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Despite intense competition throughout Canada coming from other fast food giants such as McDonald's, Tim Horton’s has acquired more than 75% share of customer traffic in Canada’s coffee and baked goods sector. The company views Quebec and Western Canada as its fastest-growing domestic markets and as opportunities for further expansion. Tim Horton's has also been eager to expand U.S. operations, since it already has high market saturation in Canada. This is problematic, as it is forced to compete with entrenched brands like Dunkin' Donuts , McDonald's (MCD), and Starbucks, and it hasn’t been that successful in the U.S. markets where it currently operates (same-store sales growth was cut in half from 2006 to 2007).

Another issue that the company confronts in 2008 is rising prices for commodities such as coffee, oil, wheat, and sugar, which have compressed margins. Tim Horton's must keep its products affordable to attract customers, which keeps it from passing these costs directly onto consumers.

[edit] Business Overview

As of December 30, 2007, Tim Horton's and its franchisees operated 2,823 restaurants in Canada and 398 restaurants in the United States.^[1]The firm's principal business is the development and franchising of quick-service restaurants. The bulk of its revenues come from retail sales at its owned restaurants, from distribution of wholesale baked, refrigerated and frozen products to Tim Horton restaurants, as well as from the consolidation of a limited number of franchised restaurants (66% of revenues). The company also owns or leases the land and/or the building for the majority of its restaurants, and leases or subleases the real estate to its franchisees, collecting both rent from franchisees as well as, royalties from franchisees, based on a percentage of gross sales (29% of revenues). In addition, the company receives fees upon the opening of new franchised units(5% of revenues).^[2]

Revenues over the past 3 years have increased 30%, but operating margins have tightened 4% during 2007. This is because of spikes in commodity prices, the relief given to franchisees in the US with regards to rent and royalties, and the increased costs of their new product mix. Essentially, their operating costs have increased at a faster rate than sales during 2007. At the same time, costs in the US were somewhat relieved due to the strengthening of the Canadian dollar relative to the US dollar .

Furthermore, from the chart below, you can see that US operations have only been profitable two out of the last three years. The U.S. segment operating income will continue to show volatility as they continue growth and expansion into new and existing markets. As Tim Horton's enters new markets, average unit sales volumes for franchisees is typically lower than sales levels in more established markets. In order to encourage franchise purchases in the US, Tim Horton's provides relief in the areas of rents and royalties, and in some cases, relief on other operating costs. In 2008, the U.S. segment will not be a significant contributor to Tim Horton's consolidated operating income.

[edit] Key Trends and Forces

[edit] Same-store sales growth and unit growth are declining

Tim Horton's two primary business model drivers, same store sales growth and unit growth, have been declining, on average, over the past 4 years. As you can see from the chart below, total system wide sales growth has fallen from 16.6% in 2004 to 10.2% in 2007, and system wide unit growth has fallen from 7.7% in 2004 to 5.7% in 2007. Additionally, same store sales growth in the US, which was the main driver of system wide sales growth, fell to only 4.1% in 2007, a 46% decline in growth since 2006. Market saturation is a concern in Canada, while market penetration is a concern in the US.

[edit] Increases in commodity prices are compressing margins

With coffee, wheat, oil, and sugar vital inputs to THI's core business, the increase in commodity prices during 2007 has put pressure on operating margins. In addition, Tim Horton's does not actively use financial products such as future contracts or forward contracts to hedge the risk of commodity price increases which, exposes their operations to constant commodity price fluctuations^[3]. Over the last 3 years, global food prices have increased 83%. Tim Horton's cannot pass these costs directly onto consumers, because as a fast food restaurant it depends on low prices (and quick service) to attract customers.

[edit] A poor economy drives demand

Despite menu price increases, casual dining chains are expected to continue to struggle with high commodity costs. Consequently, quick-service eateries with lower priced menus stand to benefit in a slowing economy . While Tim Horton's competitor Starbucks has suffered due to current economic woes because of the premium prices on its coffee, Tim Horton's lower priced goods seem like cheap substitutes to consumers. While a tall (medium) cup of coffee at Starbucks is $1.65, the price of an equivalently sized cup of coffee at Tim Hortons is just $1.22. This is besides the fact that Starbucks is mostly known for its premium coffee drinks which can cost up to $5.

[edit] US expansion is a difficult task

Even though U.S. operations have been sub-par, THI continues to look towards U.S. expansion to combat any signs of market saturation in Canada. In 2005, they confirmed their plan to add 240 restaurants in the U.S. by 2007 to the existing 260. However, slow growth forced the firm to adjust its plan, and as of 2008 there are 398 Tim Horton's in the U.S. It appears that market penetration has been difficult, as existing brands like Starbuck's and Krispy Kreme command American consumers' attention. Americans have little recognition or emotional attachment to the Tim Horton's brand, unlike Canadians who have extreme loyalty to the brand (enhanced by the folk hero status of founder Tim Horton, who was a Canadian hockey player) ^[4].

[edit] Higher coffee prices will preserve margins and growth

Tim Horton recently followed through on coffee price increases. The increased prices are expected to boost same-store sales growth and operating margin, which was suffering from higher operating costs. A medium coffee will now cost $1.22 (excluding taxes), up from $1.17 previously. The price of a large coffee moves from $1.31 to $1.38, and an extra large from $1.49 to $1.57. The coffee price increases will relieve some of the pressure on margins. At the same time, the increased prices have the potential to drive customers away.^[5]

[edit] Competition

Tim Hortons competes in the fast food restaurant segment in Canada and the U.S. In Canada, they have the leading market position in the quick service restaurant segment, based on system wide sales and number of restaurants, with a strong presence in every province.

Additionally, their main competitors in the quick service sector include McDonald's (MCD), Wendy's International (WEN), Yum! Brands (YUM)(which owns KFC and Taco Bell, among others) and [Subway], and in the coffee and baked goods segment, Starbucks (SBUX), Second Cup, Country Style, and Coffee Time. In Canada, they also compete with multiple regional quick service restaurants, specialty coffee restaurants, deli and other sandwich shops, gas and other convenience locations.

 Tim Hortons

	Select All  |  Select None Metrics Total Number of Restaurants Comparable Sales Growth Net Income Company-operated Sales Company-operated Restaurants Number of Franchised Restaurants Number of Affiliated Restaurants Operating Income Sales per Restaurant Cancel

	Select All  |  Select None Companies McDonald's (MCD) Wendy's International (WEN) Burger King Holdings (BKC) Buffalo Wild Wings (BWLD) Caribou Coffee Company (CBOU) CKE Restaurants (CKR) Chipotle Mexican Grill (CMG) Cosi (COSI) Denny's (DENN) Good Times Restaurants (GTIM) Jack In The Box (JBX) Krispy Kreme Doughnuts (KKD) Luby's (LUB) Max & Erma's Restaurants (MAXE) Nathan's Famous (NATH) Papa John's International (PZZA) Pizza Inn (PZZI) Rubio's Restaurants (RUBO) Triarc Companies (TRY) Yum! Brands (YUM) Steak n Shake Company (SNS) Tim Hortons (THI) Sonic (SONC) Brazil Fast Food Corp. (BOBS) Cancel

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Company	Data From	Sales per Restaurant	Operating Income	Company-operated Sales	Company-operated Restaurants	Number of Franchised Restaurants	Number of Affiliated Restaurants
Krispy Kreme Doughnuts (KKD)	2008	Add	($42.6M)[6]	$429M[6]	97[6]	198[6]	Add
McDonald's (MCD)	2007	$2.4M[7]	$3.88[8]	$6.91K[9]	6.91K[10]	31.4K[11]	3.97K[12]
Tim Hortons (THI)	2006	$2.53M[13]	$379M[14]	$1.07B[15]	95[16]	2.95K[16]	0
Wendy's International (WEN)	2007	Add	$1.26K[17]	$6.91K[18]	Add	Add	Add
Yum! Brands (YUM)	2006	$1.08M[19]	$1.26B[19]	$8.37B[19]	7.74K[19]	23.5K[19]	3.34K[19]

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See all Fast Food Restaurants (QSR) Industry WikiData

[edit] Market Share

The company says that its stores represent 42% of the Canadian fast food restaurant sector for the 12 months ended May 2007 and 80% of the coffee/donut/gourmet coffee/tea sector of the Canadian quick service restaurant sector for the same period, in each case based on number of customers served^[20]. At the same time, THI has more Canadian stores than even McDonald's (MCD)^[21]. In the U.S., market share is dismal as THI's presence is trumped by such companies as McDonald's (MCD) and Dunkin Donuts.

[edit] References

1. ↑ THI:Profile for Tim Hortons Inc.-Yahoo! Finance
2. ↑ THI 2007 10-K, Item 1, p.1
3. ↑ THI 2007 10-K, Item 7a, p.76
4. ↑ Tim Horton's: Encountering Trouble Expanding In The U.S.
5. ↑ Tim Hortons: Will Price Increases Stimulate Sales Growth?
6. ↑ ^{6.0 6.1 6.2 6.3} SEC
7. ↑ 2007 10-K pg 13
8. ↑ McDonald\\\\\\\\\\\\\\\'s
9. ↑ McDonald\'s
10. ↑ MCD 2007 10-K pg 9
11. ↑ McDonald\'s 2007 Annual Report
12. ↑ MacDonald\'s
13. ↑ THI, 2006 10-K, Item 6,Pg.35
14. ↑ THI, 2006 10-K, Item 6,Pg.35
15. ↑ THI, 2006 10-K, Item 6,Pg.35
16. ↑ ^{16.0 16.1} THI, 2006 10-K, Item 6,Pg.35
17. ↑ 564
18. ↑ McDonald\'s
19. ↑ ^{19.0 19.1 19.2 19.3 19.4 19.5} YUM, 2006 10-K, Item-6,PG-23.
20. ↑ THI 2007 10-K, Item 1, p.10
21. ↑ http://www.bloggingstocks.com/2007/09/17/tim-hortons-inc-thi-canadians-love-it-can-americans/