Cannibalism

A Crack in the Cup

Chapter 3

Cannibalism

It’s a strange word to be used in a business context. Images of horrible mutilation and death as parts of a human body are eaten don’t fit. It’s simply part of the jargon we use. If a new product is introduced and it takes away from the sale of an existing product we say “it cannibalizes it”.   If a new store opens in the vicinity of an existing store and negatively impacts its sales and customer transactions , we say it cannibalizes it, usually expressed in dollars or percentages. However, when the store owner’s pocket book gets a big bite, they are expected to suppress any emotion for the sake of the brand which eventually erupts as some of those primal instincts resurface.

This chapter explores cannibalism in our business as it progressed from a gentle nibble to bite size pieces. We are now at a point in many communities where we must ask when is enough enough. How much of the body can be nibbled away until it can no longer heal?

There are realities in the franchising business that have always existed and always will. First, as developers and stewards of the brand, the franchisor must operate from a position of power. It has to be that way. The franchise agreement is thick, full of legal language and tends to spell out the franchisees obligations in considerable detail. Franchisee rights are included but are minimal. There is legislation in all provinces of Canada designed to offer some protection for franchisees under what is known as the “Arthur Wishart Act’. It is weak legislation that has not kept pace with the ongoing tightening up of franchise agreement by franchisors. Franchisees that challenge what would seem to be an obvious violation of the agreement has a high risk failure in addition to high legal costs. Franchisors have deeper pockets. Many cases are brought forward with an emotional driven sense of being morally wronged. The legal document outweighs past reputations, promises and practices, moral or otherwise. The success rate on franchisee litigation is very low.

Generally if someone is interested in buying a franchise they take the franchise agreement to their lawyer for an opinion. Legal advice frequently goes something like this, “run from it as fast as you can and don’t sign it”. Often the advice they paid for gets ignored and the agreement is signed, simply based on trust. The trust is based on a reputation built up over time, often decades as with Tim Horton’s. Despite a very one sided franchise agreement, franchisees that do their homework by searching out and talking to several existing franchisee first, consulting with an accountant familiar with that business and a lawyer that can explain the risks, they can still do very well. Buyers beware. Conditions can change faster than perceptions when new owners arrive with a new priorities.

Cannibalization:

The first Tim Horton stores opened in new territories or at least a fair distance from existing stores. Sales in existing stores weren’t impacted and generally if a second store was planned for the same community it was offered to that owner.

As the chain grew, a new problem emerged. If a new store was planned that fell between two franchisees both franchisees would be impacted by lost sales to the new store. In our jargon it would cannibalize the sales of both. It could only be offered to one franchisee. Initially it generally worked out okay with agreements reached between the franchisees. However, gradually as the number of stores increased and communities became saturated the stakes became higher. Franchisees goals were no different in that they wanted to grow and they wanted to control their market.

The fear of losing a substantial amount of sales when a new store opened nearby became a friction point between franchisees and between franchisees and head office. There was a winner and a loser and nobody likes to lose. Through the 70’s, 80’s and 90’s any friction was somewhat mitigated by the huge year after year sales increases. If a store took a 10 or 15% hit in sales they would have it back within a year or two. Sales increases in the double digits became the norm. Guidelines were set up to help decide who would qualify for the new store. It was imperfect, allowing for considerable discretion which tended to foster an underlying feeling of favoritism being shown to certain franchisees. I believe that in some cases that could be true but overall there was a conscious effort to be impartial.

Territory franchises were not granted. The reason goes back to the first few stores when a couple of franchisees were granted territories. Those early franchise agreements were lacking teeth. Franchising in Canada was fairly new. Unfortunately these were not good operators so allowing them to expand with more stores was not a good option. Termination of the agreements on an operational default was not felt to be enforceable. The problem is the agreement did not allow Tim Horton’s to expand in that territory without the franchisees permission. Stalemate. Now this territory was vulnerable to competitors opening up without a challenge. Needless to say once the 20 year term expired; the territory rights were rescinded.

Participating in a cannibalistic expansion sounds terribly unfair and mean spirited. But going back in time to the 70’s and 80’s it was a necessary method of both promoting and protecting the chain. Although by the mid 70’s Tim Horton’s had already leapt ahead of its competition, there was reason to be concerned. The huge Duncan Donuts chain from the U.S was trying to establish itself in Ontario and the Maritimes. They were already dominant in Quebec. Country Style Donuts entered the 70’s with more stores than Tim’s and was still expanding, Mr Donut had a number of stores in Canada, Robins Donuts out of Thunder Bay were aggressive in the West and starting to move east and several small chains were starting up. There was a race on.

In the 70’s the Tim Horton package was working well but expansion was slow at around 8 to 10 stores a year. The execution at store level was superior to any competitor but I recall after a day of store visits Ron shook his head and muttered “We’re just the best of a bad lot”. With a real threat of serious competition he fretted about how to ensure Tim Hortons reached top of mind with consumers. In the 70’s, a community of 30,000 was considered minimum to support a store. That was the current benchmark. How that has changed! I think it must have felt like one of those nightmares where you find yourself trying to cross the street, a big truck is coming and you can only move your feet in slow motion. Sure it was now a national chain but with 100 stores scattered from St. John’s Newfoundland to Burnaby B.C there was no critical mass anywhere other than perhaps Hamilton. The advertising fund was growing with every new store and became sufficient to produce commercials for radio, buy targeted airtime and rent some billboards. There was an obvious void between hearing a commercial and finding a store. The only real answer was to ramp up expansion, push operation excellence in existing stores and be very vigilant in cutting off competition before they could be entrenched in our market.

Imagine the world at your feet, with a limited budget to grow and a very lean mostly inexperienced staff. There was no model to follow. It was pioneering all the way. There was a sharp awareness that the window of opportunity was now and that it wouldn’t wait forever.

So in the Joyce years of Tim Horton’s expansion, cannibalism was actually good for the whole chain. Saturation in many communities didn’t happen until the mid 2000’s. With growing Canadian awareness, sales were breaking records year after year. The growth in the advertising fund allowed a leap into the big league. Television commercials were finally within grasp by the 80’s.

When I joined the Tim Horton team in 1977 there was one store in Burlington Ontario. It was store number 5 located on Plains Road and owned by Eldon and Doreen Fawcett. Ron approved two new locations in Burlington to open in 1978. It was a big step for both Ron and Eldon as they were both concerned about what this would do to store number 5 sales. These two new stores were miles away on the other side of town and both were sold to Eldon. I don’t believe store 5 sales were impacted. Both of those two locations have since closed and relocated to better real estate accommodating a drive through. This venture became a new benchmark for safe expansion.

When I became a franchisee in 1994, there were approximately 8 stores in Burlington. At last count there are 29. I soon experienced a couple of things that other franchisees could relate to. First, franchisees in the area resented a new franchise being granted a store in their area, particularly to a former corporate executive. Ron took flak for it on my behalf but I could feel the resentment. Fortunately, my location had an impact on only one other store nearby that was hampered by difficult access and no drive through. I was too busy learning how to run a busy store to give it much thought at the time.

Second, I learned firsthand the real impact of a new store opening close to me. I had the good fortune of acquiring what turned out to be a high volume, very profitable location. The bank allowed me to leverage the cash flow to finance the purchase of new franchises. Within a short time I owned and operated 6 restaurants, two of which were doing amazingly well. When a new store opened close to my breadwinner the proverbial shit hit the fan. The new store cannibalized my sales by 13 %. That was within the area of acceptability I had preached when I was in corporate management. What I hadn’t anticipated was a drop in profit of between 35% and 40%. The fixed costs didn’t go down, adjustments in staff hours were minimal and the gravy was gone off the top. This caused a chain reaction that almost led to bankruptcy. The bank told me I was now offside in my debt to revenue requirement and insisted rudely, I must say, to get it in order immediately or they would force sale of my assets even though I always made my payments on time. I can only forgive the cold, ruthless, unreasonable, greedy, self serving, psycho bully that handled my file because Christ tells me to. It is certainly not natural. At this particular time corporate had switched to electronic banking and were aggressively tightening the payment terms and bringing receivables current by taking funds out of franchisee accounts. In the midst of this I was audited by CRA and reassessed on some travel expenses. It was a perfect storm with the tsunami wave hitting on a Friday. My wife and I had to be very creative to survive. That is a story I will reserve for my grand kids or another chapter.

We did survive and eventually prospered. We accepted it as our own fault for naively trusting and not taking worst case scenarios into consideration. I was so eager to expand that I ignored the danger signs. In this crisis I was painfully made aware that new owners are not bound by a previous owners promise. On the positive side, we actually became better operators and business managers. It opened my eyes to the stress franchisees undergo faced with cannibalization which at times I imposed on others. In fairness, at that time, Burlington needed more stores but not that one.

I recently checked my store records for 2001 the year before the store up the street was opened. Multiplying the customer count that year by the average dollar transaction anticipated for 2017, the sales would now be approximately $5,000,000 per year, almost 65% above its sales today. This is an educated guess not having access to those store numbers since 2014 when I exited the chain. Might have been, could have been. This is really not relevant other than to show the impact cannibalization can have. I can’t disagree with cannibalization in principle. It has been important in the development of the brand but I do know that it poses real dangers for franchisees and the whole chain if not managed responsibly.

By the late 80’s the competitive danger really wasn’t a major factor. Country Style was no longer growing, Robin’s were sold and started dropping in quality and significance, and Dunkin gave up expanding in Canada partly because of problems they were facing in their own organization. We were starting to make inroads in Quebec. Yet the competitive factor remained a corporate obsession. It is still a driving force often used to justify opening more stores in already saturated markets.

There is a compelling argument for RBI to push expansion as shown in this example. I have not used actual stores but this exercise makes the point:

Two stores are each doing $2million a year in sales. On $4million total sales, corporate collects 3% royalty, 3.5 % advertising 10% rent and distribution revenue (not profit) of roughly 27%. That is a total of 43.5% of the franchisees sales of the top for a total of $1,740,000. Let’s assume the impact of the new store on the two existing stores is 20% or $800,000, divided equally between them and the new store does $1,600,000 in sales. Three stores sales now total $4,800,000 which generates $2,088,000 in corporate revenue an increase of $348,000 or 20%. The existing stores EBITDA drop by 20%. The purchase cost of the third franchise at roughly $500,000 and needs to be financed. There are now three below average stores struggling to build sales. Unless the same person owns all three stores, there is a serious cut in pay. This is a very strong motivation to search out new locations as long as the investment adds net revenue without causing store failures. There is no data to show what the long term effect will be as individual stores get squeezed but the current climate should be a good test.

Taking a snapshot today, there are real challenges. Competitors and particularly McDonalds are taking a serious run at the coffee, breakfast and baked good categories. Tim’s has to step up to the plate, freshen up, clean up and stay modern. They need to look successful. Passing through a littered, stained, overgrown drive through does nothing to make me want to come back. That just makes me assume the kitchen is the same. Bad operators need to be retrained or turfed. It’s an age old struggle. Do you decrease crime by hiring more police or by increasing people’s income and self esteem? If the product Tim’s sell has lost its point of difference, then it’s time to focus on the supply line and get it back. If the trend of flat sales continues and operating costs continue to rise, franchisees instinctively take steps to offset it by cutting in the only areas they have any control; labour and maintenance. This has a domino effect. Reinvesting in modernizing stores, maintenance, landscaping and renovations gets stretched. Tim’s main competitor, MacDonald’s, have 8 stores in Burlington versus Tim’s 29, all 8 are doing well with the exception of perhaps one located inside a large store. As an observer, I have the impression they still invest heavily in renovations, landscaping and staff.

Winston Churchill said and I quote, “However beautiful the strategy, you should occasionally look at the results”.

The strategy was good at the time. It made sense and worked in the 70’s, 80’s and 90’s but someone forgot to connect the dots. Customer counts per store started declining in the early2000’s

A challenge facing foodservice in general is coping with the costs of staying fresh. It costs the same to renovate a low volume store as a high volume store, it costs the same to landscape a low volume store and overhead costs don’t decrease as sales decline. It is a challenge. Perhaps the model will change again.

In the expansion drive in the 80’s a couple of offshoots from cannibalization developed. Low volume stores that would not support a one store owner were assigned to a multiple store owner. This would ensure the store would remain operational and a multi store owner could absorb a low profit store. Initially it was to ensure competition couldn’t get a foothold but eventually as Tim Horton’s dominated the market it became more of a profit generator for the franchisor. The franchisor collected 3% royalty, 10% rent, 3.5% advertising and markup on product. This encouraged keeping all stores open. A small number of low volume stores have been closed over the years but only upon expiry of their lease.

The growth of multi store owners was a positive force in the early years. Franchisees that were entrepreneurial were key players in developing new stores in their community. Gary and Mary O’neill in Moncton, Danny Murphy in PEI, John Hoey in Mississauga, Jeff and Heather Agnew in Kingston, Bob and Cathy Noble in Toronto are just a few examples of franchisees that built a small empire in their partnership with Tim Hortons.

Along comes tribal warfare. The small franchisee and low volume store increasingly become casualties of a newer threat of cannibalization. The willingness of the multi unit owner to take on more and more stores has created a two class system within the franchise body. Suspicions, jealousy and self preservation are eroding the “help your brother” attitude. The biggest competitor a Tim Horton franchisee has is another Tim Horton franchisee. This competiveness doesn’t fall on deaf ears at the corporate level. A house divided cannot stand. Alluding opportunities for more stores are enough for many franchisees to ignore their fellow franchisee. As smaller franchisees fall off the map, opportunities are created for the larger operator. As one multi unit operator said to me “I have more staying power so I will survive the peaks and valley’s”. The player with the biggest pot will eventually win. So perhaps in a time of rising costs and declining profits the role of the multi store owner will gain momentum.

Again quoting from Winston Churchill, “an appeaser is one who feeds a crocodile, hoping it will eat him last”.

It is unfair and not factual to paint any group of franchisees with the same brush. I personally know several franchisees that believe in and support RBI. I know multi store owners that fight for and support their fellow franchisees. There are franchisees working with RBI determined to resolve issues and work through major problems. They are dedicated, still believing in the founding principles…and the fun of making money. For the thin skinned loyalist it is a lonely position but moving from the barn to the ball room can be an intoxicating experience. Every franchisor covets such loyalty and cultivates it. But wounds are opening up that will take strong leadership to heal. These bumps to the cup are tearing out the heart and soul of Tim’s. Franchisees devouring franchisees will destroy the community developed trust.

Just prior to the sale to 3G, TDL started to downsize head office staff. That was inevitable as the hiring ramped up after the Joyce era at a hectic pace. It was no longer lean but this was the first time in its history a large scale firing took place. A former employee that attended the meeting told me that when the CEO was questioned about the impact on the Tim Horton family his response was “we are not a family, we are a business”. As he pondered that comment he said “oh my god, this is the end of Tim’s and welcome to the so called Global Economy.”

 

Stay tuned. Chapters to follow:

*Community

*irony of death in the path of a business

*how to squander points of difference

* History of 3G Capital

Advertisements

Crack in the Cup

A Crack in the Cup

Introduction

There is no chronological order to the topics and chapters that follow. They are snippets of memories and impressions formed over years of working closely with Ron Joyce. Memories can fade but impressions seem to last. Who I am is not relevant to the story. It is simply a story seen through my glasses.

Chapter 1

The Brand

I’m sure some of you will remember the small white china cup that was so ubiquitous with Tim Hortons. They were made by Royal Doulton. Less expensive china was available but Ron Joyce insisted that we reinforce the commitment to a great coffee with a cup that shouted quality by its very name. The cups were expensive but had a great “feel” to them. I also recall the anxiety franchisees felt every time one shattered on the floor or was stolen.

It became fairly common to see these signature cups in University dorms and in kitchen cupboards of the more daring customers. I recall Ray Rhinelander, the first franchisee in St.John’s Newfoundland inventorying his cups at the beginning and end of each shift to try and control the epidemic of theft. Great advertising but very expensive! In 1983 upon the purchase of the hotelware division from Royal Doulton and the formation of Steelite International, the name on the bottom of the cup changed to Steelite but it was still the same cup.

In the late 70’s and early 80’s, stores were experiencing higher than normal cup breakage. Handles were snapping off and seemingly good cups were breaking for no apparent reason. Royal Doulton sent their technical experts from England to Tim Horton stores to observe firsthand. They responded quickly at their factory by reinforcing the bond between the handle and the cup. An interesting factory tour can be viewed at “factorytour.steelite.com” They observed that on a daily basis the cups were handled dozens of times, often roughly. Tim’s usage was much different than typical restaurants. The handling from dishwasher to counter to customer and back with continual banging together was not royal treatment. I will never forget how the expert explained it to us. “Imagine that each cup has a memory. Every time it gets a hard bang, it remembers it. Each bang creates microscopic spider web cracks. It’s not visible but it doesn’t go away. After multiple bangs it simply reacts, sometimes suddenly shattering as these spider webs connect. It cannot hold itself together any longer.”

What a simple but graphic way to explain a material problem. I have often used this analogy to explain breakdowns in relationships and even organizations. No matter how big the name or reputation, it can be broken. Often it is the multitude of bangs, imbedded in the subconscious that finally erupt unexpectedly. The eruption is often triggered by a seemingly minor incident. Like death by a thousand cuts. Malcom Gladwell in his book ‘The Tipping point/How Little Things Can Make a Big Difference” says and I quote , “ Ideas and products and messages and behaviors spread just like viruses do.”

The Royal Doulton cups are no longer part of the Tim Horton experience but that hasn’t dampened the enthusiasm of loyal customers. Perhaps the cup never did matter but in my gut I believe it did. In time the use of china inside the stores declined. It was the growing popularity of the drive throughs and the Roll up the Rim to Win contests that gradually made paper the cup of choice. No one would notice switching to “made in China” cups, would they?

What is the magic of this brand? It was well anchored in the consciousness of Canadians long before Ron Joyce sold Tim’s to Wendy’s International in January 1996.

Shortly after joining Ron’s team in 1977, I was placed in the construction/design group. Stores were built with Blue Steel brick,  tables used harvest gold formica, walls used flat cut English oak with red trim, and the floors used Frontenac 4101 quarry tile and each store had two wagon wheel chandeliers with red shades. Why after 40 years would I remember such trivial detail? I remember because I tried to change the materials and colors and ended up on the carpet in Ron’s office. He said “don’t change a dam thing until I figure out why this business is working so well.  DON’T CHANGE A THING”.

I don’t think the word “Brand” was in our vocabulary at that time. The energy that enveloped those of us that were fortunate to be part of it was amazing. I’m sure we individually thought we understood why the stores were successful. Henry Svazas in Real Estate must have felt his great choice of locations were the key. John Lynn in Research& Development must have felt the great products he continually perfected carried the name and Ron Buist in marketing was proud of his attention to detail. Alf Lane used his legal expertise to ensure we were doing things properly and Ron Fitchett in accounting believed his purchasing and financial management were key to moving forward. The operations team were called on to be unrelenting in reinforcing the basics in food service. (fresh well made product, fast friendly service, a clean store and good price value).

In reality, each was part of the whole package. There was always a constant pressure to do better. A familiar saying from Ron was “that’s good enough is never good enough”. But there is nothing unusual about this part of the success story. Tim Hortons was a good sounding name. But success meant Ron tirelessly pushing us to be better and do more than we thought possible. We were ordinary people doing extraordinary things. In the midst of the bricks and mortar, the coffee and donuts, the twin oval pylon signs and the TV commercials was the birth of a heart and a soul. It was a less tangible but an increasingly powerful force that set Tim Hortons above the rest. Ron’s determination to engage and celebrate the franchisees, suppliers, employees, politicians, communities, friends, family and celebrities in his vision became the connector.

I can best illustrate this with simple example. The first Tim Hortons Kids Camp was originally an old hunting camp located at Lorimer Lake near Parry Sound in Ontario. It consisted of several dilapidated cabins for sleeping, a rustic log cabin for dining and a beautiful waterfront. The intent was to provide monetarily underprivileged kids a unique, inspiring free camping experience. Recalling his own childhood Ron was painfully aware that taking underprivileged kids to a rundown camp in an old school bus did not provide them with an opportunity to see the “possibilities” life had to offer. He embarked on a major renovation program to replace and upgrade the buildings and facilities. Volunteers were recruited to form work parties to rake, cut trees, hammer and paint. As funds were raised, the old buildings were replaced with new modern facilities that even had hot and cold running water. Volunteers included franchisees, friends of franchisees, head office staff, suppliers and friends of Ron. It was hard work but no one complained. Weekend after weekend a cavalcade of workers headed for Parry Sound to help out. Ron made sure there was ample good food and libations.

After one such weekend when a particular group of hard workers stayed up late and drank his bar dry Ron said to me the next day “you know it would be cheaper to hire contractors based on how much I just spent on booze but what makes it worthwhile is to have them see the camp and to be involved and feel part of it. I highlight “feel part of it”. The generosity of those volunteers and their enthusiasm for the camp was infectious as they returned to their communities and jobs.

It wasn’t long before the franchisees in Atlantic Canada approached Ron and said “we are supporting the Kids Camp and sending kids to Ontario but why can’t we have kids come to the Maritimes and experience our part of Canada”. Volunteers from Ontario, Quebec and the Maritimes converged on Tatamagouche Nova Scotia to build the second kids camp. Soon Quyon Quebec and Kananaskis Alberta followed with volunteers flying and driving to be part of it.

Significantly, through this evolution of the kids camp Ron resisted letting it be exploited as a marketing program. Perhaps this insight and resolve came from his own life experiences growing up during the depression in Nova Scotia having lost his father at age five. Perhaps his service in the Navy developed an understanding of the importance of teamwork and leadership.  Many times he had to insist that if what we are doing is the right thing then the rewards will follow.

Regional marketing groups were formed in the early 80’s to encourage franchisees to engage with the community and with each other. Ron allocated a portion of the national advertising fund to be spent in each community. Ideas that worked well were adopted by other regions. Gary and Mary O’neill from Moncton New Brunswick had started supplying hockey sweaters to a local kid’s hockey league. What a great program. It developed into a national project and expanded to include soccer. It became known as the Timbit Hockey and Timbit Soccer program. At one time, kids wearing the Timbit jerseys could go into any Tim Horton store after a game, show the tag on their jersey and get a free cold drink and Timbit. Generations of kids that have being part of the Timbit program are now customers that stop by Tims on the way to work. It was an extra bonus when the kid’s parents accompanying them purchased their own treats. Support for hospices, hospitals, food banks, women’s shelters, free skating at Christmas and free swimming at community pools are a few of the community projects that evolved through this program.

In the late 70’s Ron was motivated to set up an Advisory Committee to involve franchisees in the selection of marketing and advertising programs which included the expenditure of the advertising royalty. It became evident that addressing franchisees other concerns warranted a larger portion of these meeting. We, in senior management were on the hot seat because the Advisory representatives demanded answers prior to reporting back to their local area franchisees. Initially construction deficiencies, equipment breakdown, delivery problems from the warehouse and pricing were time consuming issues. It helped create a more transparent accountability for management. It was a free and open discussion that produced results.

These are just a couple of examples of many programs that Ron initiated and supported designed to build strong relationships.

I recall him chastising one of his senior executive (reaming out was the term used at the time) for an offhand comment about franchisees.  Ron said “don’t ever forget whose paying your salary. If they are not successful we don’t have a job. They are our customer.” I’m not suggesting everyone loved Ron and his sometimes hardnosed and explosive approach but they did respect him.

If it’s not obvious, I am absolutely convinced that the trust, loyalty and belief in the Tim Horton Brand is rooted as much in the relationships withTim Horton franchisees and their involvement and their employees involvement in the individual  community as in the coffee, baked goods, locations and massive media advertising. Community connection has been the foundation. The big question going forward is “now the train is running is the platform still needed?” Is the heart and soul replaceable in an era of robotics?

It’s easy to discount the past as “The Glory Days”.  We can’t go back in time but if we can glean some threads of understanding regarding the importance of those early relationships perhaps the future can sustain a few more bumps.

There was a sentiment at one time that Tim Hortons customers were loyal because it was a Canadian owned business. This myth was dispelled when the owner, Nova Scotia born Ron Joyce sold Tim Horton’s to Wendy’s International in 1996. (Something he still regrets). Since then, in 2004 Wendy’s were pushed into selling their new crown jewel and by 2006 Tim Horton’s was expatriated back to Canada. In 2014 it was purchased by 3G Capital for a staggering $12 billion. So it doesn’t seem to really matter where the owners are from. During these ownership changes, growth continued at an impressive rate. Trust in the brand does not seem to be diminished or enhanced by whom the corporate owners are.

Chapter 2

The 3G Challenge

There is no doubt at all that 3G Capital understand the value of a brand. They paid a much higher price to obtain Tim Hortons than is the norm for this type of business. Within the Tim Horton brand lies an untapped potential to expand worldwide with thousands of stores if not tens of thousands. Tim Hortons Brand has a high international recognition. Of the top ten Brands in Canada in 2015, three are now owned by 3G Capital which includes Tim Hortons, H.J.Heinz and Kraft Foods. 3G are good at identifying and purchasing strong Brands.

They are good at identifying opportunities within the companies they buy. They cut waste, use technology effectively, streamline systems and dramatically reduce overhead.

The decision to purchase Tim Hortons must have been enhanced as well by unique clauses in the franchise agreement established back in the Ron Joyce era. Following the establishment of the corporately owned and operated distribution network around 1968, the franchise agreements were updated to require franchisees to purchase all their supplies with the exception of milk and cream from head office. This worked well for all parties under Ron’s era but has been the center of friction between franchisees and franchisors following the departure of Ron Joyce from the Wendy’s board in 2002. Unique is the total control the franchisor has to manage the maximum level of franchisees profit.  In addition to controlling the selling price at the cash register they control what franchisees pay for their product at their sole discretion. Whatever markup on product they choose is not negotiable. It takes a benevolent dictator to have that much power and not abuse it.  With the aid of today’s technology there is an opportunity to manage the franchisees profitability down to a level deemed to be sustainable in the opinion of the franchisor.

But if “economies of scale” were to out trump “ relationship building” for short term profits for the shareholders then the brand  may be a disrupted by a bump that knocks the handle off the cup. After all, the Brand is the sum of people’s perception.

So what is going on with Tim’s?

A large number of franchisees are concerned enough to form an association ( GWNFA). There are lawsuits filed. The relationship appears to be stressed. Even franchisees are divided into two camps. One group trusts the owner and will continue to be supportive. They believe RBI will ensure they are financially successful over the long haul.  One group doesn’t. Is this a normal push-pull experienced in an evolving business or is it a fracture line?

The most recent bump on the cup became viral on the week of January 1. The Ontario government raised the minimum wage $2.40 an hour at a cost to employers of $3.38 per hour.  Many small businesses are trying to figure out how to cope with half their bottom line wiped out.  It would seem that the government was anticipating a push back and unions were out of hibernation. For the media it became a relevant, emotionally packed story. Even a TV celebrity jumped on the bandwagon ridiculing and berating the actions of a Tim Horton’s franchisee in a vicious rant.

For goodness sake hasn’t anybody paid attention to the election of President Trump and the lingering anger over the sub-prime meltdown? Aren’t we continually reminded about the growing gap between the have’s and have not’s? The movement to help the less fortunate is not a new agenda item.  Hello! Somebody dropped the ball. Was there a “do and not to do list”? Franchisees operate their franchises under their own incorporated companies but are certainly receptive to sound reasoning and solid advice. Was it a coincident the whole energy of the movement focused on a store owned by Tim Horton’s daughter and Ron Joyce’s son? Many small business owners sucked in their breath and thought thank god it’s not me and on the next breath thought this is not good for a brand. A cost of being part of a high profile chain was emphasized when demonstrations took place at Tim Hortons all across Canada initiated by an incident at one store.

Other than a brief comment attributing the incident and media releases to a couple of rogue franchisees, RBI has declined further comment. Media couldn’t find any franchisees willing to comment. They wouldn’t for good reason. The subject was volatile with demonstrations ramping up. Franchisees are obligated in their license agreement to refer media questions to head office. That makes total sense. The stakes are too high. There can’t be 1000 spokespersons. The brand can be damaged by a wrong word, a misinterpreted comment or the interviewers own biased agenda. Sometimes silence can be the safest strategy but sometimes crisis are opportunities to build trust with the partners in the brand.

I believe this incident highlights an important issue that should never be overlooked. A management decision to cut back on certain benefits was challenged based on what we can call a moral or rights issue rather than a legislated or legal obligation. No laws were broken but there is a universal sentiment that a benefit given year after year is expected to be continued. It was seen as an affront to deprive  those that are trying to cope with rising costs for affordable shelter, food and clothing. In other words, the basic necessities of life. Perhaps this should be a hallelujah moment. It is not relevant to the story that the franchisees in the headlines are victims as well and they care deeply about their employees and in return are respected. It doesn’t matter that they in particular were targeted because of their name, not their character. It is not relevant that a number of small business owners all over Ontario are scrambling to deal with the survival of their businesses. Small business owners are rightfully called to make above all, the proper moral decisions in the operation of their business regardless of the cost. A knee jerk reaction to a difficult business problem can seriously impact people and can damage a brand.

But it’s a fuzzy line that’s being drawn. It doesn’t seem to move beyond the small business owners. There seems to be less fanfare and objection when larger companies downsize, firing hundreds of employees not just to survive but for the simple opportunity to increase profits.

So again, what is happening inside our Tim’s that is causing such a commotion?

Today CEO’s and Board of Directors of companies are well versed and understand their role above and beyond legal compliance. Sure they must maximize profits for their shareholders but at the same time they must ensure management are making plans and decisions to continue operating profitably over the long term (sustainability). This has often justified the sale of a company or placed it under new management as was perhaps the case with Tim Hortons sale to 3G. . It’s improbable that a company as diverse and profitable as 3G Capital would invest $12billion without a sustainability plan. They have a strong track record and tend to view purchases as long term investments.

It’s a no brainer to conclude that sustainability is a high priority of RBI. So what is the plan? Does the existing business model still work as all their economies of scale are rigidly applied? Are the franchisees whom are digging in their heels by forming an association simply dinosaurs in a new economy or are they the last line of resistance to salvage for themselves and their families not only their business but their trust, respect, and security. Are they misunderstood protectors of the heart and soul of the Brand or just renegades  No doubt franchisees will continue to be part of the equation for the future but how will they fit in RBI’s new model. It is a highly sensitive question hitting at the core of the brand. The train is running. Is the platform important?

Stay tuned for Chapter 3 and more as we explore

  • Importance of the community and how it relates to Tim’s future
  • Cannibalism and how it has divided the chain.
  • Bumps along the way.
  • Some fun stories from the “Glory Days”

 

 

Definitions:

RBI is Restaurant Brands International owned by 3G Capital. RBI  in turn owns Tim Hortons, Burger King and Popeyes.

3G Capital is a global investment company located in New York which also owns RBI, H.J. Heinz Company and Kraft Foods Group.

TDL   stands for Tim Donut Limited the original company that owned  the Tim Horton chain. It was later changed to The TDL Group and is now known as under the  RBI umbrella.

Chain is a common terminology used to describe a group of stores or franchises operating under the same name and management group.