Why trouble is brewing at Tim Hortons

With new ownership comes a new reality for franchisees, writes Sylvain Charlebois.

Tim Hortons is slowly becoming a classic case of a completely dysfunctional franchise system.

Franchisees on both sides of the border are now pressuring Restaurant Brands International Inc. (RBI), the new owners of the franchise, to ease up on increasingly strict rules around standards, pricing and inspections. Some franchisees have sought a class-action lawsuit against RBI. One Canadian-based franchisee is even alleging the parent company of improperly using funds from a national advertising campaign.

But what lies ahead promises to be even worse. Lack of bilateral trust in a franchise system often leads to more severe challenges down the road.

For most investors, this is hardly surprising. Brazilian-based 3G Capital, which owns the majority of RBI, has a reputation for driving margins higher, whatever it takes. Anything can be compromised: jobs, costly practices, corporate culture — you name it.

In the case of Tim Hortons, two business models are essentially colliding.

For decades, Tim Hortons focused on offering a place for people of all ages to congregate, serving several communities in the style of the general stores of old. Some aspects of this practice left much to be desired, like having cars with engines running lined up at the drive-thru for coffee for several minutes. But people just kept on coming. It wasn’t so much about loyalty as about a customer base needing their coffee fix.

But since 2014, RBI’s rule of law is about efficiency and increased profitability for the parent company.

Most consumers would not have noticed the difference. But what has changed is what consumers never see.

Providing value to RBI shareholders is now superseding the corporate will to empower outlets.

In the case of Tim Hortons, two business models are essentially colliding.

This has led to major changes in procurement strategies and corporate protocols. Most franchisees did not sign up for such a modus operandi. Several of them invested hundreds of thousands of dollars and in some cases millions.

Failing to anticipate any contractual changes from the franchise often leads to a state of confusion and eventually despair. This is what is now happening with Tim Hortons. Most franchises are owned by families or local heroes, who pride themselves on supporting local community groups. That is how Tim Hortons gained the recognition it has today.

Then again, it is difficult to argue against RBI’s success. RBI owns other major chains like Burger King and Popeyes. Its shares have more than doubled in value since its inception in 2014 and are now valued at more than $80 per share. RBI’s stock has outperformed peer companies by a wide margin in recent years.

Furthermore, in 2010, Burger King was going nowhere before it was bought by 3G Capital. That was before RBI. Since then, Burger King is much more competitive and has been able to increase its market share across North America.

Not all franchisees are suing RBI. Most Canadian and American franchisees are staying on the sidelines and letting things play out. There have been no lawsuits from Burger King or Popeyes franchisees, at least not yet. Only time will tell.

The acrimony between 3G Capital and franchisees will probably continue for a while. What is at stake is a brand that has served communities well for many years. Tim Hortons went from being an iconic Canadian-owned business to being merely part of a much larger portfolio. This is a reality all franchisees will need to accept.

Along the way, though, RBI will need to appreciate the intimate connection local stores have with communities. A franchise system relies on two fundamental principles: transparency and trust. A lack of both leaves one of the two parties feeling betrayed.

No matter how high RBI’s share price point goal is, it can’t achieve it without the support of its community investors.