Country Style files for bankruptcy protection

"The franchisees are in shock — they are worn out," said Les Stewart, head of the Canadian Alliance of Franchise Operators, who complained yesterday that the company did not give enough warning about what changes were in store for the chain.

The Financial Post
December 15, 2001

Country Style files for bankruptcy protection
Owes $23M to creditors
Hollie Shaw


Ailing coffee and doughnut chain Country Style Food Services Inc. has filed for court protection from creditors and will close a quarter of its franchised doughnut stores across Canada, the company announced yesterday.

Country Style, which is in the process of closing 50 of its 200 Country Style Donut outlets, owes $15.7-million to its secured lender, Bank of Nova Scotia, and an additional $7.3-million to unsecured parties, including landlords, franchisees and suppliers.

"The franchisees are in shock — they are worn out," said Les Stewart, head of the Canadian Alliance of Franchise Operators, who complained yesterday that the company did not give enough warning about what changes were in store for the chain.


About 100 other Country Style locations operating as leasees, 60 Buns Master bakery outlets and 200 international Country Style franchises are not affected by the court order.

"Our chain is very viable but it had lost its way in the recent past," Patrick Gibbons, president of Country Style, said yesterday in an interview.

"These stores are not performing stores — many of them did not have a drive-thru, and a drive thru is about 70% of the business," he added. "But this is a new era. Unfortunately it might cause hardship to some in this process, but at the end of the day we will have a much more solid and profitable base to build on."

Country Style's majority owner, New York-based investment firm CAI Capital Partners and Company II, L.P., has invested $3-million to help turn the business around.

Canada now has more doughnut stores per capita than any country in the world, making it a particularly tough environment for older players such as Country Style, which started with a handful of outlets 38 years ago.

The competition has become especially brutal since 1995, when key rival Tim Hortons was sold to Wendy's International Inc., the third-largest burger chain in the United States.

At the time, Tim's had 1,200 Canadian outlets. Nowadays, it has closer to 2,000 and regularly achieves same-store sales in the double digits.

"Country Style was faced with a very strong competitor on every corner," said Richard Talbot, a retail consultant based in Unionville, Ont. "Tim Hortons has become Canada's preferred brand."

In a court affidavit, Mr. Gibbons said Country Style's financial condition had deteriorated rapidly in the last year. For the fiscal year ending June 30, same-store sales at franchised locations dropped 6.6% from the prior year.

Tim Hortons' addition of numerous drive-thru outlets in the last two years and the company's successful "Roll-up-the-Rim-to-Win" promotion also hurt Country Style's sales, he noted.

A boom in specialty coffee, marked by the rapid expansion of chains such as Starbucks and Second Cup, also ate into the coffee-and-snack market, Mr. Talbot said.

As a result, inexpensive sweet snacks confections are no longer the bread-and-butter of either Country Style or Tim's, both of whom have focused on a broader lunch and hot meal menu in the last decade.

Tim Hortons notwithstanding, Mr. Gibbons said the core business is profitable, with average yearly sales growth of about 2%, and the chain is poised again to expand.

Country Style has launched new products, such as the "cinnamon twister" and a chicken stew, and would like to open another 20 outlets in the next year.

"This brand is very strong," Mr. Gibbons said. "When you think of the growth that has come in the past from all of our competitors, and we are still here."

Mr. Gibbons, former head of marketing at Burger King Restaurants of Canada, also said the chain will do more to promote one of its most valuable assets: its coffee, which accounts for over 50% of sales.

"We are the only chain that grinds our coffee fresh in the store, and it has some very loyal followers," he said. "We didn't really do a good job of telling you that."

Country Style is Canada's third-largest chain behind Tim Hortons and Coffee Time Donuts Inc., with annual sales of $120-million.

Post-restructuring, it will be closer in size to Dunkin' Donuts, which has 175 franchised outlets in Quebec.


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