FDD Talk 2018: Tim Hortons Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Tim Hortons franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Tim Hortons franchise, based on Item 7 of the company’s 2018 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Tim Hortons franchise, based on Items 5 and 6 of the company’s 2018 FDD

• Section IV – Number of franchised and company-owned Tim Hortons outlets at the start of the year and the end of the year for 2015, 2016, and 2017, based on Item 20 of the company’s 2018 FDD

• Section V – Presentation and analysis of Tim Hortons’ financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:

• 2017 average gross sales for all franchised standard Tim Hortons shops that were open and operating for at least one year as of December 31, 2017, in Michigan, Ohio, New York, Pennsylvania, West Virginia, Maine, Indiana, New Jersey, North Dakota, Kentucky, and Minnesota, respectively

Section I – Background Information

21 Things You Need to Know About the Tim Hortons Franchise

Pulls Back on U.S. Expansion

1.  After Tim Hortons merged with Burger King in 2014 and formed a new parent company, Restaurant Brands International, Inc. (RBI), the company had plans to strengthen its U.S. expansion efforts. However, in early June 2018, BNN Bloomberg obtained documents stating that Tim Hortons would be pulling back in some of its biggest U.S. markets, citing crowded competition in the fast food space and tensions with its franchisees.

2.  According to BNN Bloomberg, Tim Hortons’ overall U.S. outlet store count has declined by 14 percent over the last three years, while most of the U.S. states it operates in, including its bigger markets of New York and Ohio, reported falling average gross sales. Additionally, the documents show that under Restaurant Brands’ ownership, the company shrunk its total store count by 50 outlets in the U.S. last year, opening 30 stores while closing 80.

3.  In addition to the store closings, average gross sales in seven of the 11 U.S. states Tim Hortons operates in have declined year-over-year. In New York, where Tim Hortons has its biggest U.S. presence with 257 stores, average gross sales declined 3.4 per cent in 2017 from the year prior, while the company reduced its footprint by 39 stores.

4.  Alex Macedo, president of Tim Hortons, said, “As with any business, from time to time we may close some restaurants in the ordinary course of business.” He added that Tim Hortons has experienced “softer comparable sales growth” in the U.S. in recent quarters given the competitive restaurant market.

5.  Besides facing a crowded market, Tim Hortons is also having some trouble securing development partners, with some suing the company for allegedly breaking development agreements. According to BNN Bloomberg, Tim Hortons documents show that the company is currently involved in at least 11 lawsuits pending throughout the U.S. court system.

6.  Despite declining sales and legal troubles with U.S. franchisees, Tim Hortons said that it continues to seek prospective franchisees throughout the U.S. and expects to open between 20 and 50 new franchised stores in 2018. BNN Bloomberg noted that Tim Hortons failed to meet its 2017 projections of opening between 70 and 100 new franchises by the end of last year.

Planning Major Changes to Help Revive Company’s Growth

7.  Around the end of April 2018, the parent company of Tim Hortons, Restaurant Brands International, told investors that it had plans to implement major changes to the brand. During an earnings conference call, Daniel Schwartz, CEO of Tim Hortons, said, “We’re not happy with sales growth and overall results at Tim Hortons.” Schwartz blamed increased competition in the coffee space, as well as negative media coverage of Tim Hortons’ reported tensions with some franchisees in Canada over management practices, for the slip. (Tim Hortons is also facing lawsuits from U.S. franchisees.)

8.  In the past, Restaurant Brands International has been media shy, which has caused more problems for the brand. Schwartz said, “We have not historically dedicated much time to media relations to tell our story. Unfortunately, this has resulted in the publication of several articles particularly related to Tim Hortons in Canada that mischaracterize our intentions, that often cite inaccurate information and that usually reflect a purposely negative tone dictated by a group of dissident franchisees.”

9.  He also stated that the news coverage of the lawsuits has hurt customers’ perceptions of the brand. To combat this narrative, Schwartz said the company will be looking to be more proactive with its marketing and media relations.

10.  Tim Hortons also hopes to boost sales by improving its mobile app and the quality of its lunch offerings, revamping some locations, and bringing in new management. Schwartz suggested that “the current challenges at Tim Hortons can be addressed with a series of short easy fixes.”

11.  Over the next four years, Restaurant Brands International will roll out a new restaurant design at Tim Hortons to provide a more natural and modern feel, with Canadian maple tables and new artwork. The company has already opened 10 of these restaurants in Canada. According to Schwartz, response to the new design has been positive, with 75 percent of customers who visited one saying they would be more likely to become repeat visitors.

Releases Special 24k Gold Timbits During U.S. National Donut Day

12.  On National Donut Day (June 1, 2018), customers in select Tim Hortons U.S. markets had the chance to try the special 24k gold-covered Timbits and win free donuts for a year. Five specially selected restaurants across Buffalo, New York; Columbus, Ohio; and Detroit, Michigan offered the 24k gold-covered Timbits. The first in-restaurant customer after 6 a.m. to ask for the Gold Timbits at each one of the five locations won the free donuts for a year prize.

Company History

13.  Tim Hortons was founded in 1964 by Canadian businessman Jim Charade and Canadian hockey
player Tim Horton in Hamilton, Ontario. Charade had the idea to start a doughnut shop chain in Canada after visiting the Mister Donut Boston headquarters in 1960. Initially, Charade wanted to open a Mister Donut franchise but decided to try to start his own doughnut shop business instead.

14.  After Charade met Horton at a local barbershop and later bought a car from him (Horton sold cars during the hockey off-season), Charade realized that a celebrity name could help his doughnut business succeed. Horton agreed to work with Charade but wanted to open a hamburger franchise instead. They formed Timandjim Ltd. and opened a few hamburger restaurants that were unsuccessful.

15.  Charade eventually convinced Horton to give his doughnut idea a shot and they opened the first store in April 1964 on Ottawa Street in Hamilton. This first Tim Hortons store was a success and they opened a few more locations. Despite the early success, by the mid-1960s, the half dozen Tim Hortons restaurants were near bankruptcy. While Horton was doing well financially because of his hockey career, Charade was forced to sell his home to make ends meet.

16.  Around this time, Charade met Ron Joyce, a former Hamilton police officer who owned a Dairy Queen franchise. Charade decided to let Joyce take over the original Tim Hortons store after discovering that the franchisee was skimming profits. Charade had to leave the business due to taking on a lot of debt and Horton agreed to form a new partnership with Joyce. Their partnership would continue until Horton died in 1974 following an unfortunate traffic accident.

17.  Following Horton’s death, Joyce bought out the Horton family’s shares of the company for $1 million and became sole owner of Tim Hortons. Joyce expanded the business and opened Tim Hortons franchises across Canada. In 1984, Tim Hortons opened its first U.S. store in Tonawanda, New York.

18.  Tim Hortons’ massive growth continued over the next few decades and the 500th store opened in 1991. Around this time, Joyce met Dave Thomas, the founder of Wendy’s, after Tim Hortons franchisee Daniel Murphy successfully opened new franchise outlets combining the two brands. Due to Murphy’s success, Tim Hortons merged with Wendy’s International, Inc., which gave new focus to Tim Hortons’ expansion in the U.S. After the merger, Joyce became the largest shareholder of Wendy’s, even surpassing Thomas.

19.  The merger lasted for about a decade and in late 2005, Wendy’s announced that it would sell between 15% and 18% of the Tim Hortons operations in an initial public offering. Wendy’s sold off the rest of its remaining interest to shareholders in 2006. Tim Hortons continued to operate independently until 2014 when Burger King announced that it was in negotiations to merge with Tim Hortons.

20.  As a result of the merger, Burger King and Tim Hortons formed Restaurant Brands International, Inc. to oversee both companies as well as new acquisitions such as Popeyes. Today, Tim Hortons continues to grow across Canada and internationally. In recent years, the brand has shown a renewed interest in establishing a stronger presence in the U.S.

Entrepreneur’s Franchise 500

21.  Tim Hortons did not rank on Entrepreneur’s 2018 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Tim Hortons franchise costs, based on Item 7 of the company’s 2018 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Tim Hortons’ initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2018 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2015

• Outlets at the Start of the Year:  880
• Outlets at the End of the Year:  758
• Net Change:  -122

2016

• Outlets at the Start of the Year:  758
• Outlets at the End of the Year:  788
• Net Change:  +30

2017

• Outlets at the Start of the Year:  788
• Outlets at the End of the Year:  738
• Net Change:  -50

Company-Owned

2015

• Outlets at the Start of the Year:  3
• Outlets at the End of the Year:  0
• Net Change:  -3

2016

• Outlets at the Start of the Year:  0
• Outlets at the End of the Year:  0
• Net Change:  0

2017

• Outlets at the Start of the Year:  0
• Outlets at the End of the Year:  0
• Net Change:  0

Section V – Financial Performance Representations (Item 19, 2018 FDD) and Analysis

• The following table describes the average Gross Sales in 2017 for all franchised Standard Shops that were open and operating for at least one year as of December 31, 2017.

• A Standard Shop is the typical Tim Hortons restaurant. It produces, merchandises, and sells a variety of baked goods, such as donuts, cookies, muffins, tarts, as well as coffee and other beverages. Most Standard Shops also offer a variety of soups, chili, and sandwiches. The Standard Shop generally ranges in size from 1,000 to 2,300 square feet, and contains a seating area for customers. The Standard Shop also typically includes a drive-thru facility and may be a stand-alone or an in-line Shop.

• The table reflects the results of 440 franchised Standard Shops (which includes Shops operating under a Franchise Agreement and under an Operator Agreement) or 64% of all franchised Shops. The remaining franchised Shops were not included because they opened or closed after January 1, 2017 (8%), they were not Standard Shops (23%), or they did not report actual sales for all 12 months in 2017 (5%).

• 27 of the Shops that were excluded closed during 2017. Tim Hortons did not have any Shops close in 2017 after being open less than 12 months.

• In preparing this table, Tim Hortons relied on the data contained in the unaudited reports submitted to it by its franchisees and operators.

• As of December 31, 2017, 77% of the Tim Hortons System operated a Standard Shop.

• The information appearing in this table reflects the aggregate Gross Sales results of individual Standard Shops. The information does not reflect the costs of sales, operating expenses, or other costs or expenses that must be deducted from the Gross Sales figures to reflect net income or profit. Moreover, this information should not not be considered as the actual or probable sales results that will be realized by any franchisee or Shop.

Average Gross Sales in 2017 for All Franchised Standard Shops That Were Open and Operating for At Least One Year as of December 31, 2017

Michigan