Who really owns Tim Hortons?

By: on January 12, 2018 |

Tim Hortons has been called – and sees itself as – quintessentially Canadian, a social hub in thousands of communities, a multicultural leveller, a symbol of patriotism, and part of the nation’s fabric, among many other hyperbolic descriptors. As self-regarding and sometimes inflated as such claims surely are, they are not inaccurate. Tim’s is unlike other fast-food chains. Beyond its phenomenal success as a business, it is a Canadian cultural icon. Over its nearly 54 years it has provided entry-level employment to millions, rise-through-the-ranks careers for thousands of managers, upper-middle-class lifestyles to franchise owners, and a leg up for innumerable disadvantaged kids through the Tim Horton Children’s Foundation. It’s hard to find a Canadian who doesn’t have some kind of personal anecdote involving Tim Hortons. The sight of multi-car lineups of customers patiently waiting for their Tim’s double-double while adjoining fast-food joints sit empty demonstrates the extraordinary brand devotion it has forged.

But what stands out above all is the chain’s knack for changing with the times without selling out, for overhauling its offering without diluting its essence. As others fell by the wayside – including competing donut mongers – Tim’s evolved and became Canada’s top-ranked fast-food chain without resorting to burgers, deep-fried chicken or fries. Its once-dowdy outlets today have smart, modernized décor with lounge seating and simulated fireplaces. By all appearances, Tim’s is as indestructible as the vast landscape upon which its 3,500 Canadian outlets are scattered from sea to sea to sea (there’s one in Iqualuit).

Or is it? Ontario Premier Kathleen Wynne, who faces a tough re-election fight later this year, made a play for the low-income vote January 1 by raising the province’s minimum wage by a whopping $2.40, from $11.60 to $14.00, with another buck-an-hour bump set for next January. That sparked a familiar debate over the economic impacts of government wage-fixing, but it also prompted the owners of a couple of Tim’s outlets to cut employee breaks and benefits. Those owners happened to be the very wealthy heirs of Tim’s founders, so Wynne double-doubled down, calling them bullies. Her allies in the labour movement quickly ratcheted up the class war rhetoric, casting Tim Hortons as oppressors of the working poor.

The wage hit for an average Tim’s owner is estimated at more than $200,000 year. But the brand hit, to a business built on middle and lower class customers, could be devastating. Even worse, Big Labour clearly smells an opportunity for a union drive. And to top it all off, this one-two punch from government and labour comes a time when Tim’s has already been weakened by a bitter internal conflict between its American corporate head office and an apparently growing number of its approximately 1,100 Canadian franchise owners.

Last year the dispute went public and escalated into mutual accusations of wrongdoing, disloyalty to the Tim’s brand, and massive lawsuits. On one side are the company’s American overlords, the publicly traded Restaurant Brands International Inc. (RBI), in turn controlled by the Brazilian brewing and food industry behemoth 3G Capital. Since acquiring Tim’s in a $12.5-billion deal in late 2014, RBI has aggressively sought to boost profit margins through relentless cost-cutting, productivity-boosting technology and work processes, management downsizing, grinding of suppliers, and imposition of sophisticated performance metrics. This approach by the youthful American executive team angered some Canadian franchise owners, who banded together to fight back as the Great White North Franchisee Association.

Great White North accuses the corporation of “mismanagement” and abusive practices. These include allocating excessive internal costs to an advertising fund that franchisees pay into (and then allegedly altering its records to hide these costs), imposing unattainable standards to push out some franchisees without compensation, sacrificing product and equipment quality though excessive cost-cutting, offloading corporate expenses by inflating supply costs so as to “expropriate” some of the franchisees’ profits, a “general lack of transparency and accountability,” and preventing franchisees who want to retire from freely selling their outlets. True or not, Great White North’s complaints resonate with many franchise owners; it claims half the Canadian ones as members and has launched a U.S. affiliate.

RBI refuses to recognize Great White North and denies all its claims. It has accused some members of breaching their franchise contracts by leaking confidential and/or competitive information and harming the business by making negative statements. In an internal conference call that was leaked to the media, RBI CEO Daniel Schwartz declared he had “zero tolerance” for such behaviour. Last spring, the company issued “default notices” to nine Great White North directors. These appeared to be the precursor to cancelling their franchise agreements.

The franchisee association denounced this move as an attempt to intimidate and punish franchise owners, and filed two lawsuits. The first is for $500 million and alleges misuse of the advertising fund. The second is for $850 million and alleges that RBI’s actions undermine the Great White North members’ constitutional right to associate.

If it involved almost any other business, this story would mainly be of interest to investors and insiders. But this is about Tim’s. So the Canadian media has covered it extensively, and almost all the stories conform to the same one-sided narrative. It portrays the hard-working, salt-of-the-earth, quintessentially Canadian underdog franchise owners as victims of ruthless, oppressive, uncaring, greedy corporate titans. Foreign corporate titans oblivious to Tim Hortons’ hallowed role in Canadian life. Even worse, Americans! For an innocent Canadian news consumer hearing this story on the radio or reading it on a smartphone while waiting at a Tim’s drive-through, the facts seem clear: The noble Canadian beaver is yet again menaced by the ugly American eagle because the latter will do anything for the almighty dollar.

But is this narrative true? That ought to matter, because in siding with the ostensible underdogs, the news media have all-but ignored the hundreds of franchisees who have not joined the revolt against RBI. And they’ve overlooked the party that should matter the most. Not the franchise owner, nor the RBI shareholder, nor even the employee. The customer.

Claimed concerns over the Tim Hortons “brand” have seemed curiously detached from the actual needs and perceptions of the person who places the order, consumes the product and chooses whether to come back or spend their money elsewhere. Industry experts have fretted about Tim’s “deep connection to the fabric of the country” – but not the customer.

A working modernday definition of brand is all the associations, perceptions and experiences by a stakeholder at every touch-point with an organization. In any retail business, no stakeholder is more important than the one who provides the revenue that pays the bills, keeps everyone employed and generates the company’s profits and the investor’s returns. Tim Hortons doesn’t exist primarily to serve its franchise owners. This should be Business 101, but it appears to be news to the media, politicians and other critics of Tim’s and, perhaps, some of the disgruntled franchisees.

Daniel Schwartz, CEO of Restaurant Brands International. (Image: Tyler Anderson)

There’s another near-forgotten actor in this drama: the franchise owner who likes what’s happening under the new ownership. Such owners believe that the profit-driven, metric-obsessed RBI team understands the customer’s centrality. Profit may be the driving motivation, but the means to that end are happy customers, and the method is consistently high-quality delivery across-the-board in all outlets. And if RBI’s approach requires treading on a few toes, well, it’s high time. It’s impossible to know how large this group of franchisees is, but they tend to be successful entrepreneurs who have built up mini-chains of Tim’s outlets.

If there was a serious criticism of the old Canadian corporate team, for more than 30 years headed by the universally respected Ron Joyce, it was that they were a bit too nice, too caught up in their own aura, slow to introduce changes and indulgent of underperforming products, processes or people. Too Canadian, one might say. Although Joyce’s personal touch earned him an affection bordering on adoration among many franchisees, even some of his fans grew annoyed with Joyce’s team and the executives who followed him. They allegedly tolerated outlets with substandard food or coffee, poor service, decrepit décor or questionable hygiene. Success, says one franchise owner, “was more about who you knew than what you did.” The old team’s refusal to clamp down became a sore point among those who’d spent decades toiling to provide a great experience to the last detail.

Since RBI took over, numerous Tim’s outlets have been pulled from franchisees who failed to meet its stricter performance standards. The number is confidential, but some franchisees estimate it amounts to at least several dozen nationwide. “The cleaning up of the franchisee pool by weeding out owners who don’t run good restaurants is the best thing RBI has done,” asserts one Western Canadian franchise owner. “A lot of owners skated for far too long, and now they’re upset that somebody’s holding them accountable.”

There’s no question the new executives – who took control amidst worsening unrelated economic difficulties, including the deep downturn in Alberta, where many of Tim’s highest-grossing outlets and a large number of its new openings had been situated – produced culture shock. The days of a franchisee picking up the phone and personally hashing out any issue with Joyce were long over. The new RBI executives fired the old guard, hired people they saw as “hard-working, humble and hungry”, minimized the corporate bureaucracy, provided huge financial incentives to succeed and cut costs over and over, including by squeezing core suppliers. Immediately following the late 2014 takeover, the newly installed CEO for Canada told assembled managers to use the Christmas holidays to decide whom to let go.

Such tough moves, exacerbated by RBI’s clumsy media relations, confirmed a very unCanadian management style, at least from the perspective of some journalists and suspicious franchise owners. The Globe and Mail’s ROB Magazine published a lengthy feature article and accompanying editor’s note detailing how hard it was to get interviews with RBI and 3G Capital executives – and then griping about how unforthcoming they were. David Clanachan, the chairman of RBI’s Canadian subsidiary, refused or was not allowed to comment for that article (or, it seems, any other) – reinforcing the view he’s a puppet. It perfectly suited the news media’s and disgruntled franchise owners’ oppressor-victim narrative.

Even RBI’s supporters agree it made some early mistakes. The rush to impose uniform standards failed to make allowances for the diverse type and location of Tim’s restaurants. Ensuring every item in an outlet was “food-safe” resulted in some eye-popping costs, including it is said special $70 scissors – along with supply shortages when everyone tried to buy them at once. New coffee carafes were prone to shattering. Some franchisees already facing challenges due to Canada’s sluggish economic performance in 2015-16 and rising costs such as government-imposed minimum wage hikes began to wonder if their own company was out to get them.

Pro-RBI franchisees say management has reversed or eased off on some of its tougher demands and begun working on solutions to higher costs. New labour-saving equipment is reportedly in the pipeline, for example – although the coffee carafe mystery remains unsolved. “Right now, our prospects as business owners are worse than they used to be due to the weak economy, higher minimum wages and higher taxes at all levels,” says one franchise owner. “But I think those operators who run good restaurants are in a much better position to manoeuvre through these challenges with RBI in charge than we would have been under the old group.”

The new regime’s “data-driven decisions” have managed to drive down RBI’s corporate general and administrative costs (i.e., overhead) by 50 percent and the cost of goods sold as a percentage of sales by 10 points. Both are stunning accomplishments. Investors have noticed. RBI’s shares zoomed in 2016 and grew a further 30 percent last year. Despite accounting for only 22 percent of RBI’s sales in the third quarter of 2017, and representing less than 20 percent of RBI’s 23,000 restaurants worldwide, Tim’s generated 52 percent of the company’s EBITDA (roughly, cash flow). In other words, it’s the jewel in RBI’s crown. RBI says its approach has lowered costs for franchisees as well, in part by making use of the bargaining power of a company operating three major brands – Tim Hortons, Burger King and Popeyes – helping restaurant owners increase their own profits or at least offset rising external costs.

The supportive franchise owners like the new management team’s combination of youthful energy, business school rigour and American aggressiveness. Those franchise owners who have gotten with RBI’s program are rewarded with first crack at new outlets, while those who fall behind or buck the new standards risk losing theirs. Marketing remains intensive. New products such as potato wedges have gone over well, while food quality has gone up. Restaurant operations are subject to uncompromising metrics, such as cleanliness and drive-through times, and awards go out to star performers. Today Tim’s claims the shortest drive-through wait times in the industry. “It’s a big company in which to make changes with new products or operational processes, but RBI has far fewer levels to go through and they’re much more nimble and innovative than the old group,” says one restaurant operator.

Two recent examples are state-of-the-art, Internet-enabled programmable ovens and arguably the fast-food sector’s best espresso and cappuccino machines. A third is the new mobile ordering app, which has had a slow start but is described as solid. “The old owners treated suppliers like an old boys’ club and acted like Oakville, Ontario was a technology and manufacturing Mecca, because everything seemed to come from there,” snorts one franchise owner. “RBI has made it clear that anyone who brings us their best and most innovative products will be considered on merit. It shows.”

Surely trying to impose consistent standards, clean up questionable outlets and raise every owner’s game is in everyone’s interests, most of all the customer’s and, from there, the Tim’s brand and its beloved place in Canada. The internal acrimony is far from over, however. While RBI quietly withdrew its default notices against the Great White North directors, the franchisees’ lawsuits are still going ahead, even as political pressure on franchise owners trying to cope with higher government-imposed costs mounts. “We used to be like a big family. We were all in it together,” says one veteran owner of multiple Tim Hortons outlets in western Canada ruefully. “The franchisees, the company and its share price all need to do well. We need to work this stuff out.”

No kidding. Especially now, with the whole organization under attack from government and unions. But RBI’s initial response to the Wynne-labour offensive was to criticize the franchise owners, while the Great White North group blamed RBI’s actions for forcing them to cut breaks and benefits. The company’s stock value has been trending downwards since the start of 2018. If HQ and the franchisees don’t get their act together soon, the future looks very challenging for Tim’s owners, shareholders, workers, customers and the iconic brand itself.

 


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About Charles Schuster