The receipt also summarizes and clearly indicates the total freight, total level 1 subsidy and total level 2 subsidy. The amounts on the receipt are matched to the reconciliation (above) to ensure the accuracy of the calculations.
• As most orders are completed online, no store signage is displayed; please refer to section 5.2.1 for additional information.

5.2.3 Objective 3: Ensure that the Recipient has established an effective and cost-effective supply chain management

Observations:

• See sections 5.1.1 and 5.1.2 for the process established by the Recipient related to its supply chain management process.
• Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing. All 20 selections were shipped by air into the eligible communities with no exceptions identified.
• Based on interview discussions with the Recipient, they do not use any alternative methods to ship goods into the eligible communities (given the perishability of goods and the time taken to ship by land/water, air is the most effective and efficient method).
• The invoicing practices of the Recipient are transparent, whereby the subsidy and freight rates are clearly identified in multiple documents from the point of order initiation through to the final payment/order fulfillment. The Recipient's calculation of the subsidy is directly provided to the end customer for their information and verification, if necessary.  The Recipient has also provided any communication material received from AANDC to the customers.

5.3.1 Objective 1: Certify that only eligible items are claimed for and reported

Observations:

• See sections 5.1.1 and 5.1.2 for the process related to eligible and non-eligible items.
• Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing. All 20 selections were eligible products in accordance with the detailed list of eligible items per Appendix B, Table 2 in the Nutrition North Canada Program – National Manual for Program Recipients. No exceptions were noted.

5.3.2 Objective 2: Calculate the appropriate weight of items being claimed

Observations:

• See sections 5.1.1 and 5.1.2 for the process related to eligible and non-eligible items.
• Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing.  The products in each of the 20 selections were physically observed in the store and were re-weighed to verify that the weight per the order forms and itemized food reports appropriately reflected the weight of the actual products. No exceptions were noted.
• In some cases, at the date of fieldwork, previously claimed products had been subsequently discontinued or re-packaged. A reasonability assessment for such products was conducted using the weight of substitute products or through a pro-ration calculation (if quantities or sizing of the product had changed over time).

5.3.3 Objective 3: Ensure that monthly claims and detailed reports are valid and accurate

Observations:

• See sections 5.1.1 and 5.1.2 for the process related to eligible and non-eligible items.
• Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing. All 20 selections were recalculated to verify accuracy of the claim submitted, and traced to the detailed itemized food shipment report and monthly claim. No exceptions were noted.
• All items claimed were matched to products in the Recipient's current inventory or prior inventory records (for discontinued products) to ensure the validity of items claimed.

5.3.4 Objective 4: Demonstrate that controls in place find errors and fix them on a timely basis

Observations:

• At the end of the month, the co-owner inputs the data from the reconciliations into the CAADS system to submit the claims.
• Throughout the month, the invoices are matched with the airline waybills (customer name, products, weight shipped, freight charged). Any discrepancies are identified. If there is an error where the customer has overpaid, a credit will be issued to the customer. If the error results in the store having undercharged the customer, they must absorb this loss.
• The reconciliation sheets with the built in formulas help to ensure the accuracy, as the formulas cannot be altered by anyone (intentionally or accidentally).
• The co-owner enters the claim and reviews the reconciliations to identify any errors in invoices (usually an error on the order form – a calculation error, human error). 1-2 errors are identified by the Recipient per month; there is no independent review process of the claims submitted to AANDC.
• When the claims are input, the co-owner also ensures that the subsidy rates in the CAADS system are in line with the rates that are built into the reconciliations.

5.3.5 Objective 5: Verify that monthly food price reports are accurate (Northern retailers)

Observations:

• Not applicable; the Recipient is not a Northern Retailer.

5.4.1 Objective 1: Ensure that ineligible businesses and establishments do not receive a subsidy

Observations:

• The Recipient does not maintain a master customer list; however, the documentation for all sales shipped by air are separated as either NNC or non-NNC order. Pursuant to enquiry of the Recipient, they are aware of the types of restricted customers, and from sales experience, would be able to identify any large bulk purchases that could indicate the intent to re-sell or larger corporate orders.  Additionally, the Recipient has confirmed they do not provide or claim the subsidy on in-store sales (as the store's physical location in Yellowknife is not considered an eligible community).
• The Recipient noted that the only sales where the subsidy was applied and claimed that were made to groups were for school food programs or community cooking classes, which are not considered restricted customers and are eligible for the subsidy.
• Through our review of a sample of monthly claims, we observed that all orders were made by and shipped to individuals and did not identify any ineligible customers from the claims tested.  However, the Recipient does not further inform its customers that they cannot sell and/or ship subsidized items to restricted organizations.
• We also reviewed the Recipient's documentation for non-NNC sales to observe whether it appeared any subsidies were being granted (that could be part of the monthly claims). We noted that most non-NNC sales were to territorial/municipal government organizations, to customers who arranged their own shipping (such as airline employees who receive free or discounted shipping, or shipments on RCMP planes to various stations throughout the North), as well as several corporate customers.  From the orders reviewed, none of the non-NNC sales documentation included the provision of a subsidy that would suggest the Recipient may be claiming ineligible sales.

Recommendation: While the Recipient does not maintain a master customer list, we did not observe any instances through our testing that suggests the Recipient is providing and claiming a subsidy on sales to ineligible customers; however, we recommend that the Recipient inform its clients in writing that they cannot sell and/or ship subsidized items to restricted organizations.

Recommendation: We did not identify any errors in the information produced by the Recipient and provided to AANDC; however, we did note that there is a lack of segregation of duties in the Recipient's reporting process as there is no independent review of claims prior to being submitted to AANDC.

The Recipient should ensure that an independent review process occurs prior to information being submitted to AANDC, which will increase the quality of the information provided to AANDC.