Photo Illustration by Liz Sullivan

A bitter court battle is spilling intimate secrets about Tim Hortons’ hefty profits.

Michael Friscolanti at MACLEANS.CA reports that last year, customers spent more than $5 billion at Tim Hortons. Five billion dollars. That’s $13.7 million worth of coffee and doughnuts per day. Which, in theory, should leave everyone—head office, shareholders and individual franchisees—with plenty of profit to go around. (Don Schroeder, recently fired as Tim’s CEO, pocketed $5.7 million just for walking away and keeping quiet.)

But not everyone agrees with how the pot is divvied up. Arch and Anne Jollymore, both long-time Hortons franchisees, were in a Toronto courtroom last week hoping to certify a hefty class-action lawsuit against the iconic company, arguing that Tim’s historic shift to frozen doughnuts nearly a decade ago has taken a huge bite out of their cash registers—while providing head office with “spectacular” returns. Their legal briefs are complex (the court file is tens of thousands of pages) but the couple’s claim boils down to this: Hortons “forced” franchisees to scrap their deep fryers, then sold them frozen fritters and crullers for triple the cost of the scratch-baked versions.

Three years after the lawsuit was filed, a judge will soon decide whether the action should be sent to trial or tossed out of court. But whatever the outcome, the high-profile case has already served up one revelation that some loyal double-double drinkers will have a hard time swallowing: the Jollymores aren’t the only Hortons operators who think they should be making more money.

Among the evidence disclosed so far are a number of internal emails that discuss “fear” and “discontent” among franchisees, some of whom “are just keeping their mouths shut for fear of retribution” from management. “Every owner that I have talked to has expressed dissatisfaction with the bottom line,” reads one note sent to Roland Walton, head of Tim’s Canadian operations, weeks after the lawsuit was launched. “[T]he feeling is that [the company’s] attitude is ‘We’re still the best game in town, if you don’t like it or aren’t happy, there is a waiting list to get stores.’ ”

The email concludes: “I have yet to be in the company of Tim Franchisee’s [sic] whether at meetings or social situations that there isn’t lots of bitching and complaining.”

Read more at: MACLEANS.CA

Can there be even more Dunkin’ Donuts in Rhode Island? Apparently, yes.

A group of Dunkin’ Donuts franchise owners have nabbed up 16 former Tim Hortons locations, but just five will be new doughnut and coffee shops. The others will be leased to non-competing companies.

When asked if Rhode Island can really fit more Dunkin’ Donuts in the state, Todd Wallace, field marketing manager for Dunkin’ Donuts in the Providence market, said:

“Though we already have great brand availability in the greater Providence area, the addition of these restaurants enables us to be even more convenient for our Rhode Island and SouthCoast Massachusetts customers, and we look forward to continuing to support the community causes around these shops that are so important to our guests and crew.”

The new locations are: 159 East Main Road, Middletown, where Shawn Thornton of the Boston Bruins will be on Saturday for the official grand opening, and 1023 North Main St., Fall River. Locations to open within about a month are: 231 Main St., Ashaway, and 162 Granite St., Westerly. A spokeswoman said they have not decided where the fifth location will be.

There are 180 Dunkin’ Donuts locations in Rhode Island, and 110 in Bristol County, Mass.

Read more: Providence Business News

Even company co-founder Ron Joyce, who sold the majority of his stake in the company in 1995 and retired as a director in October 2001, was dismayed when word of the baking switch got out in 2003 and expressed his disappointment.

Time marches on though, and loyal customers adjusted to the change, but some franchise owners are still having trouble swallowing it.

Their concern has more to do with their contention that an unfinished doughnut now costs them 17.9 cents, almost triple the former 6 cent price  when they baked it themselves from scratch, an increase that takes a serious bite out of their profit margins.

That’s one of the allegations made in a $1.95-billion class action lawsuit launched by two Burlington, Ont., Tim Hortons franchise owners in June 2008. After a series of delays, a two-week certification hearing is finally set to proceed on Aug. 19.

Judge George Strathy of the Superior Court of Justice in Toronto will hear it at the same time as Tim Hortons’ own motion to dismiss the claims.

Neither side will comment on the specifics of the case as it heads to this pivotal stage of the litigation. But David Morelli, a spokesman for Tim Hortons, said in an email, “We believe the lawsuit has no merit and that we will ultimately be successful,” recapping the position the company has taken from the start.

The company plans to fight the allegations by arguing the plaintiff franchisees in question were inefficient and that the new system is profitable, according to a judge writing in an earlier motion in the case.

The Tim Hortons chain of quick-serve restaurants, founded by the legendary Maple Leafs defenceman in Hamilton, Ont., in 1964, merged with Wendy’s International Inc. in 1995 as it pursued expansion into the United States. After an initial public offering, it was spun off as a separate company in September 2006 and now has more than 3,000 stores in Canada.

Read more: Financial Post

Even though Canada’s coffee-and-donuts king has stumbled in the past in trying to replicate its success in the United States, it sees its latest marketing drive south of the border leading to strong sales momentum.

Indeed, the United States could eventually become Tim Hortons’ largest market, says Chief Executive Donald Schroeder.

“The United States is a developing market for the company,” he said.

The company, which has plans to open 300 more restaurants south of the border between 2010 and 2013, is investing heavily in advertising and marketing there to create awareness.

“People are getting to know Tim Hortons,” Schroeder said. He said brand awareness is likely to snowball into strong growth in the U.S. markets it has targeted.

“When the lights go on, and people become aware of what Tim Hortons is and what it stands for, you will see positive same-store sales growth for an extended period of time,” Schroeder told Reuters in an interview on Friday.

Tim Hortons is primarily focused on nine U.S. states, including New York, Michigan and Pennsylvania, with a combined population of 70 million people, twice the size of Canada’s.

 Read more at: Reuters

 “I’ve been working with Dunkin’ franchise owners in this area since the 1960’s,” said attorney Carl Lisa. “The way they built this market even a competitor as good as Tim Hortons couldn’t compete.”

On November 10, Tim Hortons announced it was immediately closing 54 locations in the northeast including all its Massachusetts, Rhode Island and Connecticut locations plus two stores in Portland, ME. “It won’t work everywhere,” Chief Executive Officer Don Schroeder said, referring to his company’s failure in New England. But, Schroeder says he expects the decision to have a positive impact on its U.S. business. The company plans to open 300 new U.S. stores over the next three years.

 Steve Gabellieri, a franchisee owner in Cranston and Providence, RI – and a former Dunkin’ Brands executive – says he was not surprised Hortons had to throw in the towel. “The power of the brand coupled with the franchisees’ unwillingness to settle for second best, delivered the knock out punch.”

In 2004, Hortons took over 42 former Bess Eaton stores in Rhode Island. At the time, Rhode Island Governor Donald L. Carcieri congratulated Hortons for its Ocean State achievement. But, Hortons could not achieve the market penetration necessary to keep on fighting. In the third quarter of this year, Hortons’ U.S. segment had an operating loss of $17.5 million.

According to Lisa, at the time Hortons opened its Providence stores, local owners and the brand geared up for major competition. But, much like Krispy Kreme’s failed move into the region, Hortons was unable to compete with Dunkin’s dominance. Dunkin’ Donuts shops are so tightly integrated into Rhode Island’s culture that people routinely give directions using Dunkin’ locations. “Take a right at the Dunkin’ Donuts.”

“While we cannot comment on Tim Hortons’ business, we do know that the passion for Dunkin’ Donuts in Providence and Hartford is unmatched thanks to our franchisees,” said Karen Raskopf, Sr. Vice President of Communications for Dunkin’ Brands.

Franchise owner Chris Prazeres says he believes the deck was stacked against Hortons from the start. “It would be like Dunkin’ going into Seattle. That is Starbucks country, but this is Dunkin’ country,” he said.

The iconic Canadian restaurant operator, which has been making inroads into the American market, said it has decided to make a strategic retreat from the Providence, RI., and Hartford, CT., markets in the U.S. Northeast.

Tim Hortons says a total of 36 stores will be closed, all but two of them in those two cities, and the company will record a $20.9-million accounting charge to reflect the impaired value of those assets. That will be followed by an additional charge of up to $30-million that will be recorded in the fourth quarter.

The closings, which represent a small fraction of the 600-plus stores Tims has in the United States, were largely responsible for the company’s third-quarter profit falling short of analysts’ expectations.

Tims president and CEO Don Schroeder said Wednesday that the retreat from Providence and Hartford were necessary because they are among the most intensely competitive markets for quick-service restaurants.

“We believe this step removes a significant impediment to our long-term growth and development,” Mr. Shroeder said in a statement.

“These restaurants represent a small portion of our overall system in the U.S, but had a disproportionately large negative impact on earnings, average unit volumes and same-store sales growth in the segment.”

He said in an interview that the store operators be given opportunities to relocate and open locations where the company sees a better prospect for profitable growth.

Read more at: The Globe and Mail

While Tim Hortons opened its first U.S. location in Buffalo in 1985, recent efforts led by David Clanachan — who was named chief operations officer, U.S. and international, in May 2008 — have helped the chain expand in traditional markets such as western New York, Ohio and Michigan, as well as into Manhattan, on base at Fort Knox in Kentucky and Naval Station Norfolk in Virginia, and throughout various sporting venues in cold-weather cities.

This growth has boosted Tim Hortons’ market cap to nearly $6.6 billion, making it the fourth-largest publicly traded restaurant chain behind Starbucks Corp. ($23 billion), Yum Brands Inc. (also at $23 billion), and McDonalds Corp. ($83 billion), the report stated.

And Tim Hortons is planning continued U.S. expansion. The company intends to add another 300 U.S. locations in the next three years, as well as expand its cafe-based concept stores beyond trial locations in Ohio, and enhance its commercial offerings in grocery stores and online.

Below are excerpts from TheStreet’s recent interview with Clanachan:

Tim Horton’s U.S. expansion plans call for 300 more stores over the next three years, with 70 percent growth in existing markets and 30 percent in “contiguous markets.” How has Tim Horton’s approached those contiguous markets before, and have the Cold Stone Creamery partnership and embrace of nontraditional locations such as hospitals and military bases helped your cause?

Clanachan: “Absolutely. If you look at our plans, we’re firmly entrenched in building those stores over the next three years through that strategic plan. We think that there’s a number of different ways to do it through the non-traditional locations like hospitals, universities, college campuses, sports stadiums, those types of things, as well as traditional stores and being able to do it with or without our Cold Stone partners.

As we go into markets that are adjacent to markets that we’re already in, there already is a bit of a brand presence starting to be established. It’s not as simple, because the whole Designated Marketing Area approach to marketing in the U.S. is somewhat complex compared to the rest of the world, but that brand awareness is there because, in that non-traditional audience, people travel around quite a bit, so it gives you that exposure.”

Your company has already established a sponsor presence in the U.S. through partnerships with the NHL’s Buffalo Sabres, Detroit Red Wings and Columbus Blue Jackets, the NBA’s Detroit Pistons, the NFL’s Buffalo Bills and the University of Michigan football team. How do sports sponsorships factor into expansion plans, and how does recent expansion into traditional, cold-weather hockey markets in Pittsburgh and Long Island benefit a company inherently tied to NHL hockey?

Clanachan: “The whole sports thing plays into our culture of what we’ve done for years through kids sports. More importantly, as we go into new markets and as we develop our brands in the U.S., partnering with local professional sports teams or teams on any level within the community is a big deal.

Read more at: The Street.com

The Montreal Gazette reports that Tim Hortons Inc. said Thursday it will complete the sale of its 50 per cent interest in Maidstone Bakeries on Friday.

The sale of the baked-goods producer to Switzerland’s Aryzta AG, which already owned the other half, will result in proceeds of $475 million for Tim Hortons.

Brantford, Ont.-based Maidstone Bakeries provides doughnuts, pastries and breads for Tim Hortons, and it will continue to do so until at least 2016 under a supply arrangement.

Montreal Gazette
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]]> http://www.ddifo.org/tim-hortons-rolling-in-the-dough-after-bakery-sale/feed/ 0 http://www.ddifo.org/a-timbit-of-trouble/ http://www.ddifo.org/a-timbit-of-trouble/#comments Thu, 09 Sep 2010 11:20:50 +0000 Jim Coen http://www.ddifo.org/?p=5161 570 News in Toronto reports that Tim Horton’s franchise owners have launched a near $2-billion lawsuit claiming lost profits since the iconic Canadian company switched from fresh-baked to frozen donuts. The $1.95-billion suit is scheduled to go to court in November and it has even divided franchisees, as a large group of store owners is trying to stop a smaller group from following through on the lawsuit.

A sign outside a Tim Hortons store in Oakville, Ont., west of Toronto. THE CANADIAN PRESS/Richard Buchan

“It really plays out as a battle between those ‘old school’ guys who were loyal to the Ron Joyce era and Ron Joyce himself against some of the newer store owners who have come in under the new guard in the last 10 or 15 years,” explains Michael Friscolanti, senior writer for Maclean’s, where the story appears this week.

Joyce, a co-founder of the Tim Horton’s chain, revealed in 2003 that the company had stopped baking donuts on-site and had instead turned to the “par-bake” method where a donut was 95 per cent prepared, flash frozen, and then later re-heated for sale.

At the root of the lawsuit is the cost of these new donuts. The plaintiffs in the case allege the company told them it would cost no more than 12 cents per donut, while the true cost today (according to Tim’s) is 17.9 cents. One franchise owner claims that increase cost him as much as $57,000 in profits at one store.

“What you have here is this classic case of a few disgruntled franchisees who are saying we’ve lost some money (and) Horton’s needs to pay us back some of this money that we’ve lost,” Friscolanti tells 570′s Gary Doyle Show. “And at the same time you have a much larger group of franchise owners who have come forward to say ‘no, no’ no, that’s totally wrong, we’re doing very well.’ ”

Friscolanti says the concern of the franchise owners opposed to the lawsuit is that trade secrets and their bottom line will become public fodder, making them appear greedy. There is also concern over negative media coverage of the iconic restaurant chain.

One of the franchise owners opposed to the lawsuit is Graham Oliver, who owns five Tim’s stores in Kitchener. In an affidavit obtained by Maclean’s, Oliver writes “I do not agree with many of the material allegations and claims advanced by the plaintiffs. In fact, they are patently wrong and cannot be supported. Negative publicity has the potential of tainting the public image of the Tim Horton’s brand, which is vital to our business.”

To read Friscolanti’s full story in Maclean’s, click HERE.

It might as well be the Holy Grail. Neither Joey Cups and his team of 12, nor anyone else in the industry, has been able to find it.

So now they have decided to join forces. For the first time, Dunkin’, Starbucks, and Tim Hortons are working together to conquer the sustainable container. On Earth Day this April, the competitors convened with cup manufacturers, waste haulers, and municipal officials at a cup summit held at MIT. Since then, they have been sharing prototypes of innovative designs, researching ways to make it financially worthwhile for communities to recycle used coffee cups, and designing a pilot program for a waste-free zone at Faneuil Hall Marketplace where everything would be recycled or composted.

“We are fiercely competitive but we really want to differentiate ourselves on the quality of our product and level of service in stores,’’ said Jim Hanna, director of environmental impact at Starbucks, which hosted the cup summit. “Sustainability is a problem we all have to solve together.’’

Many consumers (and even some coffee executives new to the struggle) think there is an easy answer: switch to paper. But it’s not that simple. It takes roughly 20 million trees and 12 billion gallons of water to manufacture the 58 billion paper cups that end up in the trash every year. Most communities do not have the means or equipment needed to recycle these cups, which involves separating the paper container from the wax-like inner lining that prevents your java from leaking out.

Even the compostable cups of Green Mountain Coffee, known as ecotainers, fall short of perfection because they can only be composted at a few commercial facilities, not in backyard composters.

There are also limitations on materials used to create environmentally friendly cups. The US Food and Drug Administration restricts how much post-consumer recycled fiber can be used in products that come in contact with food. Other cutting-edge containers can’t be readily manufactured in the amounts needed by coffee chains, or they fail to meet performance standards.

One time, Hellyar brought some new cups made of eco-friendly materials to Dunkin’s quality assurance lab to test them out. He poured a fresh hot brew in them and returned to his desk. A few minutes later, a research and development worker came running after him, cursing that two dozen coffee cups were leaking all over the lab.

Read more at: Boston Globe