Time for both sides to sit down over a coffee and sort this out
The long-ago Tim Hortons franchisee is reminiscing about the way life used to be. In the coffee world, that is.
“The reality is, Tim Hortons created a standard when there wasn’t one,” he says. “A pleasant flavour when coffee was that rot gut that sat on a restaurant burner for a couple of hours.”
We remember rot gut. Acrid. Burnt around the edges. Stout.
Timmies, the ex-franchisee continues, was a signature smooth taste, in his view, developed and supplied by Mother Parkers back when Tim Horton was playing for the Leafs. As time went on and the chain grew, other suppliers were brought in to assist in protecting the supply line, matching the blend and providing rich coffee to the growing roster of franchisees.
But then Tim Hortons entered the roasting business, building its own plant, freeing up all that production capacity in the other companies. Mother Parkers started supplying McDonald’s, and the ex-franchisee found the Tims coffee facing a mighty taste challenge.
“This is only opinion, but I think the good-quality coffee that McDonald’s has is probably very close to our Tim Horton original blend,” he says regretfully. (He doesn’t want to be destructive to the Tim Hortons chain.)
The obvious response from the reporter: “That’s almost sacrilege!”
“It really is!” he adds. “It’s almost like Tim Hortons sold their holy water.”
I have agreed not to name the former franchisee, as he remains close to the Tim Hortons operation in a number of ways. But as the foreign owners of Tim Hortons continue to make a mess of their brand and public relations management in the wake of the increase to Ontario’s minimum wage, it’s time to start asking some broader questions.
The former franchisee offers some math. Cost of goods: 33 to 34 per cent of sales. Labour: 30 per cent of sales. Add 10 per cent rent to the Mother Corp., Restaurant Brands International. Plus royalty fees. Plus advertising.
“If you’re a store lucky enough to have a net operating profit of 12 per cent, the wage increase basically brings you down to 6 per cent. A lot of stores are netting 10 per cent or less and this hit will bring them down to roughly 4 per cent net. At 4 per cent, you cannot survive. At 6 per cent, you cannot sustain.”
(He estimates that a franchisee with 40 employees, with a mix of full-time, part-time and student labour, could be looking at an increase to labour costs of roughly $150,000. We don’t even get into such post-EBITDA numbers as loan interest. The Great White North Franchisee Association, which says it represents more than half the Tims franchises, estimates the average franchisee will see an increase of about $244,000 as a result of labour law changes.)
Here’s a warning: “I am concerned that unless they do something that Tim Hortons is going to be in a downward slide and it’s going to be hard to turn around. It’s kind of a tipping point.”
The corporate history here is worth another brief mention. After the bust-up with Wendy’s, and after co-founder Ron Joyce sold out of the empire, and subsequent to the repatriation of Tim Hortons to Canada, the double-double company entered what I would define as the chilling embrace of 3G Capital.
Some readers may recall the time we spent in Leamington when 3G, partnered with Warren Buffett, bought the H.J. Heinz Co. and then shut down the century-old tomato operation in that sunny clime. I interviewed a self-described rightwing capitalist named Jerry Shuster.
“This was all destroyed in my view by excessive greed,” Shuster said then. “I believe in destructive capitalism. When corporations pass their life cycle, when products become more or less obsolete, let capitalism clean that out, shut it down. But not when the market’s still good, the production’s still good.”
3G was already the owner of a once-beloved Canadian company, John Labatt Ltd. (Interbrew SA bought Labatt in 1995 and was itself subsequently purchased by the Brazilians behind 3G through their beer company, AmBev. The subsequent $52-billion (U.S.) takeover of Anheuser-Busch made 3G kings of the world’s largest beer company.)
3G purchased Burger King in 2010, Heinz in 2013, merged Heinz with Kraft in 2015, blended Burger King with Tim Hortons and later added Popeyes Louisiana Chicken under the Restaurant Brands International (RBI) banner. End goal: global domination.
Here’s a quote from the Financial Times last spring: “The founders of 3G have transformed the beer, fast food and food manufacturing industries with bold acquisitions, which are quickly followed by a brutal but disciplined attack on costs, a surge in profitability and high returns to shareholders.”
The insatiable demand for ever increasing quarterly returns to satisfy shareholders seeking the highest profit margins is underpinned by the precepts of 3G cofounder Jorge Lemann: always reduce costs. Efficiencies. Supply chain logistics. Time cost savings. These become defining operational values.
Few surprises there. But still, the question arises: what is fair?
The Tims franchisees, as has been much discussed, are bound to pay RBI for products at RBI-determined prices. Coffee. Sugar. And are bound by sales prices determined by RBI even if those prices result in a loss to the franchisee.
There seems to be only one way forward. RBI needs to reduce the prices at the back door, introduce some price increases at the counter, and maybe even work with the franchisees to find ways to streamline the product offerings.
In other words, RBI needs to come to the table.