Restaurant brand culture matters: Tim Hortons’ problems in Canada tell us why

Restaurant Brands International is getting resistance from the chain’s operators that it didn’t get with Burger King, says RB’s The Bottom Line.

The Bottom Line

This hasn’t been a good month for Tim Hortons in Canada.

Earlier this week, a group of franchise owners in Canada claimed that the brand was trying to “intimidate” them by denying a license renewal to one of the chain’s more outspoken operators.

One publication there said that Tim Hortons and its franchisees were in a “civil war.”

Meanwhile, Tim Hortons workers in Quebec formed a union and negotiated their first contract.

The issues follow protests of Tim Hortons locations over franchisee plans regarding wages.

And now, consumer surveys in Canada are offering a warning to the brand. The company’s reputation among Canadians plunged in one survey released earlier this month, prompting some writers to suggest that Canadians’ connection with Tim Hortons has been lost.

It’s important to note that, based upon the numbers that matter the most—Tim Hortons’ sales—the brand’s challenges in Canada are hardly a disaster. Same-store sales rose 0.2% last year, down from a 2.2% increase the year before. The results suggest a decline in traffic in 2017, but Tim's is still in positive territory.

Canadians may have fallen out of love with Tim Hortons, but they certainly haven’t divorced the brand yet.

But the challenges there are also proving this point: Culture matters in franchise systems. Disturb that culture and the results can be a problem and may ultimately hurt sales.

That was the risk in 2014, when Burger King merged with Tim Hortons to create Restaurant Brands International, a company that has since gone on to purchase Popeyes Louisiana Kitchen.

In 2010, an aggressive private-equity group, 3G Capital, paid what was at the time considered to be a high price for Burger King, a chain that was struggling to keep up with rival McDonald’s and had angry franchisees and a bad need to remodel stores.

3G brought some much-needed stability and management strength to the brand. It quickly refranchised company-owned stores, cut the hell out of administrative costs, intensified international development and put together a doable plan for remodels. The result was strong improvement in performance that continues today.

The strength provided the energy for the 2014 merger. RBI came into Tim Hortons with its efficient management style, laying off workers and increasing standards for operators. The changes have been blamed for the discontent among operators, who formed an association and have sued the chain multiple times. Lawsuits have also been filed in the U.S.

There are a lot of differences between Burger King in 2010 and Tim Hortons in 2014. As such, the discontent surrounding the changes that RBI is making in Canada are not that surprising.

Burger King back in 2010 had gone through multiple ownership and management changes. Franchisees at the time routinely sued the company over issues such as a $1 Double Cheeseburger. Some operators were filing for bankruptcy. The focus on profits and sales success 3G brought with it were more than enough to offset any concerns about corporate cost cuts.

Indeed, Burger King operators are frequently large-scale franchisees who are more sophisticated and don’t necessarily need the corporate attention.

Tim Hortons is fundamentally different. It has small operators who rely on the company for everything, including their food. The corporate changes made by RBI could more easily rock the boat.

Those operators are responding with lawsuits and complaints that are helping bring down the company’s perception in its home country.

Tim Hortons is a big deal in Canada. It is an institution in that country, and its success there is important to RBI’s sales and profits. Investors tend to pay more attention to Burger King, but Tim Hortons accounts for two-thirds of RBI’s revenues, but only half of its adjusted EBITDA.

None of this is to say that Tim's is suddenly going to collapse in Canada. And the franchisor isn’t to blame for some of the issues, notably the protests following a decision by at least one operator to cut benefits.

But it does show the work that RBI has to do there, four years after its acquisition. The company needs to get its relations with operators on the right track, or that dwindling brand perception will turn into real sales issues.

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