Ottawa Citizen

Tim Hortons sued by franchisee­s over frozen doughnuts

- BY JIM MIDDLEMISS

“Always Fresh” apparTORON­TO • ently has its price, as doughnut king Tim Hortons is finding out the hard way.

The icon of Canadian franchisin­g has been hit with an attempted $1.95-billion class-action suit over its conversion from a “fresh-baked” goods restaurant to a “microwaved products store.”

In a statement of claim filed in an Ontario court, two Burlington, Ont., franchise owners are suing the head office on behalf of all Tim Hortons franchisee­s claiming that the move to an off-site supply chain involving frozen dough- nuts hasn’t made them any more money. Rather, they argue, it has driven up the fixed costs of a doughnut from nine cents to 20 cents without increasing sales as allegedly promised.

Moreover, the two franchisee­s claim that “a more extensive lunch menu” featuring soups and sandwiches have allegedly earned them only a “minimal profit, and in some cases no profit at all.”

They say the lunches have become increasing­ly popular; however, they have “unreasonab­ly low margins”and drive up operating costs because stores have to hire more staff to serve them.

They are claiming breach of contract, breach of duty of fair dealing, negligent misreprese­ntation, and unjust enrichment.

The claim has yet to be certified as a class action or heard by a judge.

A statement from Tim Hortons last night said the lawsuit is “frivolous and completely without merit. The company intends to vigorously defend itself in this matter.” The statement added that the lawsuit “doesn’t reflect the opinion of the vast majority of franchisee­s.”

“Strong relations with our store owners has been a hallmark of the company’s success during our 44-year history, reflected in the good relations we enjoy with the vast majority of our more than 1,200 franchisee­s.”

A lawyer for the plaintiffs, Jerome Morse of Adair Morse in Toronto, told Global News, “my client contends there has been a breach of the franchise agreement and that there has been a failure to conduct the franchise arrangemen­t in a good faith manner.”

The statement of claim says that until 2002 all doughnuts and most other baked goods were made onsite, and each store was equipped with highvolume baking equipment.

The claim alleges that around 2001 and 2002, Tim Hortons moved to an “Always Fresh” system. It built a plant in Brantford, Ont. with an Irish company to produce Timbits and doughnuts. They are baked and then frozen, known as parbaked, and shipped to stores in North America, where they are then microwaved prior to sale. Selected distributo­rs provide other goods, such as pastries.

The claim alleges that in 2002, franchisee­s were required to ditch their baking equipment and purchase freezers and microwave equipment to complete the conversion.

Franchisee­s say they were told the cost of doughnuts would jump from nine cents to 12, but that sales would also increase. However, they claim the true cost is closer to 20 cent because of “the inflated price at which the Brantford plant sells the frozen product to the franchisee­s.”

The claim alleges that franchisee­s were forced to invest $35,000 to $50,000 to complete the conversion.

Tim Hortons has “experience­d an increase in profits as a result of the Always Fresh conversion.” They allege that as part owner of the Brantford plant, Tim Hortons earns a “profit on all frozen product and supplies, which are sold to the franchisee­s at a marked-up price.”

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