netrashetty
Netra Shetty
Tim Hortons, Inc. (NYSE:THI) is the largest fast food restaurant chain in Canada (and the fourth-largest in all of North America) based on market capitalization.[1] Its best selling product is coffee, and the chain is known for its "double-double," a coffee with two creams and two sugars. Tim Horton's also has a food menu to complement its beverage selection, offering doughnuts, sandwiches, and other food items.
Despite intense competition throughout Canada coming from other fast food giants such as McDonald's, Tim Horton’s has acquired more than 75% share of customer traffic in Canada’s coffee and baked goods sector. The company views Quebec and Western Canada as its fastest-growing domestic markets and as opportunities for further expansion. Tim Horton's has also been eager to expand U.S. operations, since it already has high market saturation in Canada. This is problematic, as it is forced to compete with entrenched brands like Dunkin' Donuts, McDonald's (MCD), and Starbucks, and it hasn’t been that successful in the U.S. markets.
Another issue that the company confronts rising prices for commodities such as coffee, oil, wheat, and sugar, which have compressed margins. Tim Horton's must keep its products affordable to attract customers, which keeps it from passing these costs directly onto consumers.
Company Overview
Contents
1 Company Overview
1.1 Business Financials
2 Key Trends and Forces
2.1 Same-store sales growth and unit growth are declining
2.2 Increases in commodity prices are compressing margins
2.3 A poor economy drives demand
2.4 US expansion is a difficult task
2.5 Higher coffee prices will preserve margins and growth
3 Competition
4 Market Share
5 References
As of December 30, 2009, Tim Horton's and its franchisees operated 3,015 restaurants in Canada and 563 restaurants in the United States.[2] The firm's principal business is the development and franchising of quick-service restaurants. The bulk of its revenues come from retail sales at its owned restaurants, from distribution of wholesale baked, refrigerated and frozen products to Tim Horton restaurants, as well as from the consolidation of a limited number of franchised restaurants. The company also owns or leases the land and/or the building for the majority of its restaurants, and leases or subleases the real estate to its franchisees, collecting both rent from franchisees as well as, royalties from franchisees, based on a percentage of gross sales. In addition, the company receives fees upon the opening of new franchised units.
Business Financials
In 2009, THI earned total revenues of $2.24 billion. This was a substantial increase from its 2008 total revenues of $1.66 billion in 2008. This had a positive effect on its net income for 2009. Between 2008 and 2009, THI's net income increased from $231 million in 2008 to $284 million in 2009.
Key Trends and Forces
Same-store sales growth and unit growth are declining
Tim Horton's two primary business model drivers, same store sales growth and unit growth, have been declining, on average, over the past 4 years. Part of the reason for the average same sales growth decline is due to the general worldwide economic downturn. However, THI must be able to maintain or grow their same store sales growth to in order to maintain profitability.
Increases in commodity prices are compressing margins
With coffee, wheat, oil, and sugar as vital inputs to THI's core business, any increase in commodity prices will put pressure on operating margins. In addition, Tim Horton's does not actively use financial products such as futures contracts or forward contracts to hedge the risk of commodity price increases which, exposes their operations to constant commodity price fluctuations.[3] Tim Horton's cannot pass these costs directly onto consumers, because as a fast food restaurant it depends on low prices (and quick service) to attract customers.
A poor economy drives demand
Despite menu price increases, casual dining chains are expected to continue to struggle with high commodity costs. Consequently, quick-service eateries with lower priced menus stand to benefit in a slowing economy. While Tim Horton's competitor Starbucks has suffered due to current economic woes because of the premium prices on its coffee, Tim Horton's lower priced goods seem like cheap substitutes to consumers. While a tall (medium) cup of coffee at Starbucks is $1.65, the price of an equivalently sized cup of coffee at Tim Hortons is just $1.22. This is besides the fact that Starbucks is mostly known for its premium coffee drinks which can cost up to $5.
US expansion is a difficult task
Even though U.S. operations have been sub-par, THI continues to look towards U.S. expansion to combat any signs of market saturation in Canada. It appears that market penetration has been difficult, as existing brands like Starbuck's and Krispy Kreme command American consumers' attention. Americans have little recognition or emotional attachment to the Tim Horton's brand, unlike Canadians who have extreme loyalty to the brand (enhanced by the folk hero status of founder Tim Horton, who was a Canadian hockey player) [4].
Higher coffee prices will preserve margins and growth
Tim Horton recently followed through on coffee price increases. The increased prices are expected to boost same-store sales growth and operating margin, which was suffering from higher operating costs. A medium coffee will now cost $1.22 (excluding taxes), up from $1.17 previously. The price of a large coffee moves from $1.31 to $1.38, and an extra large from $1.49 to $1.57. The coffee price increases will relieve some of the pressure on margins. At the same time, the increased prices have the potential to drive customers away.[5]
Competition
Tim Hortons competes in the fast food restaurant segment in Canada and the U.S. In Canada, they have the leading market position in the quick service restaurant segment, based on system wide sales and number of restaurants, with a strong presence in every province.
Additionally, their main competitors in the quick service sector include McDonald's (MCD), Wendy's International (WEN), Yum! Brands (YUM)(which owns KFC and Taco Bell, among others) and [Subway], and in the coffee and baked goods segment, Starbucks (SBUX), Second Cup, Country Style, and Coffee Time. In Canada, they also compete with multiple regional quick service restaurants, specialty coffee restaurants, deli and other sandwich shops, gas and other convenience locations.
Market Share
The company says that its stores represent 42% of the Canadian fast food restaurant sector and 80% of the coffee/donut/gourmet coffee/tea sector of the Canadian quick service restaurant sector for the same period, in each case based on number of customers served[6]. At the same time, THI has more Canadian stores than even McDonald's (MCD)[7]. In the U.S., market share is dismal as THI's presence is trumped by such companies as McDonald's (MCD) and Dunkin Donuts.
Despite intense competition throughout Canada coming from other fast food giants such as McDonald's, Tim Horton’s has acquired more than 75% share of customer traffic in Canada’s coffee and baked goods sector. The company views Quebec and Western Canada as its fastest-growing domestic markets and as opportunities for further expansion. Tim Horton's has also been eager to expand U.S. operations, since it already has high market saturation in Canada. This is problematic, as it is forced to compete with entrenched brands like Dunkin' Donuts, McDonald's (MCD), and Starbucks, and it hasn’t been that successful in the U.S. markets.
Another issue that the company confronts rising prices for commodities such as coffee, oil, wheat, and sugar, which have compressed margins. Tim Horton's must keep its products affordable to attract customers, which keeps it from passing these costs directly onto consumers.
Company Overview
Contents
1 Company Overview
1.1 Business Financials
2 Key Trends and Forces
2.1 Same-store sales growth and unit growth are declining
2.2 Increases in commodity prices are compressing margins
2.3 A poor economy drives demand
2.4 US expansion is a difficult task
2.5 Higher coffee prices will preserve margins and growth
3 Competition
4 Market Share
5 References
As of December 30, 2009, Tim Horton's and its franchisees operated 3,015 restaurants in Canada and 563 restaurants in the United States.[2] The firm's principal business is the development and franchising of quick-service restaurants. The bulk of its revenues come from retail sales at its owned restaurants, from distribution of wholesale baked, refrigerated and frozen products to Tim Horton restaurants, as well as from the consolidation of a limited number of franchised restaurants. The company also owns or leases the land and/or the building for the majority of its restaurants, and leases or subleases the real estate to its franchisees, collecting both rent from franchisees as well as, royalties from franchisees, based on a percentage of gross sales. In addition, the company receives fees upon the opening of new franchised units.
Business Financials
In 2009, THI earned total revenues of $2.24 billion. This was a substantial increase from its 2008 total revenues of $1.66 billion in 2008. This had a positive effect on its net income for 2009. Between 2008 and 2009, THI's net income increased from $231 million in 2008 to $284 million in 2009.
Key Trends and Forces
Same-store sales growth and unit growth are declining
Tim Horton's two primary business model drivers, same store sales growth and unit growth, have been declining, on average, over the past 4 years. Part of the reason for the average same sales growth decline is due to the general worldwide economic downturn. However, THI must be able to maintain or grow their same store sales growth to in order to maintain profitability.
Increases in commodity prices are compressing margins
With coffee, wheat, oil, and sugar as vital inputs to THI's core business, any increase in commodity prices will put pressure on operating margins. In addition, Tim Horton's does not actively use financial products such as futures contracts or forward contracts to hedge the risk of commodity price increases which, exposes their operations to constant commodity price fluctuations.[3] Tim Horton's cannot pass these costs directly onto consumers, because as a fast food restaurant it depends on low prices (and quick service) to attract customers.
A poor economy drives demand
Despite menu price increases, casual dining chains are expected to continue to struggle with high commodity costs. Consequently, quick-service eateries with lower priced menus stand to benefit in a slowing economy. While Tim Horton's competitor Starbucks has suffered due to current economic woes because of the premium prices on its coffee, Tim Horton's lower priced goods seem like cheap substitutes to consumers. While a tall (medium) cup of coffee at Starbucks is $1.65, the price of an equivalently sized cup of coffee at Tim Hortons is just $1.22. This is besides the fact that Starbucks is mostly known for its premium coffee drinks which can cost up to $5.
US expansion is a difficult task
Even though U.S. operations have been sub-par, THI continues to look towards U.S. expansion to combat any signs of market saturation in Canada. It appears that market penetration has been difficult, as existing brands like Starbuck's and Krispy Kreme command American consumers' attention. Americans have little recognition or emotional attachment to the Tim Horton's brand, unlike Canadians who have extreme loyalty to the brand (enhanced by the folk hero status of founder Tim Horton, who was a Canadian hockey player) [4].
Higher coffee prices will preserve margins and growth
Tim Horton recently followed through on coffee price increases. The increased prices are expected to boost same-store sales growth and operating margin, which was suffering from higher operating costs. A medium coffee will now cost $1.22 (excluding taxes), up from $1.17 previously. The price of a large coffee moves from $1.31 to $1.38, and an extra large from $1.49 to $1.57. The coffee price increases will relieve some of the pressure on margins. At the same time, the increased prices have the potential to drive customers away.[5]
Competition
Tim Hortons competes in the fast food restaurant segment in Canada and the U.S. In Canada, they have the leading market position in the quick service restaurant segment, based on system wide sales and number of restaurants, with a strong presence in every province.
Additionally, their main competitors in the quick service sector include McDonald's (MCD), Wendy's International (WEN), Yum! Brands (YUM)(which owns KFC and Taco Bell, among others) and [Subway], and in the coffee and baked goods segment, Starbucks (SBUX), Second Cup, Country Style, and Coffee Time. In Canada, they also compete with multiple regional quick service restaurants, specialty coffee restaurants, deli and other sandwich shops, gas and other convenience locations.
Market Share
The company says that its stores represent 42% of the Canadian fast food restaurant sector and 80% of the coffee/donut/gourmet coffee/tea sector of the Canadian quick service restaurant sector for the same period, in each case based on number of customers served[6]. At the same time, THI has more Canadian stores than even McDonald's (MCD)[7]. In the U.S., market share is dismal as THI's presence is trumped by such companies as McDonald's (MCD) and Dunkin Donuts.
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