At Tim Hortons it’s not business as usual: Profits are up, but so is franchisee discontent, Hollie Shaw

'But the idea that you are going to have the good old days at Tim Hortons … is over with 3G running things', LES STEWART, A VETERAN ONTARIO-BASED FRANCHISEE CONSULTANT

National Post
May 25, 2017

At Tim Hortons it’s not business as usual: Profits are up, but so is franchisee discontent
Hollie Shaw


Tim Horton's head office in Oakville, Ont. where there is now such a thing as an "ideal desk." Peter J. Thompson/National Post

OAKVILLE, Ont. — During a recent visit to the Tim Hortons headquarters, Daniel Schwartz happily pokes fun at some of the more regimented hallmarks of the chain’s owner, Restaurant Brands International Inc., right down to the optimal look of an office desk.

Stopping by a row of communal desks where chief executive Schwartz and chief financial officer Josh Kobza sit several times a month alongside the office’s 400 or so other workers, he points to one that is empty save for a solitary Kleenex box.

“This,” he said while gesturing with an exaggeratedly proud sweep of his arm, “is an ideal desk,” alluding to the company’s directive for neat employee workstations. He pauses, then slides the tissue box several inches over onto a cluttered adjacent desk. “There,” he said, regarding the barren white expanse before him with a broad smile. “Now it’s perfect.”

Schwartz and Kobza are keen to show how the “3G Way” — the efficiency-driven management style espoused by the Brazilian entrepreneurs behind 3G Capital, Restaurant Brands International’s largest shareholder — is playing out at Tim Hortons as they prepare for the annual general meeting of shareholders on June 5.

The headquarters is certainly a far cry from the earth-toned cubicles and perimeter of walled offices that were expunged in the building’s sweeping renovation two years ago and is symbolic of the change that has rankled a number of Tim Hortons’ Canadian restaurant owners.

Frustrated with tough new standards for their restaurants, higher product costs and a culture that no longer lets them solve problems with a phone call to head office, they formally organized as an association and got legal representation in March.

On the surface, everything seems to be going well. The 3G formula of cutting waste and simplifying processes while pursuing an aggressive growth agenda has helped it successfully engineer the takeovers of some of the largest U.S. businesses including Burger King, Anheuser-Busch, Kraft, Heinz and, most recently, Popeye’s Louisiana Chicken.

'We want to look back 20 years from now and say we wanted to be really impactful and we transformed an industry'


Daniel Schwartz is the CEO of Restaurant Brands International, owner of Tim Hortons, and is leading the charge to implement the 3G standards, a far cry from the old way of doing things. Handout/Restaurant Brands International

The formula has also helped deliver solid profits. Shares of Restaurant Brands International are up 50 per cent year-over-year, the company’s adjusted per-share earnings surged 45 per cent in 2016, and system-wide sales climbed 5.2 per cent at Tim Hortons and 7.8 per cent at Burger King.

Overall revenue rose to US$4.2 billion in 2016 from US$4.05 billion a year earlier, while the company managed to cut its total operating costs and expenses by 14 per cent to US$2.47 billion from US$2.86 billion.

As a result, its operating margin, the amount of revenue generated after paying operating costs, was 40 per cent in 2016, compared to 31 per cent at the world’s largest fast food company, McDonald’s Corp.

The path to profits has been, at times, unpleasant, especially for those used to the classic Tim Hortons corporate culture, where doing business was built around relationships and golf games. That management style made it Canada’s biggest quick-service restaurant chain, accounting for a quarter of the $26-billion fast-food market.

But scores of Tim Hortons’ employees at the Oakville head office west of Toronto were let go in early 2015 after the company’s merger with Burger King, and almost entirely replaced with a new crop of keen, young staffers.

The building also underwent a cosmetic makeover. A big chunk of it now consists of a warehouse-like room that reflects 3G’s cultural tenets: the company’s mission statement is on a banner and its goals are colourfully painted on the white walls.

Real-time electronic billboards display employee success metrics: for example, the number of croissants and breakfast sandwiches sold at each restaurant every day that week, and franchisee drive-thru times (less than 25 seconds puts a franchise in the green zone; more than 30 seconds puts them in the red zone).

“We want all of our employees to think of themselves as owners,” said Kobza, whose father owned a small business when he was growing up in Florida. Such a culture of accountability “is a mentality,” he added. “We want everyone to act as if they are running their own small business.”

On their desks, employees post a list of up to eight self-written objectives for everyone else to see. “You can’t manage what you don’t measure,” said Schwartz, echoing a maxim of management consulting guru Peter Drucker.

Staffers also partake in quarterly Lean Six Sigma training exercises to improve business processes and productivity.

In May, dozens engaged in a timed mock sandwich-making exercise meant to enhance their problem-solving skills. They were challenged to use non-verbal communication while racing around tables covered in pieces of felt shaped like bread, tomatoes, cheese and turkey slices.

“They have a much more structured approach to dealing with problems,” after going through the exercises, Kobza said. “They identify a problem’s root causes and come up with a clear action plan.”

The open concept room, meanwhile, is meant to emphasize collaboration and efficient use of time.

But those critical of the new management style say the company is being run by a group of merciless bean counters.

“It’s a very, very different place than it was,” said one former employee who stayed at Tim Hortons after the initial rounds of layoffs. “But I think the people who came in after the layoffs absolutely loved it, because they didn’t know what it was like before.”

The former employee applauds some aspects of 3G’s approach, despite a new era of cost controls that can border on the extreme, such as a clampdown on office supplies like pens and folders.

“They are very cards on the table. The culture is what it is, and they really lay it out for you,” he said. “Everyone can see what the CEO’s metrics are. You know what your own targets are, because you see them on your desk every day. And if it is not the place for you, you can always leave — no hard feelings.”


Tim Horton's head office in Oakville, Ont, with the logo of its Toronto-based owner Restaurant Brands International. Peter J. Thompson/National Post

Schwartz laughs when asked about the office supplies. Though he denies there’s a lockdown, he said all costs need to be justified.

The bulk of the big expense cuts at Tim Hortons, he noted — a company jet, the regular use of Federal Express when emails would suffice — happened more than two years ago.

“But we frankly don’t spend that much time thinking about ways to cut costs,” he said. “We are focused on growth,” particularly in places such as the U.S., U.K. and the Philippines through local master franchise partners.

“We want to look back 20 years from now and say we wanted to be really impactful and we transformed an industry,” Schwartz said, pointing to one of the goals on the office wall about becoming the world’s biggest fast food brand. (Currently, it’s in third place, behind McDonald’s and Yum Brands Inc., owner of KFC and Taco Bell.)

The transformation does not sit well with David Hughes, a longtime Tim Hortons franchisee from Lethbridge, Alta., who owns five stores.

“We are now part of an equation focused on profit extraction, and that profit goes to shareholders,” said Hughes, president of Tim Hortons’ new association of Canadian franchisees, which organized this year amid mounting frustration and unresolved post-takeover concerns.

Calling themselves the Great White North Franchisee Association, the group said 3G’s business practices are set up to squeeze more profit out of store owners.

When the company introduced new quality scoring metrics for franchisees called the Global Performance Standard, which tracks objectives such as store cleanliness and drive-thru times, Hughes said 85 per cent of Tim Hortons franchises failed, as did four of his five locations, which received exceptional scores under the old regime.

Hughes received poor scores for infractions such as having the wrong sugar strainers. Another franchisee was docked for having the wrong pair of scissors in the kitchen.

'Restaurant Brands International 'appears to be singularly focused on cutting costs without regard to the long-term negative effect on the brand'


Donald Schroeder, former CEO of Tim Hortons in 2009: Schroeder is siding with franchisees who are unhappy with the changes brought in by Tims owner Restaurant Brands International. Brett Gundlock/National Post

The disgruntled franchisees, who have secured legal representation and an executive director, Terry Connoy — who used to run the Canadian Tire Dealers’ Association, the most powerful group of dealer-owners in the country — are also unhappy about what they say is a misuse of a company advertising fund to which they contribute 3.5 per cent of their gross revenue.

They said they have received an inadequate audit of the fund, whose administrative expenses appear to have more than doubled to $31 million in 2015 from $14.6 million in 2013.

The bulk of the franchisees’ suppliers have also changed, and costs to franchisees are higher than before.

“For goods and commodities, in some cases, we are paying sometimes 100-per-cent more than we should be,” Hughes said.

A commodities expert hired by the franchisees determined that they should by paying $10.80 more for a case of coffee since the takeover, after accounting for foreign exchange and raw product price fluctuations, but they are paying $22.05, or about $13,750 more per store each year for their top-selling product

Likewise, the cost of a case of bacon should have gone up by $50 per case, but franchise owners are getting charged $104 more, or about $5,400 per store per year.

The association believes management is looking to squeeze out franchisee owners who have a smaller base of stores in favour of larger owners by ousting them as their licences expire or because they have poor GPS scores.

One of the association’s strongest supporters is Donald Schroeder, formerly Tim Horton’s chief executive and a former franchisee.

Restaurant Brands International “appears to be singularly focused on cutting costs without regard to the long-term negative effect on the brand, or the storeowners who have worked do hard to build the brand,” Schroeder said in an open letter to franchisees in March.

“Left unchecked, there will certainly be a major consolidation of store ownership — fewer store owners to deal with is much more convenient and less costly than dealing with a system where the average franchisee owns about 3.5 stores.”

In Canada, where the chain still has 82 per cent of its restaurants, there are roughly 1,100 franchisees for about 3,800 restaurants. But in new markets such as the Philippines and Mexico, Tim Hortons is partnering with large local franchise groups that will each operate dozens of restaurants.

Schwartz has said management will only speak about franchisee concerns with the company’s official elected advisory board of 16 Tim Hortons franchisees, and has no intention of speaking with Hughes’ group, regardless of how many have signed on.

“I don’t want to speculate,” Schwartz said, when asked why franchisees would form an association if the existing advisory board adequately represented their concerns. “We continue to work with the advisory board.”

At the end of March, Restaurant Brands International executives, including Schwartz, held an open call with Tim Hortons franchisees, and apologized for not doing a good job of listening to their concerns during the past two years.

Asked about the call, Schwartz said the company has now adjusted its GPS scoring system and given franchisees all the information it is required to disclose in its audit of the ad fund.

Since Restaurant Brands International’s formation, he added, “our overall business market share has grown and the profitability of our franchise owners has grown.”

Schwartz might not be keen to negotiate with the unhappy franchisees, but 3G is very familiar with how to work in harmony with such groups.

Burger King in the U.S. has one of the most powerful franchisee associations in North America, said Les Stewart, a veteran Ontario-based franchisee consultant, “and yet 3G still saw fit to buy Burger King.”

Stewart believes Tim Hortons franchisees would have more power if, like Burger King’s U.S. franchisees, they operated more like a cooperative that owns and controls the contracts for the products it buys and the supply chain, rather than buying them through head office.

Restaurant Brands International generates a fixed percentage of its sales and boosts its profits by selling supplies to its franchisees, as Tim Hortons did in the past.

“But the idea that you are going to have the good old days at Tim Hortons where you (as a Canadian franchisee) make your money without getting involved in these kinds of business decisions is over with 3G running things,” Stewart said.

'But the idea that you are going to have the good old days at Tim Hortons … is over with 3G running things' - LES STEWART, A VETERAN ONTARIO-BASED FRANCHISEE CONSULTANT


At the redesigned Tim Hortons headquarters in Oakville, Ont. On their desks, employees post a list of up to eight self-written objectives for everyone else to see. Peter J. Thompson/National Post

Stewart noted veteran investor Warren Buffett’s Berkshire Hathaway Inc. is earning nine per cent in annual interest on the US$3 billion of preferred equity it committed to finance 3G’s deal to form Restaurant Brands International.

“That nine per cent doesn’t happen with a double-double and a cruller.”

Robert Carter, executive director of foodservice at market research firm NPD Group, said the dramatic change in head office dynamics that Tim Hortons franchisees are experiencing might benefit the chain in the long run in Canada, where it has the most limited prospects for unit growth.

“We know that the marketplace is flat (in terms of sales growth), we know that competition has increased and in order to be successful you have to be much more nimble and innovative and get to market quicker than you would have in the past,” he said.

Some of the changes, such as introducing a mobile order-and-pay app that was delayed after the franchisee association threatened legal action over its launch, are needed in order for Tim Hortons to compete against players such as Starbucks, which launched a similar app in Canada last year.

“From an industry competitiveness point of view, the mobile app should have been in the market a year ago,” Carter said.

“3G moves a lot more quickly than former Tim Hortons management. So from a stand-back view, I think 3G will help Tim Hortons evolve and expand and move to the next stage in a highly competitive market.”

Financial Post

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