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Tim Hortons Owner Vows to Speed Pace of Global Expansion

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News October 30, 2015 by Marina StraussThe Globe and Mail
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Tim Hortons Owner Vows to Speed Pace of Global Expansion

Tim Hortons’ coffee-and-doughnut assault on the world is starting to take shape.

Its new parent, Restaurant Brands International Inc. (RBI), vowed on Tuesday to step up the pace of expanding Tim Hortons Inc. around the world, with announcements of new international franchise partners expected in the coming quarters.

This month, the parent closed a deal with a U.S. partner to launch more than 150 Tim Horton restaurants in the Cincinnati area over the next decade, with the agreement serving as a model for future expansion plans.

“That’s what this deal is all about,” Daniel Schwartz, RBI’s chief executive officer, said in an interview after the parent, which also owns Burger King, reported a better-than-expected third-quarter profit.

“We plan on taking Tims all around the world. … It takes work; it takes time in markets where you don’t already have a presence. … But that’s hard work that we’re willing to put in and prospective and existing partners around the world are willing to put in to ensure that we deliver on the potential for Tim Hortons growth.”

Oakville, Ont.-based RBI, which is controlled by Brazilian 3G Capital Partners LP, is betting on a formula that worked for Burger King: Cutting costs and teaming with international franchise partners to bolster the business beyond its home base.

But now as the company adopts the same recipe for Tim Hortons, it needs to spread the word about that brand in other markets.

“The challenge is that Tim Hortons is not known internationally,” said Jean-Pierre Lacroix, president of retail consultancy Shikatani Lacroix, which has done work for Tim Hortons in the past.

As well, Tim Hortons has to learn new cultural and food habits, while taking on savvy global chains, such as Starbucks, he said. But RBI’s strategy of linking up with local franchisees to spearhead the expansion will help it in new markets, he said.

Added David Palmer, an analyst at RBC Dominion Securities: “Establishing Tim’s international growth is likely to be slightly more of a challenge than it was at Burger King.”

Mr. Schwartz acknowledged that when Tim Hortons entered the Middle East market a few years ago, it had very little brand awareness. But he said the concept and quality of the products and service helped it take off in just a couple of years. “I travel around the world wearing Burger King and Tim Hortons shirts and, believe me, people recognize it everywhere,” he said.

To help build the brand, the company is using the example of the Cincinnati master franchise agreement as a template for further expansion, he said. South of the border, the chain is moving into regions where it already has a number of locations to create more local “density,” he said.

Already, RBI’s work, including heavy cuts to corporate staff and other cost reductions, and fewer but more “impactful” product launches, have helped its bottom line, although its overall sales growth has been pinched by currency shifts. It reported relatively strong same-store sales, which are sales at outlets open a year or more and considered an important retail measure.

Tim Hortons’ third-quarter same-store sales on a constant-currency basis increased 5.3 per cent, buoyed by the introduction of premium breakfast and lunch wraps and demand for its dark roast coffee . Same-store sales rose 6.2 per cent at Burger King, helped by new menu items, such as Fiery Chicken Fries.

On the cost side, the company continued to make strides. Tim Hortons slashed third-quarter selling, general and administrative expenses to $18.5-million (U.S.) from $43.1-million a year earlier. Owner 3G Capital is well known for its cost-cutting prowess at its other companies, such as Heinz and Anheuser-Busch InBev.

Still, Mr. Palmer said that, unlike those 3G-controlled entities, which have outperformed largely as a result of cost reductions, RBI has been successful in achieving both significant cost cuts as well as “superior organic revenue growth.”

RBI’s third-quarter profit rose to $49.6-million (U.S.) or 25 cents a share from what would have been (pro forma) a profit of $46.1-million or 23 cents the previous year. (It was the company’s first third-quarter results.) On an adjusted basis, RBI earned 34 cents a share, exceeding analysts’ average estimate of 28 cents, according to Thomson Reuters IBES. Its quarterly revenue fell to $1.02-billion from $1.1-billion, slightly below analysts’ estimate of $1.04-billion.

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