Franchisees fear footing Tim Hortons takeover bill, Marian Strauss

…leaves the door open for the new owner to charge more for supplies, ranging from coffee to paper cups. That could be significant because the cost of goods can consume more than 30 per cent of a franchisee’s sales, according to some estimates… As a result, Mr. Fisher believes the new merged entity will eventually combine distribution to gain economies of scale.

The Globe and Mail
September 18, 2014

Franchisees fear footing Tim Hortons takeover bill
Marian Strauss

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A Tim Hortons franchise stands next to a Burger King outlet in a Toronto food court on Aug. 25, 2014. (Chris Young For The Globe and Mail)

Some of Tim Hortons Inc.’s franchise holders are concerned about Burger King Worldwide Inc.’s $12.5-billion bid for the doughnut chain, fearing the new debt-laden owner will find ways to squeeze them.

In a regulatory filing this week, Miami-based Burger King committed to keeping Tim Hortons’ headquarters in Canada with a “meaningful” number of Canadian-based executives. It also said the merged entity will continue to help finance franchisees’ renovations and refrain from raising their rents and royalties for five years.

Archibald Jollymore, a former franchisee and Tim Hortons executive, said while the agreement shields franchisees more than some had expected, it leaves the door open for the new owner to charge more for supplies, ranging from coffee to paper cups. That could be significant because the cost of goods can consume more than 30 per cent of a franchisee’s sales, according to some estimates.

3G Capital, the Brazilian private equity firm that controls Burger King, is known for wringing costs out of companies it acquires, said Mr. Jollymore. He added that the firm will likely feel the heat to pay down heavy debts following the takeover.

“No doubt there are operational and administrative changes that could improve efficiencies and reduce cost – that could be positive,” Mr. Jollymore, whose wife Anne is a franchisee, said in an interview about the proposed acquisition. “But 3G will control the pricing paid by its franchisees – that is the biggest stress felt by franchisees.”

The stakes are high for Tim Hortons’ franchisees as they prepare for a new era under Burger King in a tightening fast-food war that has made it tougher to snag customers. While the coffee and donut chain got commitments from Burger King that it will protect franchisees’ operations to some extent, they face the risk that 3G will still look to them for savings to bolster its bottom line.

Tim Hortons and Burger King executives are moving quickly to assuage franchisees’ worries, scheduling a series of town hall meetings starting this week in Oakville, Ont.

Tim Hortons spokesman Scott Bonikowsky said in an e-mail the company “will continue to operate as an independent standalone brand managed in Oakville and 3G Capital has made it clear they have tremendous respect for the strength of the brand and how the business is managed, and our strong collaboration and partnership with our restaurant owners will continue in the future.”

But some franchisees, who asked not to be named for fear of repercussions, said they are anxious that the deal will benefit the new owner and shareholders at their expense. Some industry observers agreed.

“Burger King can ratchet up their costs to franchisees,” said Douglas Fisher, president of food service consultancy FHG International. “Burger King – or 3G, really – is a strip-your-assets type of company.”

Mr. Fisher said he found it worrisome that Burger King has set a limit of five years for not increasing Tim Hortons franchisee rents and royalties, raising the question of whether it will move to hike those rates after that period. That’s because Tim Hortons has not increased rents and royalties for a long time. In a regulatory filing this week, Burger King said it has “no current plans” to raise rents and royalties after five years.

Tim Hortons’ Mr. Bonikowsky said he wasn’t aware when rents and royalties had been changed last “as it has been this way for so long.” Those rates have been consistently at 13 per cent of franchisee sales, with a typical model at 8.5 per cent for rent and 4.5 per cent for royalties, he said.

Still, some franchisees are concerned. “I feel we will be nickeled and dimed,” said one franchisee. Said another: “They’re saying all the right things … But at the end of the day, this is all about money. It’s not about the franchisees.”

Mr. Jollymore, a cousin of Tim Hortons’ co-founder Ron Joyce, has a wealth of knowledge about the chain, having started there in 1977 as one of its first executives. He was a franchisee for 20 years until January when his contract wasn’t renewed.

Several years ago, he and his wife Anne unsuccessfully tried to launch a $2-billion class-action lawsuit against Tim Hortons over its decision in the early 2000s to introduce its “Always Fresh” flash-freezing baking, rather than baking from scratch. The Jollymores had argued that the company was unfairly ringing up profits at the expense of franchisees.

Mr. Jollymore said this week Tim Hortons’ distribution is its “ace up the sleeve … They can engineer franchisees profits to whatever level they deem to be okay through distribution pricing. Corporate profits can be bolstered during slow growth by simply jacking up prices. The unknown is what is the critical point that pushes stores over the brink.”

Mr. Fisher said both Burger King and Tim Hortons depend heavily for their income on the franchisees’ distribution and royalty payments. As a result, Mr. Fisher believes the new merged entity will eventually combine distribution to gain economies of scale. “Given that most of the food at both Burger King and Tims are manufactured and flash frozen, mass production is easier, products are all frozen making storage and distribution very easy, and as a result, the supply line is very valuable,” he said.

But Mr. Bonikowsky said in a follow-up e-mail that “both companies will continue to be managed as independent, standalone brands so the fact they may differ is somewhat irrelevant.”

Comments

1. Les Stewart MBA
Will Tim Hortons +1,000 franchisees and 96,000 staff be going down the Country Style circa 2001/2 road: "down-and-dirty CCAA"?

Will $1.8-billion of "equity" (3,600 stores) be diverted upon churning to new franchisees using federal CSBFA liar loans?

Renting someone else’s business model causes problems, especially for mom-and-pop investors. This business risk only lies dormant no matter how positive the cash flows have been in the Joyce/Wendy's era. see Taleb's Thanksgiving Turkey situation…

“Blue chip” systems can be better at papering-over the single greatest risk to franchisees: franchisor over-reaching (opportunism) which difficult to defend against because of sunk costs and few franchisee associations. For many reasons, opportunistic franchisors make a higher ROI than non-predatory ones.

Best defense?: a non-litigation, lawyer-controlled and triggered Independent Franchisee Association (see National Bread Network). Financed by the 12.

Minister Orazietti: please reverse the onus on good faith as the 1970 Grange Report and Arthur Wishart's law partner suggested in 2000.

WikidFranchise

2. Winston Smith
So the deal isn't about tax inversion.

http://www.scoopnest.com/out/?url=http://t.co/PwQZlES7Cx&id=512907259777937408


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