Tim Hortons’ Must-Win Battle

January 12, 2015

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By Sherri Daye Scott

COPYRIGHT © 2015 JOURNALISTIC INC. ALL RIGHTS RESERVED.

http://www.qsrmagazine.com/competition/tim-hortons-must-win-battle

Now that it’s merged with Burger King, the question is more important than ever: Can the Canadian favorite finally find true success south of the border?

Tim Hortons has devoted fans in the U.S. One need only to read the Twitter and Facebook feed on the brand’s U.S. website to see the passion. “Can you please open a Tim Hortons in Cincinnati???” writes Kevin Ryne Laile. “I just had the best/fastest/nicest @TimHortonsUS service!! The new one at 5 mile & Newburgh is awesome,” tweets @lemonyellowsun.

Yet the dedication of a few has not translated into the type of market domination the brand has seen in Canada, where Tim Hortons accounts for 42 percent of all quick-service transactions and 75 percent of quick-service caffeinated beverage sales.

Thirty years after opening its first store in the U.S., Tim Hortons’ share of fast-food bakery sales is less than 2 percent, according to Euromonitor. Size plays a role; competitors McDonald’s, Starbucks, and Dunkin’ Donuts operate 10 times the number of stores. But other factors are at play, such as low brand awareness and consumer loyalty to established American brands. Krispy Kreme, for example, operates fewer than 300 stores, compared with Tim Hortons’ 860-plus U.S. units, and enjoys more market share.

“Tim Hortons saw 3 percent sales growth in 2013, which is not bad,” says Elizabeth Friend, senior consumer foodservice analyst at Euromonitor. “But Dunkin’ saw 6 percent growth, while Krispy Kreme saw 7 percent.”

Still, Tim Hortons is determined to become a major player in the U.S. Its most recent annual report called the U.S. a “must-win” market and outlined a top-line, five-year growth strategy that focused on extending dayparts, increasing check averages, expanding the rollout of its bakery-café model, and seeding new markets. And that was before the brand was purchased by Burger King, which moved its headquarters to Canada, christened the new company Restaurant Brands International, and promised to invest in Tim Hortons to set it up for U.S.—and worldwide—success.

“When I look at the U.S. market, I see the world’s largest economic market,” Tim Hortons then-CEO Marc Caira told the Wall Street Journal in May 2014. “I see the world’s largest foodservice market. I see a food market that continues to grow. I see a population that continues to grow. I see a country [that’s similar]. … When you look at all these things and you have a brand like Tim Hortons, why would you not go into that market? To me, it’s not a question of not being there, but what are you going to do that’s different for you to succeed?”

Past performance
The U.S.’s first Tim Hortons opened near the Canadian border in Tonawanda, New York, in 1984. Wendy’s International Inc. purchased Tim Hortons parent company TDL Group Ltd. for $425 million in 1995. The goal was to leverage Tim Hortons’ coffee and baked goods to drive guests into cobranded Wendy’s/Tim Hortons units on both sides of the border during the breakfast daypart.

There were early signs that the partnership might falter. Tim Hortons cofounder Ron Joyce sold his stock in Wendy’s International in 2002 after losing confidence in senior management decisions, such as switching from locally baked goods to frozen par-baked product shipped from a central warehouse. And U.S. stores continually missed sales goals despite significant marketing investment.

“American consumers were confused. They didn’t understand how the two brands worked together, so the partnership just didn’t work,” says Darren Tristano, a restaurant industry consultant for Technomic.

Still, Canadian Tim Hortons stores performed well, accounting for one-quarter to one-third of parent company Wendy’s earnings in 2004. On the strength of those stores, investors began pressuring Wendy’s to spin off Tim Hortons to increase shareholder value. In 2005, Wendy’s announced plans to roll out its own breakfast menu by 2007. The next year, it listed Tim Hortons on the New York Stock Exchange and earned more than $670 million on the first day of trading. And in August 2006, Wendy’s told The Street is would sell its $4.17 billion worth of Tim Hortons stock.

Tim Hortons corporate ownership moved back to Canada in 2009, while U.S. operations remained in Dublin, Ohio. Cobranded units with Wendy’s remain in operation, though the two brands are no longer tied at the corporate level.

Since that time, the Tim Hortons standalone growth strategy in the U.S. has come under scrutiny from stockholders and industry-watchers alike. Thirty-six stores in the Northeast closed in 2010. U.S. same-store sales dipped 0.5 percent in the first quarter of 2013, inciting pressure from hedge fund investors Scout Capital Management LLC and Highfields Capital to curb U.S. expansion efforts in favor of buying back shares.

Now with the merger with Burger King, it remains to be seen how the “Must-Win” plan outlined by Caira, who is now vice chairman of Restaurant Brands International, will be adjusted, if at all.

The current state
With systemwide sales of $589.5 million in 2013 and more than 850 units operating, Tim Hortons ranks 41st among U.S. quick-service brands, according to the 2014 QSR 50. The chain operates in 10 U.S. states—Michigan, Maine, Connecticut, Ohio, West Virginia, Kentucky, Pennsylvania, Rhode Island, Massachusetts, and New York—with the largest concentration of stores in the Midwest and Northeast.

Last year saw the chain extend its breakfast menu until 5 p.m., expand its cold specialty beverage line to include Frozen Green Tea and Frozen Hot Chocolate, and test on-the-go offerings such as Spinach and Egg and Chorizo hand-held pies and a Meatball Panini, all in an attempt to reach a broader American audience and drive up average unit volumes in existing stores.

“Tim Hortons has a much bigger presence in the U.S. than people know,” Friend says. “They are definitely a player.”

A player in a field of tough competitors all vying for a share of U.S. breakfast, lunch, and beverage dollars. Along with Tim Hortons, Euromonitor places 24 other brands in the U.S. bakery fast-food category, including fast-casual concepts such as Panera Bread, Au Bon Pain, and Corner Bakery. Factor in convenience-store chains like 7-Eleven, Wawa, and Sheetz, and you have a market saturated with choice.

However, working in Tim Hortons’ favor as it seeks to stand out is a menu that straddles the line between fast food and fast casual. “They’re a notch above McDonald’s and just below Panera when it comes to food,” Tristano says. “The average check is less than $9, but the offering is closer to bakery-café than coffee [quick serves].”

“They are unique,” Friend says, “in that what they offer is closer to full-meal options than others in their category. Food—especially dinner, snack, and specialty beverage—has been a focus in the U.S., and it shows.”

Still, there is the issue of getting the uninitiated to step into a Tim Hortons stateside.

Tim Hortons is Canada’s No. 5 consumer brand, according to Interbrand, and sells eight out of every 10 cups of coffee poured there. According to YouGov’s August 2014 Brand Index, only 30 percent of Americans are aware of Tim Hortons, while 90 percent or more know Dunkin’ Donuts and Starbucks.

A variety of factors drive those numbers. Both Starbucks and Dunkin’ are established national brands with significant brand-building media spends each year. Plus there is the retail component. Starbucks, for example, sold more than $1 billion in packaged coffee and tea at grocery stores in 2013, bringing its brand to millions of consumers who might not otherwise interact with it.

But at the heart of the matter is the simple fact that Americans do not connect with the brand’s story and links to Canadian nostalgia the way their neighbors to the north do. They view Tim Hortons as simply another bakery-café option—and an unfamiliar one, at that.

“Tim Hortons is essentially starting from scratch in the U.S.,” Friend says. “There is not enough awareness for there to be public perception about the brand, good or bad.”

The positive news for Tim Hortons, though, is that once a guest is introduced to the brand, they rank it comparatively to Dunkin’ and Starbucks on quality and significantly higher than Starbucks on value, according to YouGov’s research.

To reach its goal of 300 new stores by 2018, Tim Hortons is aggressively courting would-be franchisees. Area development and master franchisee deals have already been signed in new markets such as St. Louis; Youngstown, Ohio; Fort Wayne, Indiana; and Fargo, North Dakota. Franchise start-up costs are similar to Dunkin’ Donuts: net worth of $500,000 plus liquid assets in the $250,000–$300,000 range.

“I understand the attraction to the U.S. market,” says Peter Saleh, New York–based analyst at Telsey Advisory Group. “There’s a lot of money to be made if you do it right. But there’s also the risk of losing money for many years as Tim Hortons builds brand recognition. I don’t know that they are going to find a lot of franchisees outside core markets willing to do that.”

At the center of U.S. expansion efforts is the Tim Hortons Café & Bake Shop concept that launched in 2010. The chain describes the prototype on its website as featuring “contemporary exteriors, warm, inviting interiors, advanced equipment and new digital menu technologies.” In an August 2014 report, Morningstar analyst R.J. Hottovy noted the format’s positive impact on same-stores sales and building and equipment costs in the U.S. market.

Looking forward
The question on everyone’s mind, of course, is how the Burger King buyout will impact Tim Hortons’ U.S. plans.

Opinions vary. Some say the merger should help Tim Hortons align itself with savvy master franchisees here in the States and move into battleground states like Texas and Illinois. There is also the potential to expose millions of Burger King customers to the Tim Hortons brand by switching from Seattle’s Best coffee in favor of Tim Hortons products.

Others believe the deal will have little effect on U.S. growth efforts, but might be a positive for overseas expansion. Burger King operates 18,000 stores in 100-plus countries. Pre-sale deals are already in place to open 120 Tim Hortons stores across Qatar, Kuwait, the UAE, Oman, and Bahrain by next year, plus an additional 100 Tim Hortons stores in Saudi Arabia by 2018.

“I’m not totally sold that the U.S. should be a focus for Tim Hortons,” Friend says. “There are plenty of other international markets where there’s opportunity for organic growth versus fighting for market share.”

If the chain is to remain focused on U.S. growth, targeting Millennials with a message of quality is a smart move, Tristano says.

“The Millennial consumer is always looking for something new,” he says. “Tim Hortons could be that for them. Kids see Dunkin’ Donuts as older, their parents’ place. And they don’t have enough money to eat at Panera, but are very focused on quality. If they try Tim Hortons and experience the quality, they’ll pay more.”

Tristano’s advice is telling: the food, not the brand, is the key to find success in the U.S.


Here Are the Only 6 Food Trends You Need to Know for 2015

January 12, 2015

pictureExperts forecast that we’ll be eating more fat and insects, and predict the next sriracha

With all due respect to sports geeks, music freaks, stock jocks, and teenage girls, there is no group more obsessed with The Next Big Thing conversation than food people.
The “restaurant trends for 2015″ predictions aren’t just coming now; they’ve been coming, steadily, since before Halloween. Press releases, slideshows, listicles in trades and foodie zines all aimed at telling us what’s the next kale, sriracha, or quinoa.

Interesting reading, often hunger inducing, but with so many predictions — from so many chefs, flavor-makers, food companies, bloggers— it’s hard to make sense of it all.
So this year, to cut through the tsunami of food punditry, I submit a highly abridged list.

I asked only six experts — all industry people who live and breathe food trends. And I asked these carefully chosen experts to make some carefully chosen decisions. Instead of a top ten list — or even a five-item slideshow — just give me that one big food prediction for 2015.

1. The Rise of Fat
For most health-conscious people, fat ranks right up there on the no-no list with nicotine and smog. But Kara Nielsen, culinary director of the Boulder, CO-based Sterling-Rice Group, believes 2015 could be known as the year that more and more Americans get over their fat phobia.

Nielsen isn’t talking about just any fat — not the trans fats found in highly processed foods. She’s talking about natural, animal-derived fats. Real butter sales are at a 40-year high; cultured butter is surging in popularity; high-end burger joints, like Shake Shack, celebrate fat as an essential part of a better burger. And the trend seems to be broadening: There’s a San Francisco restaurant selling a wildly popular chicken fat rice dish; there’s a rapidly growing Boulder company that only features full-fat yogurt. Nielsen expects more high-fat dairy products, more fat-celebrating meat purveyors, and more higher fat Asian foods to hit restaurant menus and grocery store shelves in 2015. “Americans are recognizing that the fear of fat that we’ve lived under for so long is erroneous,” said Nielsen. And it’s not just because of a foodie quest for flavor. Says Nielsen: “It’s also because of books like The Big Fat Surprise that are making the argument that natural fat is an essential part of a healthy diet.”

2. Local Meat
There’s near unanimity among food trend trackers that the local foods movement will continue to grow in 2015. Darren Tristano is no exception. Tristano, who tracks the restaurant industry for market research giant Technomic, expects more local produce, more local beer, more local grains. But Tristano believes the big local story of next year will be local meat. Californians will see more menus boasting of grass-fed beef from Niman Ranch; Chicagoans will likely see more free-range bacon from Slagel Farm. Diners in DC will see more chicken sandwiches from Polyface Farms. In short, get ready for more restaurants to celebrate the local origins of their chicken, beef, or pork just as zealously as their local Brandywine tomatoes or radicchio.

3. Insect-Powered Foods
Restaurants serving grasshopper tacos and ant guacamole, entrepreneurs peddling cricket-powered powerbars —there’s been tons of media coverage of insect-eating in 2014. Yet most people regard it as a curiosity, more Fear Factor-fad than food trend.

Not Suzy Badaracco. The president of food trend consultancy Culinary Tides believes insects will rise as a foodstuff in the U.S. far sooner than many expect. In picking insects as her “Food of 2015,” Badaracco said that insects draw on not one but three food trends: the growing interest in foraging, the invasivore movement (i.e., don’t kill them, eat them), and, the granddaddy of current trends, the desire for more protein. (Insects are protein powerhouses; grasshoppers, for instance, have about the same protein content as a chicken breast). Full-bodied insects won’t appear in your Safeway this year; get ready for them to arrive in processed form, especially protein-packed power bars, like Chapul and Exo. Badaracco expects insects, processed as flour, to soon become a popular protein sources for bakery and cereal products. Full-bodied insects — tentacles and all? Further off, but coming. Badaracco sent a list of more than a dozen American restaurants that feature insect options, such as the “Grass Whopper” —a burger made from cricket meat.

4. The Next Sriracha is Harissa
A few years ago, it was the unpronounceable hot sauce that you might find in Chinatown. Now, you can get a Subway chicken sriracha melt with a side of sriracha potato chips.

Maeve Webster, a restaurant analyst for market researcher Datamonitor, believes the next sauce to experience a sriracha-like rise is harissa, a spread of dried chiles, garlic, tomatoes, caraway, paprika, coriander, and olive oil that’s as common as ketchup in Tunisia. It’s still largely unknown to Americans, but Webster says all the elements are in place for harissa. “U.S. consumers can’t get enough of spicy foods. Harissa has a flavor profile that is both spicy and familiar,” Webster says. Like sriracha, harissa is also versatile and can work in a wide variety of applications. Last year, Datamonitor found that less than 3% of American restaurants included a harisssa item, but Webster noted that’s a more than 180% leap over three years. If Webster is right, get ready for the chicken harissa melt — maybe not this year, but soon.

5. The Next Quinoa is Millet
Melissa Abbot, director of culinary insights at The Hartman Group, concedes that her pick for “Food of 2015″ is not very sexy. Millet is, after all, best known as the main ingredient in birdseed. But Abbot believes that this avian staple could quite possibly become the next quinoa. Ever since quinoa exploded on the scene, the food industry has been in hot pursuit of the Next Great Grain, and there are plenty of healthful, gluten-free candidates. So why millet, and why not amaranth, sorghum, teff, or fonio? It’s gluten-free, protein-rich, high fiber, and, Abbot says, has a superfood quality all of its own. “It retains its alkaline properties after being cooked, which helps in reducing inflammation ideal for those with wheat allergies and sensitive digestion.” Another plus for millet: it’s local. The Great Plains, especially Colorado, is one of the world’s major millet growing regions.

6. Peas
This pick for “Food of 2015″ will not necessarily be found on restaurant menus or on grocery store shelves. You may even need glasses to notice it.

Barb Stuckey, who is a vice president at Mattson, one of the world’s largest food product developers, describes Americans as being in a “torrid love affair” with protein. While it’s debatable whether Americans should be seeking out more protein, the reality is food companies are responding to our love affair with protein by giving us more protein.

Soy is one of the best, most widely available, efficient ways of fortifying foods with protein, Stuckey says. But whether deserved or not, soy is falling out of favor. Food makers are searching for non-GMO plant-based sources of protein and, Stuckey says, “the newest, hottest kid on the block is pea.” Peas are high in protein and, as people gain more experience processing it, the flavor is improving. “Look for pea protein to show up the ingredient list of bars, cereals, beverages, you name it.”