A Case Note - Tim Hortons International Strategy

Tim Hortons Inc.

1

Tim Hortons

INTRODUCTION

This case examines a Canadian fast food restaurant chain at a point when it is in

the final stages of being acquired by a large investment firm. In the third quarter of 2014,

Tim Hortons Inc. is poised for aggressive geographic expansion, is confronting critical

strategic choices, and faces tough competition, both domestically and internationally.

Based on the potential to generate a variety of ideas and recommendations, this case

analysis provides an excellent opportunity for a lively classroom discussion on the

company’s strategic options.

After a brief introduction, the case opens with data on the restaurant industry and

consumer trends. The history of Tim Hortons’ restaurants is then presented, along with

descriptions of the company’s organizational structure and goals, store locations, menu

items, franchise system, store operations, and financial performance. Comparative

information on the company’s main competitors follows. The case then closes with an

explanation of Tim Hortons’ five-year strategic plan, the impending acquisition by G3

Capital, and other strategic considerations.

In order to evaluate Tim Hortons’ strategic options, a case study should be

completed using internal and external environment analyses to produce a comprehensive

summary of the company’s strengths, weaknesses, opportunities, and threats (SWOT).

With competition intensifying for the Canadian restaurant chain, a thorough competitor

analysis should also be conducted so that appropriate business strategy proposals can be

weighed. Again, due to the complexity of choices and potential input from students’

personal experiences, a variety of strategic recommendations should emerge from the

analysis, and a vigorous classroom discussion should be possible.

• Perform an internal environment analysis of Tim Hortons Inc. Construct a

summary of the company’s strengths and weaknesses. Does the company

maintain any perceived competitive advantages?

• Perform an external environment analysis of the domestic and international

restaurant industries. Construct a summary of the company’s opportunities and

threats.

• Conduct a competitive comparison between Tim Hortons and its biggest

competitors in Canada and the U.S. What are the strategic implications of this

analysis?

• Using the results of your analysis, assess Tim Hortons’ strategic objectives and

five-year strategic plan. Does the analysis reveal any flaws in the company’s

direction? Make recommendations to strengthen the company’s strategy and to

improve its chances of achieving success.

Tim Hortons Inc.

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Tim Hortons

ANALYSIS

• Perform an internal environment analysis of Tim Hortons Inc. Construct a

summary of the company’s strengths and weaknesses. Does the company maintain

any perceived competitive advantages?

A comprehensive look at Tim Hortons reveals substantial organizational strengths

and some weaknesses within the firm. The company’s internal strengths, weaknesses, and

competitive advantages are outlined and described below.

Strengths

» Franchise Model – 99.5% of Tim Hortons restaurants are franchise-owned, and the

company maintains a close relationship with its franchisees and their communities.

Even with steep fees and stringent terms, there is high demand for Tim Hortons

franchises because of their profit potential. The table below shows that the company’s

franchise revenues are on the rise, up $95 million in 2013 compared to additional

revenues of $40 million from product sales.

% Chg

Net Change

2013

2012

Sales (in 000’s)

1.8%

$40,225

$2,265,884

$2,225,659

Franchise revenues:

Rents & Royalties

5.2%

$40,229

$821,221

$780,992

Franchise Fees

47.9%

$54,575

$168,428

$113,853

Total Revenues

4.3%

$135,029

$3,255,533

$3,120,504

» Customer Convenience – Focus in the quick service category is on convenience for

the customer, and Tim Hortons caters to “on-the-go” consumers.

▪ Hours and Service – Tim Hortons is open 24 hours a day, offering take-out food

and drive-through service in addition to the typical restaurant dining space.

▪ Menu Items – The company’s menu items are fast to prepare and easy to consume.

Tim Hortons Inc.

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Tim Hortons

▪ “We Fit Anywhere” – The company uses non-traditional locations (such as gas

stations, convenience stores, universities, hospitals, office buildings, and airports)

as well as co-locating with other franchise restaurants to extend its customer reach.

Its alliance with the Canadian Forces operation in Kandahar demonstrates the

company’s commitment to serving its loyal consumers. During the 5 years that

CF troops served in Afghanistan, Tim Hortons established a “temporary” shop

that served 4 million cups of coffee, 3 million donuts and half a million iced

cappuccinos and bagels to over 2.5 million customers from more than 37

countries.

» Menu Specialties – Tim Hortons specializes in coffee, baked goods, breakfasts, and

home-style lunches.

▪ Beverages – In addition to the coffee, Tim Hortons has an expanded offering of

hot and cold beverages, which includes teas, lattes, cappuccinos, iced teas and

coffees, smoothies, and iced lemonades.

▪ Breakfast Items – Beyond donuts and pastries, Tim Hortons serves oatmeal and

breakfast sandwiches on biscuits, bagels, and English muffins. Wildly popular,

the company holds 57% of the hot breakfast sandwich market in Canada.

Canada

U.S.

Gulf

Europe

Total

Stores

3,588

859

38

61

4,546

% of total

78.9%

18.9%

0.8%

1.3%

100.0%

Tim Hortons Inc.

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Tim Hortons

▪ Tim Hortons Coffee Partnership – Assistance and connections with farmers in

Brazil, Guatemala, Honduras, and Columbia strengthen the company’s supply of

quality ingredients and build its social capital.

▪ Distribution Efficiencies – The company’s extensive offering of baked goods is

produced centrally, and corporate-owned trucks deliver frozen product and

supplies to dispersed store locations across Canada and the United States. This

highly sophisticated operation of 3 manufacturing facilities, 6 warehouse

distribution centers, and 1 warehouse services Tim Hortons’ North American

restaurants.

ratio is improving. Also, franchise fees are up 48% (see table on page 2).

Impressively, the company’s net income after taxes is currently 18.9%, which

compares to an industry average of 3-6%.

Canada

U.S.

Comparison

Percentage

Can. to U.S.

Tim

Hortons

Number of Employees (in millions)

1.1

13.5

8.15%

0.1

Number of Restaurants

81,000

900,000

9.00%

4,546

Revenue Dollars (in billions)

$ 57.5

$ 683.40

8.41%

$ 3.3

Revenues per Restaurant

$ 709,877

$ 759,333

93.49%

$ 725,913

Employees per Restaurant

14

15

90.53%

22

Growth Rate

4.7%

3.6%

130.56%

4.7%

Tim Hortons Inc.

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Tim Hortons

» Product Innovation – Tim Hortons focuses on continuous development of menu

choices to meet evolving consumer tastes and preferences. The company invests in

product innovation to keep the menu fresh and responsive to food trends.

Weaknesses

» Iconic Canadian Brand – Tim Hortons’ brand and products are little known outside

of Canada’s borders.

» Quick Service Market Position – Tim Hortons operates in a sector with the lowest

average bills of all restaurant categories. This makes it more difficult to increase

revenues and positively impact same-store sales growth.

» International Merger – After merging with Wendy’s International in 2006, the

combined company separated just 3 years later, when TLD Group, Ltd. repatriated

itself to Canada. This raises concerns about the company’s impending acquisition by

G3 Capital.

» Financial Issues – Tim Hortons has strong financial performance, yet its records do

indicate some problem areas.

▪ Debt Exposure – Tim Hortons’ current ratio is 1.0, and its quick ratio is 0.4.

These liquidity ratios indicate a weakness in the firm’s ability to meet its current

financial needs, particularly its short-term obligations, without relying on period

sales. The company’s debt-to-equity ratio is 132.9%, which signifies that leverage

depends more on borrowed funds than shareholder contributions. In addition,

Tim Hortons Inc.

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Tim Hortons

▪ Earnings per Share – EPS are also below target levels, which means that corporate

market stakeholder expectations are not being met.

▪ Employees per Store – Referring to the table on page 4, Tim Hortons’ restaurant

operations require more employees per store than the industry average – in both

Canada (by 62%) and the U.S. (by 47%). This is an indicator of operating

inefficiencies and is perhaps partially due to stores remaining open 24 hours per

Competitive Advantages

• Perform an external environment analysis of the domestic and international

restaurant industries. Construct a summary of the company’s opportunities and

threats.

Tim Hortons Inc.

Opportunities

• International Expansion – To hit the company’s ambitious growth targets, successful

expansion in foreign markets is essential.

▪ United States – Tim Hortons’ entry into the U.S. market is considered a “must–

win” battle by the company’s top management team. The limited service sector in

limited service sector. But fast casual sales grew 11% in 2013, which is a

much faster rate than the industry average. This is the only restaurant category

seeing an increase in the number of customer visits.

Intensity of

Rivalry

Moderate

to High

Supplier

Power

Low

Threat of

Substitutes

High

Buyer

Power

Low

Threat of

Potential

Entrants

Low

Tim Hortons Inc.

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Tim Hortons

– Quick Service Sector – This sector is also growing faster than the industry

average.

▪ Emerging Economies – Growth rates in emerging economies make these

developing markets an appealing target for firms trying to expand their

international presence. As home base of acquirer G3 Capital and the location of

the coffee farms Tim Hortons sources from, South America might be a logical

• Domestic Expansion – In 2013, commercial food revenues grew by 4.7% in Canada,

1.1% faster than in the U.S. Restaurant growth can occur through an increase in the

average bill amount and/or an increase in foot traffic. Foot traffic is considered a

better indicator of a successful strategy. But as food prices continue to rise, there is a

reasonable expectation that increased bills can also contribute to increased sales.

• New Product Development – To achieve Tim Hortons’ ambitious performance targets,

product and menu innovation is a priority. It helps the company anticipate or respond

to evolving consumer tastes, and it enables the differentiation of product offerings.

• Industry Trends – Several favorable industry conditions align with Tim Hortons’

restaurant business model and create marketplace opportunities for the company.

Tim Hortons Inc.

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Tim Hortons

▪ Technological Developments – Mobile and digital technologies offer new ways to

engage and attract consumers. Nearly all consumers are connected through their

mobile devices, which presents the company with new payment options, tools to

reward customers, and opportunities to enhance service levels.

Threats

• Acquisition – G3 Capital will become 51% owner of Tim Hortons in the proposed

$12.5 billion merger. Even operating largely as two separate entities, the new owner

will have strategic objectives that the company will need to fulfill, along with an

expectation of shareholder returns. Based on previous merger difficulties with

Wendy’s, the success of this acquisition is not guaranteed.

• Market Saturation – Some analysts believe that Tim Hortons has saturated its home

market in Canada. Meanwhile, all of its competitors are also seeking ways to expand

in their home and foreign markets.

Tim Hortons Inc.

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Tim Hortons

▪ Number of Visits – This industry indicator of restaurant traffic is stagnant, and

experts estimate less than 1% growth for the next few years.

• Conduct a competitive comparison between Tim Hortons and its biggest

competitors in Canada and the U.S. What are the strategic implications of this

analysis?

Menu Variations

Tim Hortons

Starbucks

Dunkin’ Donuts

McDonalds

Coffee

Quality

“Best–in–class” –

premium and

dark roast blends

Bolder tastes

Customizable

> 30 blends/flavors

Roasting facility

Fewer blends

High quality and

flavor

McCafe

Espresso-based

beverages

Less customizable

Baked

Goods

Centralized

production

Large variety

Pastries, fresh and

packaged

52 varieties of

donuts

Other baked goods

Beverages

Variety and

choice

Customizable

blended beverages

Ready–made drinks

Hot and cold

beverage

alternatives

Fountain soda,

shakes, fruit-based

smoothies

Breakfast

sandwiches –

57% Can. share

Oatmeal, yogurt,

fruit, and

sandwiches

Breakfast

sandwiches

Egg-based

sandwiches – 29%

U.S. share

Small

Meal

Soups, chili,

sandwiches,

crispy chicken

Fresh salads and

sandwiches

Healthy options

Chicken salad

sandwiches with

sides and combos

Distinct meal

options – burgers,

fries, salads, wraps

Snack

Pastries and

baked goods

Pastries, fruit, and

small pkg. snacks

All day donuts and

breakfast items

Ice cream based

desserts

Price

Lowest costs

Highest prices

Medium point

Low price point

Tim Hortons Inc.

Menu Variations cont.

Stores

Tim Hortons

Starbucks

Dunkin’ Donuts

McDonalds

Other

S. Am. coffee

partnership

C.A.F.E., ethical

sourcing, environ.

stewardship, corp.

responsibility

Loyal customers

Aggressive U.S.

and international

expansion plans

Menu innovation

Value platform

Leading quick

service retailer

Tim Hortons Inc.

Tim Hortons

While the company has revenue growth that exceeds the industry average, the

analysis shows that most of this growth is generated through franchise rent, royalties, and

fees. And while Tim Hortons’ profit margins are strong, it is not achieving the levels of

profitable same-store sales growth that is desired. This also follows for EPS growth. The

In Tim Hortons’ “Winning in the New Era” Strategic Plan for 2014-2018, the

company envisions a rejuvenated Canadian business that is the growth engine for the

period. The aim is to have a profitable U.S. business that is ready to be aggressively

scaled by 2018. The firm plans to build on its established, growing international presence

and to create above-market-average total shareholder returns. Tim Hortons’ plans are

based on four core ideas, which are outlined in the tables below. Using the strategic

analysis performed above, strategic fit with the environment is assessed. Then, discussion

and recommendations follow for each of the core points in the strategic plan.

Same-Store Sales

Strategy Components

Strategic Fit

Day category

segments

Hot and cold beverage

category

Snacks between meals

Capability, but potential for

segment growth is unknown

Strength matched with

opportunity

Marketing

Branding

New advertising/marketing

campaigns

Strength to overcome stagnant

conditions (threat)

Strength matched with new

opportunities to use

technological tools

Product innovation

Differentiation in U.S.

Strength matched with

opportunity

Tim Hortons’ same-store sales growth is underperforming. Because average bills

in the quick service segment are low, an increase in SSSG figures must come from an

increase in restaurant traffic. To be the fuel for the company’s expansion, it is critical to

overcome stagnant traffic trends. As the table above confirms, targeting same-store sales

Tim Hortons Inc.

Targeting snacks between meals is one of the strongest growing segment

opportunities matched with Tim Hortons’ core competencies and ability to cater to “on–

the-go” customers. The development of new menu items in this category, coordinated

with marketing, has the greatest potential to draw customers into existing stores. With the

company’s centralized production and distribution system, local sourcing is not a strong

option. However, the introduction of natural ingredients, healthy and nutritional menu

items, gluten-free pastry options, and trending ethnic flavor profiles fits with the growing

consumer demand for these types of products. Prepared and frozen “bites” fits with the

distribution system as well as the growing snack segment. As the company makes its new

menu selections, it will be important to consider the following factors:

The key is to innovate, differentiate, and create value and to compete on speed,

price, and convenience variables. Product differentiation is particularly important for U.S.

expansion, as it increases the company’s prospects of pulling competitors’ customers into

Tim Hortons’ stores. The ability to aggressively grow in the U.S. depends upon the

company’s ability to generate enthusiasm for the brand.

Brand management and marketing are crucial elements to the strategy. The

company has enormous opportunities to employ new technologies to effectively market.

Tim Hortons Inc.

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Tim Hortons

cont.

New/Existing Markets

Strategy Components

Strategic Fit

Brand

Strength in domestic market to

overcome global weaknesses and

pursue international opportunities

Tim Hortons’ strategy to broaden its international presence and establish a

profitable U.S. business that can support a scaled launch by 2018 require a thoughtful

Broaching the U.S. marketplace, the following factors should be considered when

deciding how to move forward:

o How can the brand be shaped to facilitate success in new markets?

o Does brand awareness precede or coincide with new locations?

o How can Tim Hortons’ name recognition along the U.S. border be

Recall that in addition to good service, good value, favorite food types, and

healthy menu items, quick service customers are looking for convenience to their home

or work place. One of the most promising approaches for Tim Hortons to consider is the

use of alternative store formats, many with which the company already has experience.

[Note: even though alternative store formats are outside of the company’s successful

Tim Hortons Inc.

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Tim Hortons

with powerful entrenched rivals? Younger customers, like college students, are an ideal

demographic due to their snacking trends, sensitivity to price points, and potential for

life-time loyalty. Thus, finding the “nooks” where this demographic can be serviced is a

promising approach. And again, this is a distinctively different way to meet the needs of

“on-the-go” customers than the fast-casual methods of some competitors. This is

particularly important because the U.S. market has more competition and much more

fragmentation than Canada’s. A precision micro-market strategy may be the way to

discover unoccupied space under the immediate radar of competitors.

In addition to the U.S., Tim Hortons has existing plans to aggressively expand in

the GCC during the plan period. This follows the logic of expanding in markets where

some inroads have already been made. However, in consideration of other international

opportunities beyond Canada, the U.S., and the GCC, it is important for the company to

conduct further global analysis to understand regional growth rates and market

distinctions. Then, its strategy can be defined. It is probably most fitting to select a

transnational international strategy that pursues both global efficiencies and local

responsiveness. However, decentralized decision making based on the needs of individual

markets weighs more heavily, so the multidomestic features of the international strategy

should take precedence over achieving global efficiencies. (This is consistent with Tim

Hortons’ different brand presences in each of its three existing jurisdictions – Canada, the

U.S., and the GCC.) Finally, the firm should select international markets based on

pursuing the most promising opportunities that best fit with the company’s strategy and

core competencies. Additional considerations, derived from the analysis above, include

conditions in Europe and opportunities in emerging nations.

Tim Hortons Inc.

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Tim Hortons

on potential opportunities to expand in South American markets, beginning with

Brazil.

Growth in New Ways

Strategy Components

Strategic Fit

Standard restaurant design

Capacity

Throughput

Corporate resources to match

market opportunities

Equipment

Menu items

The redesign of restaurant space to maximize capacity and throughput is

consistent with the goal of enhancing convenience for “on-the-go” customers discussed

above. New store design also supports the flow of increased traffic required to grow

same-store sales. Interior and exterior elements should be designed in ways that reinforce

Core Competencies

Strategy Components

Strategic Fit

Business strengths

Vertical Integration

Supply Chain

Capabilities and opportunities are

uncertain.

Strengths exist, but specific

opportunities are unknown and

ability to apply beyond current

operations is uncertain

Tim Hortons Inc.

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Tim Hortons

cont.

Core Competencies

Strategy Components

Strategic Fit

Franchise system

Strength not certain to match

conditions in international markets

The success of the company and brand is currently linked to its franchise system.

(As discussed above, all but a few of Tim Hortons’ restaurant sites are franchise-owned.)

However, the strength of the company’s franchise system may not succeed in markets

where its value is not perceived or where the market is saturated with well-known fast

food restaurants. Therefore, newer store formats and cooperative arrangements should be

given strong consideration, especially to facilitate flexibility and quick movement into

new convenient locations. This may become a key to successful international expansion

as it also provides valuable knowledge of new market conditions and enhances

performance.