The coffee giant needs a fix

Tim Hortons is slowly becoming a completely dysfunctional franchise system.

Franchisees on both sides of the border are pressuring Restaurant Brands International Inc. (RBI), the new owners of coffee giant, to ease up on its increasingly strict rules around standards, pricing and inspections.

Some franchisees have even called RBI’s approach abusive. And some are pursuing a classaction lawsuit against RBI. One Canadian-based franchisee even alleges the parent company of improperly using funds from a national advertising campaign.

It seems the trust in this relationship is all but gone. And lack of trust in a franchise system leads to more severe challenges.

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

Food processor Kraft Heinz, also recently taken over by this Brazilian giant, has been subjected to major cuts over the last few years.

Just talk to the people of Leamington, Ont., where a Heinz plant used to keep the self-proclaimed Tomato Capital busy.

In the case of RBI and Tim Hortons franchisees, two business models are colliding.

For decades, Tim Hortons’ steady-as-she-goes attitude focused on offering a place for people of all ages to congregate.

Certainly some aspects of this operation left much to be desired. Cars with engines running, lined up at the drivethrough for coffee for several minutes, made no environmental sense. But people just kept coming to Tim’s. The customer base was addicted and needed their coffee fix.

But since 2014, when RBI took over, the rule of law is about efficiency and increased profitability for the parent company.

Most consumers wouldn’t have noticed the difference. The uniforms, Roll Up the Rim to Win campaign and summer camp fundraisers are all still the same.

But the changes were dramatic. Providing value to RBI shareholders is superseding the corporate will to empower outlets.

This has led to major changes in procurement strategies and corporate protocols.

Most franchisees didn’t sign up for such a modus operandi. And they invested hundreds of thousands of dollars and, in some cases, millions. What was once considered a licence to print money — a tried and true program — has turned into a nightmare for some of the franchisees.

Failing to anticipate contractual changes from the parent company often leads to confusion and despair. This is what’s happening with Tim Hortons.

Most franchises are owned by families or individuals who pride themselves in supporting local groups. That’s how Tim Hortons gained much of its reputation.

Nevertheless, it’s difficult to argue with RBI’s success. RBI owns major chains like Burger King and Popeyes Louisiana Kitchen. The company makes money and keeps its shareholders very happy. Its shares have more than doubled in value since its inception in 2014 and now sit at more than $80 apiece. RBI’s stock has outperformed peer companies by a wide margin.

Burger King was going nowhere before it was bought by 3G Capital in 2010 but has since increased its market share across North America. RBI’s most recent acquisition, Popeyes, should experience the same success.

Most Canadian and American Tim Hortons franchisees are staying on the sidelines and letting the lawsuit play out. Despite the very public discontent around the new ownership, some franchisees are co-operating. And no lawsuits have come from Burger King or Popeyes franchisees — at least not yet.

The acrimony between 3G Capital and franchisees will probably continue for a while. At stake is a brand that has served communities well for many years.

Tim Hortons has gone from being an iconic Canadianowned business to being merely part of a much larger portfolio. This is a reality all franchisees need to accept. However, RBI also needs to appreciate the intimate connection these coffee shops have with their communities.

There’s nothing wrong with making a profit but RBI must work on its relationships with franchisees before they get worse. Without transparency and trust, both parties will feel betrayed.

RBI can’t achieve its share price goals without the support of its community investors.