Chapter 4- Doors Closed, Doors Opened

Part 1

Ronald Joyce boarded a train at Truro Nova Scotia destined for Ontario, carrying as he said, “a cardboard suitcase with a change of underwear and $20.00 in my pocket”. At the age of fifteen he had already worked part time making hay at his Uncle Stan’s farm on Brule Point, slaughtering pigs for Langille’s meat business and for a short spell worked night shifts at an apple juice canning business in the Annapolis Valley. Ron never shied away from physical work but soon after starting in the apple business, the company was sold and he was out of a job. World War II had just ended but the economy in Nova Scotia was still suffering. Not wanting to be a further burden to his mother and younger siblings Ron knew it was time to head out on his own

Nova Scotia had being suffering severe economic hardships before the worldwide depression was declared in 1930. The depression in Nova Scotia started at least 10 years previously and the economy had already being in a decline since Confederation. Manufacturing incentives heavily favored Ontario and with the loss of the shipbuilding industry, Nova Scotia now depended on farming, lumbering, fishing and some mining. The migration of young workers from the Maritimes to other parts of Canada and United States had been epidemic for decades and continues today.

In 1935, Ron’s father Willard Joyce was working as a plasterer for his uncle on a construction job in Pictou County. Riding in the back of a construction truck, a barrel of fuel dislodged knocking Willard off, landing on him. Willard died as a result, leaving behind a young widow pregnant with Gweyn, and two young sons, Willard age 3 and Ronald age five.

Willard had moved his young bride to Westville from her home in Tatamagouche in 1930. Their romance started the previous year while he was working with his uncle on the construction of a new Bank of Nova Scotia located on Main Street in Tatamagouche. Boarding at the home of Arch and Minnie Jollymore  a friendship and bond soon developed between Willard and one of Arch and Minnie’s s four daughters. Following Willard’s death, Grace moved back to Tatamagouche to raise her children close to the comfort and support of her family.

There were no jobs in Tatamagouche for a young widow with three kids.  Government assistance was difficult to get and a demeaning application and interview process had to be completed in order to qualify for a small widow’s allowance. Family looked out for family and neighbors helped neighbors in a real community effort, repeated in communities across Canada. As a young kid I remember asking a neighbor what it was like to be in the depression. He said, “let me put it this way, we were fourth in line in the neighborhood to get the soup bone”. I thought he was serious and perhaps he was.

This period in history left its mark on Ron. He still recalls with a sense of guilt how hard his mother worked to keep the three kids clothed and fed and his voracious appetite. He recalls been sent from family member to family member for short stays. On reflection he believed his mother was trying to give him a chance to have some male role models in the absence of a father. Engrained deeply in his memory are the taunts from some of the town kids and a teacher that singled him out and embarrassed him in front of the class. Poverty was widespread but seems to have had a lasting impact on Ron. With an excessively restless energy, a highly competitive spirit, an intelligent mind with a powerful memory and something to prove Ron embarked on what would prove to be an incredible journey.

Part 2

In the early hours of Feb 21, 1974, a speeding Ford De Tomaso Pantura lost control on the QEW near St. Catherine’s striking a concrete culvert flipping several times. Hockey star Tim Horton was thrown from the vehicle and pronounced dead shortly after. Tim’s wife Lori, and his four daughters Jeri-lyn, Traci, Kim and Kelly were devastated and in shock. Tim’s close friend and business partner Ron Joyce had his world turned upside down. In the months ahead Ron had to deal with his own grief at the loss of a friend and business partner but the company didn’t come to a standstill. There were new stores still under construction, franchisees in training, supplies to be delivered and bills to be paid. Ron and Tim were ramping up store expansion leaving them stretched both financially and short of staff.

Ron had found something he was passionate about and it was all unfolding beyond his wildest dreams. A new home in Burlington with swimming pool, an airplane, sport car, a new young family and a cottage on a lake were already the early signs of an exploding success story. Ron totally got it. He loved the simplicity of the concept. Focus on satisfying the customer and the rest will follow.  Fresh product made on site, friendly service, clean stores and convenient locations was the theme he relentlessly hammered to anyone that would listen.

What woke him up at 3 in the morning in a sweat was the new uncertainty of his future. The thought of losing it all occupied more and more of his thoughts and energy. With Lori now his business partner he didn’t know what part she would want to play in the company. Now, with a new inexperienced partner and Tim’s hockey salary no longer flowing into the partnership the imbalance was bound to cause friction down the road. There were four options; continue on as a workhorse for the partnership, have Lori buy him out, buy Lori out or find a new owner. Lori understandably didn’t want to buy him out and Ron didn’t feel he could raise the money to buy her out as he was already leveraged with the store expansion program.

Ron had a good rapport with Bob Rosenberg, CEO and son of the founder of Duncan Donuts out of Canton Massachusetts. Bob was interested in acquiring Tim Hortons and invited Ron to meet with him in Canton to hammer out a deal. Ron flew to Boston, drove to Canton and waited in the lobby for Bob to greet him. Bob met Ron in the lobby but was in an obvious state of agitation and distress. The courts had just certified a class action lawsuit by their franchisees which could financially ruin Duncan Donuts if they were unable to overturn it on appeal. He told Ron he couldn’t possibly talk to him while this was still before the courts. Ron returned home empty handed.

A young financial manager named Alan Pyle at Victoria and Grey surprised Ron by suggesting they could   finance the purchase of Lori’s shares. He was impressed with Ron’s track record and was able to sell the deal to his boss’s. After the normal process of valuation a fair deal was struck and Ron ended up as sole owner of the Tim Horton chain.

Part 3

In 1981, Alan Lowe, founder and owner of Country Style Donuts died suddenly of a heart attack. Alan formed Country Style Donuts in 1962, bringing to Canada an American concept and started franchising in 1963 a year before Tim Horton purchased his first donut store in Hamilton in 1964. When Tim died in 1974, Country Style was the largest donut chain in Canada with 50 stores compared to Tim Hortons 34.

Alan, similar to Ron, owned and flew his own airplane, loved to socialize and party and was a tireless worker.

In 1982 I travelled with Ron on a trip throughout Western Canada visiting franchisees and staff members in Thunder Bay, Winnipeg, and finally Edmonton. We all met at a pub in Edmonton to have a casual meeting and some lunch. Ron was quietly complaining of heartburn and rubbing his chest. When he declined a drink we really got concerned. Ron’s friend Colleayn Mastin was able to convince him to go directly to the hospital emergency facility. I dropped them at the door and by the time I parked the car and rushed inside he was already hooked up to blood thinners and a morphine drip. An angel was looking over him as he had the actual heart attack while in intensive care. Ron lived.

Tim Horton had already surpassed Country Style by 1977  but following Alan’s death Country Style growth slowed noticeably, operations quality declined and ownership changed hands a couple of times. In 2008 it was sold to a Quebec based company MTY for $12million plus $6million of debt. At this same time Tim Horton’s value would have been in excess of $6billion.

Part 4

In 1974, George Spicer and Harvey Caldwell opened their first Robins Donut store in Thunder Bay Ontario. They had worked for Ron and Tim long enough to learn and understand the donut business but wanted to strike out on their own. Initially they focused the expansion westward, dominating that market until the mid 1980’s. Misfortune met first Harvey and then George, both dying while still relatively young men.

Part 5

In January 1996, Ron Joyce sold Tim Hortons to Wendy’s International, becoming the largest single shareholder of Wendy’s International

Ron had been struggling with a couple of issues that led him to this decision.

Following his heart attack in 1982, he was concerned about succession planning and was getting some pressure from senior franchisees. This health issue plus Ron’s lifestyle made him a higher risk for a catastrophic ending. During this timeframe, Ron didn’t feel any of his children had developed and matured enough in business to take over the reins of such a complex operation. His management team was expanding and maturing but he did not feel comfortable they possessed the skills yet to carry his torch.

Through the mid 80’s and early 90’s Ron explored a number of options, always torn between expanding explosively or finding a suitable buyer. He had started negotiations with Allied-Lyons in 1988, coordinated by Bill Fitz, President of DCA Canada. That deal fell through suddenly when in 1989 Allied- Lyons purchased Duncan Donuts. The Duncan Donuts deal happened very quickly initiated by CEO Bob Rosenberg, taking countermeasures to prevent a hostile takeover by a Canadian group The DD Acquisition Corporation, a partnership of Kingsbridge Capital Group and Cara Operations Ltd. Over the next few years Ron explored a number of possible acquisitions each time concluded it would be easier to continue expandion with his own locations than to upgrade and retrain existing competitors’ stores.

By the late 80’s the success of Tim Hortons plus Ron’s extensive investments outside the chain was generating more cash than needed to finance new store growth and an aggressive renovation program. The evaluation of other chains became a welcome diversion and a valuable training tool for the management group that had up until now being totally internally focused. The evaluation process created an acute affirmation that Tim’s was doing a lot of things right and certainly better than chains we looked at. This boosted management’s confidence and with morale at a high point, the expansion picked up a notch. The interest in expansion by acquisition or partnerships did not go away but actually heightened.

A relationship with Wendy’s had started a few years earlier. Scott’s Hospitality (at that time owners of Commonwealth Holiday Inns and a KFC Master Franchise) negotiated a contract with the Ontario MOT to upgrade food offerings at service centers along the 401. They were able to include Wendy’s and Tim Hortons at the same locations, becoming franchisees of multiple operations. We had already discovered there was a synergy by locating on the same site with other types of restaurants. On sites shared with for example Burger King, both Tims and Burger King enjoyed higher sales than projected. The expanded draw helped both operations, or, the sum total was greater than the parts. The availability of good locations at an affordable price for a single store was becoming more difficult to find.

Through sharing real estate and approving joint franchising, a good relationship with Wendy’s senior management developed. Wendy’s earned the respect of Ron Joyce through a shared approach to operations.   Wendy’s, founded in 1969 had grown dramatically in the 70’s and early 80’s but by 1984, the chain was floundering. Sales suddenly leveled, profits declined, share prices spiraled downward and morale within the chain was low. In 1986 David Thomas, the founder, recruited Jim Near to head up the company as President and COO. Jim Near was raised in food service and owned his first franchise at age 23. A highly successful entrepreneur, at one stage opened and owned 39 Wendy’s franchises in only 4 years. Jim refocused Wendy’s by changing the customer experience. Jim imposed high standards of cleanliness and simplified the menu with both low price specials and higher price premium quality offerings. Salads were introduced to meet the growing health concerns. Internally he cut corporate expenses but improved the pay and benefits of employees.

In 1987, Jim Near had already recruited and was grooming his successor, Gordon Teter. Gordon graduated from Purdue University with an MBA and spent the next 20 years in the franchise industry with Red Robin, Casa Lupita and Ponderosa. In 1991 he was promoted to President and COO, and in 1995 was made CEO of Wendy’s. Gordon had a photographic memory, amazing franchisees by his instant recollection of names, family members, sales and percentages of any store or owner he encountered. Gordon played the lead role in negotiating the acquisition of Tim Horton’s.

There were similarities in David Thomas and Ron Joyce’s lives. Dave Thomas was an orphan, served in the US military and supported a foundation helping orphans. Ron Joyce grew up without a father, served in the Canadian Navy and founded and supported the Tim Hortons Children’s Foundation to help monetarily underprivileged kids. Though fiercely competitive, success driven and independent, a friendship and bond quickly grew. The values Jim Near adhered to in resuscitating Wendy’s struck a chord with Ron. To this point, attempts to establish Tim Hortons south of border cities were in most cases failures. Even by the early 90’s we were aware that growth in Canada would slow as saturation was reached. The opportunity to expand Tim Hortons into United States by teaming up with an established brand such as Wendy’s had some appeal.

Once again, untimely deaths interfered with the direction of lives and fortunes. Just months after consummation of the marriage between Tim Horton’s and Wendy’s, Jim Near died of a heart attack while attending the Summer Olympics in Atlanta Georgia. He was only 58 years old. In 1999 Gordon Teter died from complications from a virus he contracted while attending meetings in Eastern Canada. Patti Jameson then VP corporate Communications for Tim’s was on the same flight from Halifax with Gordon, disembarking in Toronto while Gordon continued home to Dublin Ohio. Patti became critically ill with the same virus, was hospitalized and fortunately survived. Gordon was only 56.

In the span of 3 years the leadership of this highly successful company changed, setting in motion a series of events that now finds Tim Hortons in a precarious position for the first time in its 50 year history.

In spite of his success in recruiting Jim Near, considered the top CEO in the food service industry, David Thomas did something unusual. He ignored the efforts and results of the committee headed by members of the board including Ron Joyce, commissioned to search for a new CEO and unilaterally selected and promoted from within Wendy’s management team Jack Scheussler. Although respected and well liked, it was widely held that Jack was not quite ready for this role.

Over the next few years Wendy’s was again floundering while Tim Horton’s continued to flourish. Discussions regarding spinning off Tim Hortons came up from time to time but it was Bill Ackerman from Highfield Capital Management, a hedgefund firm, acquiring 6% of Wendy’s shares was able to push Jack and  the board into selling Tim’s. In 2006, Tim Horton’s was separated from Wendy’s remaining an American company based out of Delaware.

In 2009, Tims was expatriated back to Canada based at its original home office in Oakville Ontario

In 2014 Tims was sold to 3G Capital. Once again Bill Ackerman was a factor in putting this deal in play.

The evaluation of the package Ron sold to Wendy’s was carried out using standard accounting practices taking into consideration historical growth, potential growth, the value of assets and the brand strength.

The “crack in the cup” in this deal was the hidden (or ignored) value in the distribution division. The potential for any owner to legally pillage the franchisees and reap huge profits was already built into the system when Ron sold it to Wendy’s in 1996.   Ron was a stickler for detail. Site location, product development, store design, operational excellence were all driven and carefully scrutinized by Ron. The contractual obligation to purchase all goods from the TDL owned and operated Distribution System at prices set at the sole discretion of TDL were important for brand protection but also an important revenue stream necessary to supplement the lowest royalty (3% of sales) in the industry. The franchise agreements developed over the previous 30 years ensured full disclosure was made to franchisees, complying with the main concerns of the Arthur Wishart Act which focuses more on disclosure than leveling the playing field. Ron’s system worked well in the context of common sense and fairness. It was not conceivable that new owners would abandon such a successful model, corrupting and abusing the relationship with franchisees. However, this neat and tidy bundle actually provided new owners with a tempting and powerful tool to boost profits at their whim or under pressure from the market. The inclusion of this mechanism in the sale of Tim Hortons has become a pivotal or tipping point in the confrontational relationship between RBI management and franchisees. It has the potential to cause irreparable damage to the brand, destroying the livelihood of many franchisees,damaging the investment and expansion plans of 3G.

By the late 90’s, the ability to drill down on store operating numbers finally became a reality. Technology had arrived in the donut business. There had been a concern and an opinion by certain senior management that franchisees were “making too much money” or perhaps better said they were “leaving too much money on the table”.  I recall a conversation with Gordon Teter as we compared Wendy’s store profits to Tim Horton’s. He confided that higher profits in the Tim Horton stores were becoming a point of contention with their Wendy’s franchisees and may have to be dealt with somewhere down the road. I suggested that by bringing Wendy’s profits up comparable with Tim Horton’s the problem would be solved. He laughed and acknowledged that would be the ideal solution. At the next Wendy’s franchise meeting in Mississauga, Wendy’s set up a committee including franchisees to address the high food cost issue. This committee’s efforts resulted in improving the bottom line by close to 2% through negotiating better prices and changing some suppliers.

Perhaps TDL’s CFO Cyril Garland’s exodus from the corporate ranks in 1998, provided ammunition for the “too much money” theory. Cyril, now a franchisee, brought into his store operation well honed “bean” counting talents, using perpetual inventory and category cost analysis tools he had originally developed for corporate use. He quickly fine tuned his store operation achieving in excess of 24% EBITDA on a full store with a drive through and 32% on an Esso kiosk. This information freely shared with his former corporate team members supported the management view that the majority of franchisees were leaving too much on the table, reporting closer to 15% EBITDA. If they didn’t want it then why not take it? Soon after, the cost of purchasing an Esso kiosk dramatically increased, and rent and royalties on these units substantially increased. Margins generated by the distribution system gradually abandoned the old model Ron Joyce developed and today appears to be geared more to what the franchisor “believes ” the market (franchisees) can sustain rather than what is considered a fair industry standard. This new era, starting soon after his departure from the chain could be defined as the death of the Ron Joyce model.

At a snapshot in time when morale is low in the chain, sales are flat, store profits are down, competition is fierce and Tim’s public image is taking a hit in the media, it seems a good time to ask some tough questions and come to grips with some realities.

Assuming it is true that RBI has the absolute right to charge franchisees any price they choose for goods and services, how will they govern their own conduct in taking profit? It becomes more of a question of “how much” rather than” if”.

RBI purchased a business that had already demonstrated the ability and willingness to use the distribution system to boost profits and tune franchisee profits. There had been no resistance from the franchise community other than the attempt of a class action in 2008. With new case law supporting franchisors, it is difficult for franchisees to have a voice. What incentive could there possibly be for a franchisor, in a position of almost unlimited power to be charitable to a large group of seemingly rebellious franchisees?

What is the compelling connection between Tim Hortons and their customers today? It has always relied on a level of trust and loyalty unparalleled in the food service industry? Are those connections still nurtured or are they replaced instead by massive advertising and new social media trends? Is the connection with community still as relevant today as it was?

Does a contract allow a party to enforce particularly harsh conditions? In 2012 Judge Strathy ruled in favor of the franchisor, basically re-writing franchise law with his interpretation of certain clauses in the franchise agreement. In a nutshell his ruling entrenched he franchisors right to charge whatever they choose for product and to make whatever changes to the store operation they choose even at the franchisees expense. I haven’t revisited the court files since 2013 so I may be summarizing only what I understood his ruling to mean. I seem to recall that he did mention “as long as it does not endanger the livelihood of the franchisee”, whatever that means. His ruling really tipped the playing field.

Can it really be an acceptable practise to use the distribution system pricing to lower franchisee profits rather than using it as a profit center strictly in line with industry standards? Flagrant abuse of this methodology flies against the reasons for franchising in the first place, the principals of free enterprise, the achieving of common goals, and more. At what point does the abuse of the model become so offensive that it is detected by our customers, and celebrated by our competitors?

What will be the major points of difference between Tim Horton’s and its competitors? Over time, the leadership role in fresh baked goods was relinquished in favor of frozen product, now easily duplicated by competition.  The emergence of multiple sources of good coffee is having an impact. The recent explosion in the number of small coffee roasters, small coffee shops and micro breweries seem to support the notion that consumers like and support a community based business. Are we still seen as a community based business or simply another distant, foreign corporation? Have both franchisees and the franchisor simply got “too big for their britches” to be an effective player in our communities?

If even the best franchisees are stifled and denied renewal of their franchises for speaking up and offering criticism of corporate programs, what will the new Tim Horton model resemble? “Yes people” have seldom being contributors of innovation or managers of excellence.

Franchisees should be held accountable for the customer’s experience in areas they have control over. Franchisors should be held accountable for implementing programs that enhance the brand and fairly enrich all the stakeholders which certainly include both shareholders and franchisees.

Can the Tim Horton franchisee community be coached out of this cloud of suspicion and mistrust that seems to hang over the whole chain? Their total focus needs to return to what they do best. It’s time to celebrate the coffee (consistency and quality improvements from the supplier and a refocus at store level), develop new points of difference, upgrade stores, share the wealth, and build the trust.  As Dave Thomas used to say at every meeting “does anybody want to make some money?”

Problematic to both sides today is the high probability the current negativity will continue to spill over to customers and media, seriously damaging the brand.

Rebates, price mark up, kick backs and suspicion have been a trademark of the franchise industry for many years occasionally resulting in landmark court decisions. Major franchises today deal professionally with this issue, involving franchisees in the product purchasing process or at least providing enough transparency to ensure franchisees know they are receiving competitive and fair pricing. It is reasonable to believe that this will not likely happen at Tim Hortons. The new owners have been assured by the previous management that franchisees have no say in the matter. It seems that the sellers capitalized on this “crack in the Cup”, disregarding the welfare of their employees and franchisees.

What choices do franchisees have? They can simply, enthusiastically support the new programs and accept what comes down the tube trusting that their investment will continue to be rewarded. Trust is a decision, not necessarily based on evidence.  Among them are the scavengers hoping to benefit from the misfortune of their fellow franchisees. Another option is to fight. Larger armies and deeper pockets don’t always win. Remember “David and Goliath”. The last option is to run. This is not always a bad option either. Personal happiness, family relationships, self worth and integrity are all tied to a healthy living.

What choice does the franchisor have? They can gamble by creating a level playing field with franchisees. The upside revenue creation by working together may more than offset any windfall they now enjoy with current practices in the distribution system. Financial reward for good performance is usually an effective motivator and sounds like a better long term strategy. Staying the course is an option but also has a risk of failure.

Can Tim’s still rebound and enjoy exciting new levels of prosperity and reputation? Absolutely. The power of a unified, highly charged team can never be underestimated. Customers will respond. It may sound old fashioned but there are situations that call for a trusted leader to be out in front leading the troops, rather than behind them swinging a sword. If the will is there the problem is solvable. If not, a new model will evolve that will be substantially different from what we see today.

Doors close, doors open.

Yesterday I saw Ron Joyce driving his car to work. He was going to his office to do something he does well…making his investments and philanthropy work. He will be 88 in October.

Stay Tuned

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