Ris­ing wages, ris­ing costs: Tim Hor­tons own­ers push for price hikes

Some Tim Hor­tons fran­chise own­ers, al­ready fac­ing a rift with par­ent RBI, say higher wages may push them to the brink.

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - MA­RINA STRAUSS RETAILING RE­PORTER

Some Tim Hor­tons fran­chisees, say­ing they’re al­ready be­ing pinched by their par­ent com­pany, are push­ing it to ap­prove price hikes to help cover the cost of pend­ing min­i­mum wage in­creases in On­tario and Al­berta.

The Great White North Fran­chisee As­so­ci­a­tion, which was formed in March by un­happy fran­chisees to fight par­ent Restau­rant Brands In­ter­na­tional Inc.’s laser fo­cus on ef­fi­ciency, says in a let­ter last week it is con­cerned RBI is fail­ing to help restau­rant own­ers ease the pain of in­creased wage ex­penses and other ris­ing costs.

The let­ter, ob­tained by The Globe and Mail and sent to RBI top ex­ec­u­tives, says the as­so­ci­a­tion wants as­sur­ances the par­ent com­pany “will be rais­ing prices be­fore these labour in­creases come into ef­fect,” start­ing in Oc­to­ber in On­tario and also spread­ing to Al­berta and po­ten­tially Bri­tish Columbia.

“You need to un­der­stand that fix­ing store prof­itabil­ity is ur­gent,” says the Sept. 7 let­ter to Daniel Schwartz, chief ex­ec­u­tive of­fi­cer of RBI, and Sami Sid­diqui, pres­i­dent of Tim Hor­tons in Canada.

It urges RBI to stop over­charg­ing fran­chisees for their food and other sup­plies and help restau­rant own­ers be­come more ef­fi­cient.

There are signs RBI is con­sid­er­ing such price in­creases and other mea­sures to off­set steeper labour costs.

Those signs are based on in­for­ma­tion its of­fi­cials have pro­vided to some fran­chisees. The Oakville, Ont.-based com­pany joins a grow­ing bevy of others that are grap­pling with the spec­tre of higher min­i­mum wages and feel­ing the pres­sure to find ways to mit­i­gate steeper ex­penses partly by rais­ing prices and risk­ing los­ing some cus­tomers.

RBI did not re­spond di­rectly to a ques­tion about whether it would boost prices. “We re­main com­mit­ted to work­ing col­lab­o­ra­tively with our restau­rant own­ers on ini­tia­tives de­signed to not only drive their prof­itabil­ity, but to also help de­liver great guest [cus­tomer] ex­pe­ri­ences every day,” spokes­woman Shan­non Hall said.

But in an e-mail to Toronto area fran­chisees on Sept. 7, RBI of­fi­cial Greg Hiltz says it is ex­plor­ing “a mul­ti­fac­eted ap­proach that will likely in­clude tak­ing [in­creas­ing] price, ex­am­in­ing costs, and look­ing at op­er­a­tional ef­fi­cien­cies that will al­low you to run lower costs.

“We re­al­ize that owner prof­itabil­ity is the back­bone of our sys­tem and we are pre­sent­ing our plans for the wage in­crease to your ad­vi­sory board later this month,” writes Mr. Hiltz, who leads fran­chisees in Cen­tral Canada. “You will not be alone dur­ing this trans­for­ma­tional pe­riod and you can ex­pect that you will get fur­ther de­tails on changes at” its con­ven­tion start­ing Nov. 7.

The rift has been grow­ing be­tween RBI and some fran­chisees over what they say are ris­ing costs it is pass­ing on to fran­chisees in the form of higher prices they have to pay RBI for their sup­plies – ev­ery­thing from cups to cof­fee – re­sult­ing in lower fran­chisee prof­its and bet­ter prof­its for the par­ent. Now, some restau­rant own­ers say higher wages threaten to push them to the brink.

Fran­chisee labour costs make up roughly 30 per cent or less of restau­rant own­ers’ costs and that pro­por­tion could jump to as much as 43 per cent un­der new min­i­mum-wage rates once pay- roll taxes and in­creased wages to higher-earn­ing employees are taken into ac­count, the as­so­ci­a­tion warns. “Store own­ers sim­ply can­not ab­sorb these costs with­out some in­ter­ven­tion on RBI’s part,” it says.

RBI has de­nied it has raised its sup­ply costs to fran­chisees since it ac­quired Tim Hor­tons in late 2014, apart from com­mod­i­typrice or for­eign-ex­change in­creases.

Mr. Hiltz says in his e-mail, ob­tained by The Globe, that op­er­at­ing mar­gins of 442 restau­rants in his area de­clined 1.48 per cent to 12.48 per cent in 2017 from a year ago. “This is some­thing we’re not happy about and work­ing to rec­tify for you but there is no easy, sil­ver-bul­let so­lu­tion.” He says labour ex­penses were the big­gest driver of the cost dif­fer­ences.

How­ever, other fran­chisees are man­ag­ing to im­prove their labour ex­penses and mar­gins, he says. One fran­chisee re­cently had labour costs as low as 21.72 per cent of ex­penses and a stel­lar 21.89-per-cent op­er­at­ing mar­gin, he says.

He urges fran­chisees to get train­ing on the au­to­mated Clearview em­ployee-sched­ul­ing tool that some restau­rant own­ers say is help­ful, but can’t be re­lied on com­pletely be­cause of shift­ing lo­cal events and weather condi- tions.

John Gor­don, prin­ci­pal at restau­rant ad­viser Pa­cific Man­age­ment Con­sult­ing Group in San Diego, said labour cost in­creases will be painful for fran­chisees and may re­quire price in­creases.

He said typ­i­cally cus­tomers stop com­ing to restau­rants when they raise prices more than 3 per cent. “There’s a lot of po­ten­tial price sen­si­tiv­ity.”

RBI could re­solve dis­putes over fran­chisees’ sup­ply costs by set­ting up a non-profit co-op­er­a­tive sup­ply chain, bor­row­ing from the play­book of RBI’s sis­ter chain Burger King, Mr. Gor­don said. But RBI prob­a­bly would op­pose such a move be­cause it would lose con­trol and po­ten­tially prof­its, he added.

Tim Hor­tons raised the price of some of its hot drinks and break­fast menu items a “slight” amount in early Au­gust be­cause of “op­er­a­tional costs,” it said in a mes­sage to cus­tomers. (Small and medium cof­fee prices rose 4 cents and a large by 6 cents; break­fast sand­wiches in­creased 30 cents to $2.99; sub­sti­tut­ing a pop for a cof­fee added 80 cents to a combo’s price, al­though pric­ing var­ied by re­gions, fran­chisees say.)

In On­tario, min­i­mum hourly wages of $11.40 are set to rise to $11.60 by Oc­to­ber, $14 by Jan. 1 and $15 by 2019. In Al­berta, hourly min­i­mum wages are set to in­crease to $15 by next year from $10.20.

The fran­chisee as­so­ci­a­tion says even be­yond wage in­creases, restau­rant own­ers in Que­bec and Man­i­toba are be­ing forced to raise wages to en­tice peo­ple to work for them. “We be­lieve that this is not just an On­tario, Al­berta and B.C. is­sue,” its let­ter says.

It urges RBI to act on its com­mit­ment to im­prove fran­chisees’ prof­its. “While RBI keeps rack­ing up prof­its, Tim Hor­tons’ fran­chisees con­tinue to strug­gle with prof­itabil­ity.” In many cases, restau­rant own­ers are “on the verge of be­ing in de­fault, if not bank­ruptcy.”

It ac­knowl­edges RBI has made some progress in re­duc­ing some costs to fran­chisees, but “not near enough.”

Don­ald Schroeder, as­so­ci­a­tion spokesman and a for­mer CEO of Tim Hor­tons, said in an e-mail to The Globe that fran­chisees are con­cerned about the neg­a­tive im­pact that wage in­creases will have on stu­dents and first-time food-service work­ers if com­pa­nies cut em­ployee counts.

He said fran­chisees “have al­ways been re­luc­tant to take a price in­crease be­cause of the im­pact on their loyal cus­tomers.” How­ever, the in­creased labour com­bined with ris­ing food and pa­per costs “will put our store own­ers in an al­most un­ten­able po­si­tion.” He said the as­so­ci­a­tion aims to work with RBI to ad­dress the prob­lems.

The as­so­ci­a­tion points to a switch this year to Eco­lab from Di­versey for clean­ing sup­plies which has re­sulted in those costs hav­ing al­most dou­bled from 2016. “We have been of­fered sig­nif­i­cantly lower pric­ing by an­other provider,” it says in its let­ter. “If RBI is se­ri­ous about im­prov­ing the prof­itabil­ity for own­ers it could start by al­low­ing the own­ers to pur­sue their own deals for clean­ing sup­plies. Ei­ther that, or sig­nif­i­cantly lower the prices it charges for Eco­lab … Get your peo­ple to ne­go­ti­ate a bet­ter deal for us.” Restau­rant Brands Int’l. (QSR) Close: $76.67, down 27¢

FRED LUM/THE GLOBE AND MAIL

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