Tim Hortons sued by franchisees over frozen doughnuts

"Always Fresh" apparently has its price, as doughnut king Tim Hortons is finding out the hard way. The icon of Canadian franchising has been hit with an attempted $1.95-billlion class-action suit over its conversion from a "fresh-baked" goods restaurant to a "microwaved products store."

The National Post
June 13, 2008

Tim Hortons sued by franchisees over frozen doughnuts
Jim Middlemiss

TORONTO - "Always Fresh" apparently has its price, as doughnut king Tim Hortons is finding out the hard way.

The icon of Canadian franchising has been hit with an attempted $1.95-billlion class-action suit over its conversion from a "fresh-baked" goods restaurant to a "microwaved products store."

In a statement of claim filed in an Ontario court, two Burlington, Ont., franchise owners are suing the head office on behalf of all Tim Hortons franchisees claiming that the move to an off-site supply chain involving frozen doughnuts hasn't made them any more money. Rather, they argue, it has driven up the fixed costs of a doughnut from nine cents to 20 cents without increasing sales as allegedly promised.

Moreover, the two franchisees claim that "a more extensive lunch menu" featuring soups and sandwiches have allegedly earned them only a "minimal profit, and in some cases no profit at all …"
They say the lunches have become increasingly popular; however, they have "unreasonably low margins" and drive up operating costs because stores have to hire more staff to serve them.

They are claiming breach of contract, breach of duty of fair dealing, negligent misrepresentation, and unjust enrichment. The claim has yet to be certified as a class action or heard by a judge.

A statement from Tim Hortons released Friday evening said the lawsuit is "frivolous and completely without merit. The company intends to vigorously defend itself in this matter."

The statement added that the lawsuit "doesn't reflect the opinion of the vast majority of franchisees."
"Strong relations with our store owners has been a hallmark of the company's success during our 44-year history, reflected in the good relations we enjoy with the vast majority of our more than 1,200 franchisees."

A lawyer for the plaintiffs, Jerome Morse of Adair Morse in Toronto, told Global News, "my client contends there has been a breach of the franchise agreement and that there has been a failure to conduct the franchise arrangement in a good faith manner."

The statement of claim says that until 2002 all doughnuts and most other baked goods were made on-site, and each store was equipped with high-volume baking equipment. Bakers would work through the night preparing goods for the next day.

The claim alleges that around 2001 and 2002, Tim Hortons moved to an "Always Fresh" system. It built a manufacturing plant in Brantford, Ont. with an Irish company to produce Timbits and doughnuts. They are baked and then frozen, known as par-baked, and shipped to Tim Hortons stores in North America, where they are then microwaved prior to sale. Selected distributors provide other goods, such as pastries.

The claim alleges that in 2002, franchisees were required to ditch their baking equipment and purchase freezers and microwave equipment to complete the Always Fresh conversion.

Franchisees say they were told the cost of doughnuts would jump from nine cents to 12, but that sales would also increase. However, they claim the true cost is closer to 20 cent because of "the inflated price at which the Brantford plant sells the frozen product to the franchisees." They claim the cost of other baked goods has also increased.

The claim alleges that franchisees were forced to invest $35,000 to $50,000 to complete the conversion, and while they have "suffered a loss in profit,"

Tim Hortons has "experienced an increase in profits as a result of the Always Fresh conversion."

They allege that as part owner of the Brantford plant, Tim Hortons earns a "profit on all frozen product and supplies, which are sold to the franchisees at a marked-up price."

The claim alleges there are between 500 and 800 potential class members operating 2,400 Tim Hortons stores in Canada.

Ned Levitt, a franchise lawyer at Gowlings in Toronto, said class actions involving franchisors "are not unusual anymore. There's quite a lot of activity in that area. It's going to be a battle."

John Sotos, a franchising lawyer, added that most franchisors reserve the right to make changes in the operations under the franchise agreement.

The problem, he said, is when the changes impact rights.

"Franchise agreements are predicated on certain economics. The franchisee paid certain fees in exchange for an opportunity to run a business which will generate some pro forma profits."

If the changes impact that model, he said, "that's where you can have a problem."

© Financial Post 2008

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