Which will it be? (Jonathan Lin)
Thursday marks the start of a busy week for Tim Hortons. The company’s fourth-quarter results will be released, followed by a special Investor Conference on Tuesday next week where Tims is expected to lay out its plans for the next five years.
Times have been a bit tougher for the Canadian coffee favourite in the past year. While Tims still maintains its dominance in the quick-service coffee market in Canada, its success has increasingly been under siege by competitors like McDonald’s coffee brand McCafe, and it’s received criticism for its U.S. expansion strategy from activist investors. While Edward Jones consumer analyst Brian Yarbrough says Tims has mostly dealt with dissident voices by taking on debt and undergoing a share buyback program, investors will still be looking for the company to return to its former strength. The next few days will be an opportunity for Tims, and CEO Marc Caira, to lay out a new plan of attack and address investor concerns.
“It’s not like it’s a broken business,” says Yarbrough. “They just need some tweaking.”
Here’s what some analysts want to hear from Tim Hortons as it announced its earnings this morning:
1. Even more interest in the U.S. as a growth market
Having kept the activist investors at bay for now, Tims will likely focus even more intently on its U.S. expansion strategy in the coming months. While the company has faced difficulties in opening new locations south of the border, “the U.S. longer term is still their biggest growth market,” says Yarbrough. Tim Hortons has been incredibly successful with about 3,000 locations in Canada, while Dunkin’ Donuts has over 7,000 stores in the U.S. alone and plans to double that number in the next 20 years. If Tims sets its sights on having that kind of presence in the U.S., it could be a growth market for the next 15 or 20 years, Yarbrough noted. Despite being a “mature” company, Tims still has “above-average earnings growth potential,” RBC analyst Irene Nattel wrote in a research note last week. Strengthening the company’s position in the U.S. would be a way of encouraging that growth potential.
2. A different business model for the U.S. than what we’ve seen in Canada
Nattel has also noted that investors can “likely expect” Tims to operate via “well capitalized potential franchisees” as it continues to set up new locations in the U.S. This is a strategy that’s been up for discussion for months now, whereby Tims would hand over the operations of stores in a certain region to mass franchisees who have the financial ability to run multiple locations right from the get-go. In the coming days we might see Caira confirm one way or the other as to whether this will be Tims new strategy in the U.S.
3. A plan to deal with long line-ups
Caira has hinted during analyst conference calls that the chain is looking for ways to reduce wait times, says Yarbrough. With a more complex menu, it’s been taking longer than usual to get your order at a Tim Hortons drive-through, which may be sending customers to competitors, he added. One solution might be the implementation of double drive-throughs—as McDonald’s has already done in the U.S.—while another remedy may be the creation of beverage-only line-ups in stores.
4. Menu modifications
Yarbrough also notes that the Tim Hortons menu has become increasingly complicated in the past few years, as the company has taken to providing every type of breakfast sandwich imaginable and a long list of hot and cold beverages. “For years and years they just kept adding additional items to the menus, and I think that’s complicated things and that’s slowed down service,” he says. What Caira might choose to do is streamline the menu and perhaps cut out any extraneous or unpopular items in order to reduce wait times.
5. A roadmap for reinvigorating same-store sales growth
All of these expectations essentially boil down to one overarching imperative: a resurgence of same-store sales growth. RBC’s expectation for Canadian same-store sales growth in Tims’ fourth quarter is about 1%. That’s below the 2-4% target that the company had initially aimed for last year. What Yarbrough is looking for in the coming days is a roadmap for returning Tim Hortons to its same-store sales strength. “They need to innovate and get back to the speed and the customer service,” says Yarbrough. If Tims can continue to improve the aesthetics of its stores (efforts at introducing Wi-fi and even fireplaces have been ongoing), and address its menu and customer service issues, “I think they can get back to their consistent ways of 3-4% same-store sales,” Yarbrough added.
