Tim Hortons is Struggling to Win Over Customers, Here’s Why
Tim Hortons is often synonymous with what it means to be a Canadian. Tim Horton, a Canadian hockey player who played for the NHL opened the first Tim Hortons location in Hamilton, Ontario in 1964. While it would be hard to find a Canadian that isn’t familiar with the brand the company is struggling. In the fourth quarter of 2019 same store sales at Canadian Tim Hortons location were down 4.6% compared to the previous year.
Speaking about the poor performance in 2019, Restaurant Brands International (RBI) CEO Jose Cil said: “at Tim Hortons, our performance did not reflect the incredible power of our brand and it is clear that we have a large opportunity to refocus on our founding values and what has made us famous with our guests over the years, which will be the basis for our plan in 2020.”
So what happened? A mix of declining product quality, a proliferation of new products that have missed the mark, an inability to court new customer segments and public spats between management and franchisees have caused the retailer’s woes.
1. Product quality is not keeping up with the competition
While Tim Hortons is often seen as a national treasure it has to keep up with the times if it wants to maintain its place within the hearts of Canadians. Companies within the coffee industry in Canada face fierce competition. In 2019 Starbucks said that the number of members in its loyalty program in Canada grew by 25% over the past two years. Bank of America recently stated that: “we think Tim Hortons has lost share over the past several years in Canada to its two biggest competitors, Starbucks and McDonald’s.”
As Starbucks and McDonald’s have continually increased the quality of the coffee they serve the quality of Tim Hortons coffee has not kept up. In a 2018 survey by Angus Reid, 14% of those surveyed said that the quality of Tim Hortons coffee improved while 19% said that it had worsened. When asked about the quality of Starbucks coffee 13% said that it had improved while only 7% said that it had worsened. When it comes to service 8% of consumers believe the quality of service at Tim Hortons has improved while 25% believe it has worsened. Compared to Starbucks, 13% believe that the quality of service has improved while only 8% believed it has worsened.
Sylvain Charlebois, a professor in food distribution and policy at Dalhousie University has said: “if you were to use [Tim Hortons ]coffee as that anchor product, it’s still not great. They have to really dig in and see how exactly they can perfect that, because everyone else has picked up their game.”
Many believe the declines in quality at Tim Hortons is due to the $11.4 billion takeover of Tim Hortons by 3G Capital in 2014. The private equity company is known for aggressive cost cutting and a laser focus on operational efficiencies. True to form in 2015 hundreds of people at Tim Hortons’ head office and regional offices lost their jobs as part of cuts implemented by the new management team 3G Capital brought in.
2. A proliferation of products that have missed the mark
Who would have thought that one day you would be able to go into a Tim Hortons and have a plant based burger? Alex Macedo Tim Hortons’ now departed Global President was focused on: “on-trend innovation” with the desire to be first or a close second in the market for new products. Apparently, coffee wasn’t sexy enough.
After launching a plant based Beyond Meat burger last July Tim Hortons quickly removed it from its menu after only two months in market. In search of growth companies often make the mistake of going outside of their core competency. They overestimate their customer’s desire for something new and underestimate how quickly they can become known for selling the new hot thing.
The Beyond Meat burger wasn’t Tim Hortons’ only new menu item in 2019. Last year the brand made 60 new menu additions, two – three times the normal amount. Not only do these menu additions confuse customers they are difficult to execute. Speaking about this Duncan Fulton, RBI’s Chief Corporate Officer said: “some new products over the last two years strayed too far from our core categories that we’ve always been famous for. Going forward, new launches will be more targeted and will build on our core categories.”
Product proliferation also creates execution issues. “It causes havoc at the restaurant level because there’s a ton of part time employees that come in every week needing to learn (new items) and it causes confusion with guests who love us for our basics, and every time they come in, the menu board is plastered with new special offers,” Fulton said. “You saw Tim Hortons try a burger for the first time. Quite honestly, we have no business doing burgers at Tim Hortons.” A move back to focusing on the basics is a step in the right direction.
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3. An inability to please existing customers while courting new ones
Tim Hortons is not the hot new brand highly coveted by Gen Zs and millennials. Tim Hortons has been in business for a little over 50 years. Not ancient by any means but its core customer is getting older and it has yet to wow Gen Z and millennial consumers. New menu items like the Impossible Burger were likely introduced as an effort to target younger health conscious consumers. But Tim Hortons’ core customers are not looking for a plant based burger. They go to Tim Hortons for a cup of coffee and a donut.
Health conscious consumers are not going to view a place that sells a plethora of baked goods as the place to have a healthy meal. As a brand ages staying relevant with younger consumers is always tricky. This is an issue department stores have struggled with for decades. Kohl’s was founded two years before Tim Hortons in 1962. The department store has struggled to win over millennial customers. Kohl’s even created a "Millennial Initiative" team dedicated to coming up with ideas for new initiatives that will resonate with millennials. But so far Kohl’s has been unsuccessful with its efforts and as it pursues initiatives targeted at millennials it risks alienating its core consumers which are older than the average millennial.
A better strategy for Tim Hortons is to stick within its wheelhouse and become the best at what it is known for which is coffee and baked goods. That will keep the core customers that have been with Tim Hortons for a long time satisfied. Being the best at coffee is also Tim Hortons best shot at taking back share from McDonald’s and Starbucks. And if Tim Hortons wants capitalize on what’s popular with younger segments it should focus on innovating within the coffee and baked goods categories instead of straying away from what it knows best.
4. Tensions exist between management and franchisees
After 3G Capital purchased Tim Hortons in 2014 it merged Tim Hortons with another one of its assets, Burger King to form Restaurant Brands International (RBI). RBI and Tim Hortons franchisees are not a match made in heaven. In 2017 the Great White North Franchisee Association (GWNFA) a group representing some of Tim Hortons’ franchisees filed its first lawsuit against RBI. It alleged that management improperly used funds from a $700 million national advertising fund. Franchisees claim that money was taken from the fund to pay overhead expenses. GWNFA didn’t stop there. Another lawsuit was filed in 2017 that claimed that RBI was trying to block the franchisees’ right to organize.
Then in 2018 GWNFA wrote a letter to Navdeep Bains, Minister of Innovation with a list of grievances. The association claimed that 3G Capital’s buyout of Tim Hortons failed to meet requirements from the government for the 2014 deal to go through. Some of the stipulations include: “not increasing franchisee rents and royalties for five years; keeping levels of staffing for franchisee operations; maintaining the company’s financial contribution to renovations; applying industry best practices on matters such as safety; and maintaining its franchisee advisory board’s policies.”
Franchisees argued that RBI increased the cost of supplies (i.e. goods that must be purchased from head office such as coffee and sugar) and did not pay for required restaurant renovations. GWFNA argued that those actions are in effect a change to the rent and royalty structure. In the letter GWNFA wrote: “franchisees are increasingly concerned with RBI’s self-serving attempt to significantly increase its margins at the expense of the franchisees.”
Both of the lawsuits were settled last spring. Speaking about this, Ken Wong, marketing professor at Queen’s University’s School of Business said: “in a better-run business, head office would try to resolve the problem with franchisees without airing the dirty laundry in public. The fact that they couldn’t do that says volumes to me about the state of management at Tim Hortons. But this is something that happens quite often, unfortunately, when an operating company gets bought out by a financial holding company.”
Needless to say, lawsuits are not good for business. Since Tim Hortons was taken over RBI has failed to have a material impact on the growth of the retailer. In first quarter of 2019 Tim Hortons’ sales were $1.55 billion. In the first quarter of 2014, just prior to the takeover, Tim Hortons’ sales were $1.5 billion. The 3% increase in sales is offset by 6% inflation during that time period. At the same time the number of Tim Hortons’ restaurants increased by 7.6%. The two effects taken together according to Barron’s is a -10% impact on sales per restaurant in real terms.
Even RBI has complained publicly about the tensions. RBI Chairman Daniel Schwartz said that: "negative media created by this group of franchisees" is having a negative impact on customer perceptions of Tim Hortons’ brand.
It’s hard to successfully run a company in a fiercely competitive market if there is infighting. It’s a distraction that takes the company away from focusing on what’s best for the organization.