Tim Hortons Report
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[pic 1]Tim Hortons ReportUniversity of British ColumbiaProfessor DereticJune 18th, 2017EXECUTIVE SUMMARYTim Hortons (TH) is a restaurant franchise chain that was established in 1964 in Hamilton, Ontario. Their menu focuses on caffeinated beverages, donuts, and savory snacks. TH currently has 4613 restaurants across the globe, with the majority of them in Canada. Approximately 99% of the restaurants are franchises, and only 1% of them are owned by the company. In 2016 TH’s revenue was $3 billion, with a gross profit margin of 45.1%. In 2014, TH was acquired by Burger King, and both brands are now held by the parent company Restaurant Brands International (RBI). TH’s goal is to continually innovate their products, adopt consumer-oriented technology, and expand their presence globally. They operate in the Quick Service (QS) industry, specifically in the donut, coffee, and tea segment. This industry is mature, with high levels of competition between conglomerated brands and slim profit margins at 8.3%. The target market is not strictly segmented, as everybody is a target consumer. However, the industry is mainly sustained by middle-class consumers. With changing age demographics, the industry does have its eye on Baby Boomers and young adults’ discretionary income. The extremely large consumer base and low average transaction price means low buyer bargaining power, but this comes at the price of low cost of brand switching. TH currently holds 68.8% of the Canadian market share in the donut, coffee, and tea segment and is the market leader. Starbucks is TH’s biggest competitor, holding 15.2% of the Canadian market share. TH’s position is much weaker in the U.S., being only a minor player. This weakness is one reason for the acquisition by Burger King. Despite the QS industry being mature, industry revenues are still growing at a modest 2.8% annually. This, coupled with low barriers to entry, makes the industry susceptible to threat of new competitors. The industry’s biggest substitutes are the quickly growing Fast Casual industry and grocery stores. To stay price competitive in this mature industry, companies like TH need to improve their cost structure’s efficiency. Many companies are now looking at vertical integration of suppliers to better manage demand and volatile supply. For TH, this means further vertically integrating coffee plants to reduce vulnerabilities in its cost structure. This can allow them to achieve the same efficiency of their internal and third-party distribution channel, and their franchise model. TH’s franchise model has been extremely successful in reducing the risk for TH and increasing the speed of expansion globally. Through its franchising, TH has three main revenue sources: supply sales to their franchisees, royalties from franchise revenues, and property leasing. Another strength of TH is their strong branding, which significantly contributed to their dominance in the Canadian market. However, weaknesses include an outdated menu, a weak American presence, and the lack of mobile technology adoption. Key opportunities for TH include the shifting consumer preferences to be more health-conscious, technology changes such as mobile apps and automation in the service industry, and the success of loyalty programs. Based on these analyses, we recommend TH to update their menu, adopt ordering kiosks, and update the TimmyMe app in the short-term. In the long-term, we recommend TH to focus on global expansion, specifically leveraging Burger King’s more established American presence.
1. BRIEF INTRODUCTIONTim Hortons (TH) is a quick service franchise chain that originated in 1964 from Hamilton, Ontario. As a franchise chain, franchisees own 99% of restaurants, and the company only owns 1% for training and product testing (Restaurant Brands International, 2016). The company has one of the most successful marketing campaigns called “Roll Up the Rim”, which TH has run for over 30 years to defend its market share. In 2014, TH was acquired by Burger King (BK), which is held by Restaurant Brands International Inc. (RBI). TH and BK are both Quick Service restaurants, and the goal was to leverage each other’s resources to push international expansion. TH has four main sources of revenue: sales from supplying their franchisees, royalties from franchise revenues collected as a percentage, property revenues from leasing to franchisees, and sales at company restaurants, which is minimal (Restaurant Brands International, 2016). Moving forward, the company is focusing on innovating food products, adopting new technology to better shape the consumer experience, and growing organically through international expansion. 2. INDUSTRY / ENVIRONMENT ANALYSISIndustry Life CycleTH operates in the Quick Service (QS) industry, specifically in the donut, coffee, and tea segment. The QS industry is mature, with a handful of consolidated players. Growth has slowed down because the industry has become saturated. The donut, coffee, and tea segment is especially conglomerated, with TH and Starbucks holding 84% of the market share. After water, “coffee is the second most consumed beverage in Canada,” (Tedesco, 2013) and it has been marketed as a lifestyle product (D’Costa, 2011). TH holds 68.8% of the Canadian market share in its specific segment, with major competitors being Starbucks Coffee (15.2%) and smaller coffee chains. In the United States, McDonald’s is a bigger threat along with Dunkin Donuts. Environment AnalysisThe threat of potential entry is high due to low entry barriers. Generally, there are low switching costs for consumers, and the franchising method is less risky compared to expanding through company owned restaurants. The largest caveats of entry are securing financing and achieving a competitive economy of scale. Outside of the QS industry, there are many substitutes, such as the Fast Casual industry, grocery stores, and convenience stores (Restaurant Brands International, 2016). The most concerning may well be the Fast Casual industry, which is chain restaurants that are very similar to QS in terms of convenience, but they serve better quality food and ambiance, and charge higher prices. In a mature food service industry, Fast Casual has grown 10.4% from 2014-2015, making its growth the fastest across the food service industry (QSR, 2016). This trend may be attributed to consumer preferences for not only convenience, but also quality consumption.