Tim Hortons, Inc. is positioned within the market as a mature company with a strong consumer franchise. Broadly, the entity enjoys a strong brand, very profitable franchise income, strong cash flow, high returns, strong same store sales, and a low-risk business model.
Tim Hortons, Inc. engages in the ownership and operation of quick service restaurants, Tim Hortons restaurants, in Canada and the United States. The company offers coffee, flavoured cappuccinos, specialty teas, home-style soups, fresh sandwiches and fresh baked goods.
Broadly, the restaurant industry has benefited from a long term trend towards eating out, driven by a growth in disposable income, a decline in the price difference between dining out and eating at home, and an increase in the number of dual-income and single-parent families. Demand has remained strong in the broad sector, leading to the conclusion that casual dining is less sensitive to economic conditions than previously assumed.
Tim Hortons operates within the broader context of the mature foodservice industry, which is characterized as having little growth prospects. Tim Hortons operates in the highly competitive Coffee and Baked Goods (CBG) sector of the Canadian Quick Service Restaurants (QSR) market. Despite
The QSR market is intensely competitive in terms of pricing, quality and speed of service, the number and convenience of locations, attractiveness of facilities, personnel and selection of food. Within the sector, Tim Hortons franchises compete with a variety of international, regional and local restaurants. The consumers are very demanding in terms of the speed and quality of service; they have well-established preferences and are extremely price-sensitive. As such, the customers are powerful enough to influence downward price pressures, demand higher quality and speed of service, as well as require convenient locations. In addition, Tim Hortons competes within the QSR market not only for customers, but also for hourly employees. As such, the company’s survival depends on the effectiveness of advertising and marketing programs targeted at both, customers and employees. Due to the proprietary nature of the manufacturing process for major restaurant chains within the CBG segment, alternative suppliers for their baked products are not readily available, which makes the switching costs for the companies high. In addition, with the market for high-quality coffee beans being particularly volatile, coffee shops are highly dependant on the commodity prices.
The Value Chain
Tim Hortons has a diverse revenue base generated from franchisee royalties and fees, rental income, warehouse sales and company-operated stores. A major strength of Tim Horton’s integrated and scalable business model is its unique vertically integrated manufacturing and distribution platforms. These platforms enable the company to maintain its overall cost leadership while offering ‘always fresh’ and innovative products. The company operates a joint venture bakery, Maidstone Bakeries in Ontario and a Maidstone Coffee roasting plant in Rochester, New York, which ensure timely delivery of products and provide economies of scale. Tim Hortons built one of the most advanced food service distribution facilities in Canada that allows the company to improve its distribution efficiency and create additional economies of scale. In general, Tim Hortons’ attains an overall cost leadership in all of its value-chain activities (refer to Appendix XX). The Maidstone Bakeries manufactures par-baked donuts and breads, which are then flash frozen and shipped to system restaurants, each of which contains an ‘Always Fresh’ proprietary technology. The ‘Always Fresh’ baking system requires limited space, and thus provides operational efficiencies and reduces product waste on the levels of operations and outbound...