The cof­fee gi­ant needs a fix

The Guardian (Charlottetown) - - OPINION - BY SYL­VAIN CHARLEBOIS Syl­vain Charlebois is Se­nior Fel­low with the At­lantic In­sti­tute for Mar­ket Stud­ies, dean of the Fac­ulty of Man­age­ment and a pro­fes­sor in the Fac­ulty of Agri­cul­ture at Dal­housie Uni­ver­sity

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.

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