Tim Hortons Company Analysis

The Tim Hortons chain was founded in 1964 in Hamilton, Ontario. The chain’s focus on top quality, always fresh product, value, great service and community leadership has allowed it to grow into the largest quick service restaurant chain in Canada specializing in always fresh coffee, baked goods and home style lunches. The first Tim Hortons restaurants offered only two products – coffee and donuts. The selection of donuts to enjoy was highlighted by two original Tim Hortons creations, the Apple Fritter and the Dutchie. They became the most popular donut choices in the 60’s, and remain two of the most popular today.

But as consumer tastes grew, so did the choices at Tim Hortons. The biggest change in the chain’s product focus took place in 1976 with the introduction of the phenomenally successful Timbit (bite-sized donut hole), today available in over 35 different varieties. The chain’s growth into the 1980’s brought about a whole series of new product introductions: muffins (1981), cakes (1981), pies (1982), croissants (1983), cookies (1984), and soups ;amp; chili (1985). Sandwiches, which were originally introduced in 1993, were re-introduced as a new and improved line-up of 6 varieties, called “Tim’s Own”, in 1998.

Also, in the 1990’s, bagels (1996), flavoured cappuccino (1997), Cafe Mocha (1999) and Iced Cappuccino (1999) were introduced. In 2003, the Turkey Bacon Club sandwich and Maple Pecan Danish were successful menu additions. In 2005 Tim Hortons introduced, Yogurt & Berries, Cinnamon Roll and Hot Smoothee to the menu. Many new great products were added to the menu in 2006 such as the Chicken Salad Wrap and the hot Breakfast Sandwich (eggs, sausage or bacon, processed cheese on a toasted home style biscuit).

The chain’s biggest drawing card remains its legendary Tim Hortons coffee. To ensure the coffee is always fresh, Tim Hortons serves its coffee within 20 minutes of being brewed or it’s not served at all. The premium blend is also available in cans, as are Tim Hortons hot chocolate and flavoured cappuccinos, allowing guests to enjoy these great tasting products at home. GLOBAL RESTAURANT SYSTEM DEVELOPMENT The first Tim Hortons restaurant was opened in 1964 by Tim Horton, a National Hockey League All-Star defenseman.

In 1967, Tim Horton and Ron Joyce, then the operator of 3 Tim Hortons restaurants, became partners and together they opened 37 restaurants over the next 7 years until Tim Horton’s death in 1974. Mr. Joyce became the sole owner in 1975. In the early 1990s, Tim Hortons and Wendy’s, now owned by The Wendy’s Company (“Wendy’s”), entered into a partnership to develop real estate and combination restaurant sites with Wendy’s and Tim Hortons restaurants under the same roof in North America. In 1995, Wendy’s purchased Mr.

Joyce’s interest in the Tim Hortons system and incorporated the company known as Tim Hortons Inc. , a Delaware corporation (“THI USA”), as a wholly owned subsidiary. In 2006, Tim Hortons became a standalone public company pursuant to an initial public offering and a subsequent spin-off of its common stock to Wendy’s stockholders through a stock dividend on September 29, 2006. Tim Hortons restaurants operate in a variety of formats. Tim Hortons’ standard restaurant locations typically range from 1,000 to 3,080 square feet.

The non-standard restaurant locations include small, full-service restaurants; self-serve kiosks, typically with a limited product offering, in offices, hospitals, colleges, airports, grocery stores, gas and other convenience locations; drive-thru-only units on smaller pieces of property; and full-serve locations in sports arenas and stadiums that operate only during on-site events. Also Tim Hortons developed co-branded locations in its restaurant system. Tim Hortons is party to an agreement with Kahala Franchise Corp. the franchisor of the Cold Stone Creamery brand, pursuant to which Tim Hortons has exclusive development rights in Canada. Tim Hortons is also party to an agreement with Kahala Franchising, L. L. C. in the U. S. , pursuant to which Tim Hortons has the right to use the Cold Stone Creamery trademarks in specified locations in the U. S. The development process for each standard restaurant location typically takes 12 to 18 months. Development of non-standard restaurants and self-serve kiosks usually requires much less time.

Tim Hortons typically oversee and direct all aspects of restaurant development for system restaurants, from an initial review of a location’s demographics, site access, visibility, traffic counts, mix of residential/retail/commercial surroundings, competitive activity, and proposed rental/ownership structure, to considerations of the performance of nearby Tim Hortons locations, projections of the selected location’s ability to meet financial return targets, restaurant owner identification, and physical land development and restaurant design and construction costs.

As at December 30, 2012, the number of Tim Hortons restaurants across Canada, both standard and non-standard locations, which for this purpose includes self-serve kiosks, totalled 3,436. Standard restaurants constitute approximately 71. 4% of this total. In the U. S. , Tim Hortons has a regional presence with 804 restaurants, including self-serve kiosks, in 13 states, concentrated in the Northeast in New York and Maine, and in the Midwest in Michigan, Ohio and Pennsylvania with standard full-serve restaurants representing approximately 59. % of all U. S. restaurants. Notably, Tim Hortons owns, rather than leases, the land underlying a higher percentage of standard system restaurants in the U. S. than in Canada. Restaurant owners operated substantially all of Tim Hortons restaurants both in the CANADA and U. S Recently Tim Hortons has granted a master license to Apparel in the GCC States of the United Arab Emirates, Qatar, Bahrain, Kuwait and Oman, which is primarily a royalty-based model, together with ongoing supply chain margin and an upfront license fee.

Apparel is responsible for capital spending, real estate development, operations, distribution and marketing. At the end of 2012, there were also 190 and 55 Tim Hortons kiosks in the Republic of Ireland and United Kingdom, respectively, which generally offer self-serve premium coffee, tea, specialty hot beverages and a selection of donuts and muffins at gas and other convenience locations. DISTRIBUTION SYSTEM

Tim Hortons distribute items to its restaurants through 5 distribution centres located in Langley, British Columbia; Calgary, Alberta; Kingston, Ontario; Guelph, Ontario; and Debert, Nova Scotia. The Guelph and the Kingston facilities distribute frozen, refrigerated and shelf-stable products and dried goods to restaurants in our Ontario and Quebec markets. Under the franchise arrangements, each Canadian restaurant owner is required to purchase substantially all food and other products, such as coffee, sugar, and restaurant supplies, from Tim Hortons or it designated suppliers and distributors.

Canadian and U. S. restaurant owners and international licensee are also required to purchase par-baked Maidstone Bakeries products from either Tim Hortons or an outside distributor, depending upon the restaurant location. Tim Hortons own or lease a significant number of trucks and trailers that regularly deliver to most of its Canadian restaurants. Tim Hortons uses third-party distributors to deliver all products to U. S. restaurants and to deliver to certain limited geographic areas of Canada.

The international licensee, Apparel, is responsible for local delivery of all products in its market in the GCC through the use of third-party distributors. BUSINESS MODEL Tim Hortoms primary business model is to identify potential restaurant locations, develop suitable sites, and make these new restaurants available to approved restaurant owners. As at December 30, 2012, restaurant owners operated 99. 5% of Tim Hortons’ system wide restaurants. Tim Hortons directly own and operate (without restaurant owners) only a small number of company restaurants in Canada and the U.

S. Tim Horton also have warehouse and distribution operations that supply paper and dry goods to a substantial majority of its Canadian restaurants, and supply frozen baked goods and some refrigerated products to most of its Ontario restaurants and Quebec restaurants. In the U. S. , Tim Hortons supply similar products to system restaurants through third-party distributors. Tim Hortons’ operations also include coffee roasting plants in Rochester, New York, and Hamilton, Ontario, and a fondant and fills manufacturing facility in Oakville, Ontario.

These vertically integrated manufacturing, warehouse, and distribution capabilities benefit Tim Hortons’ restaurant owners and are important elements of Tim Hortons business model which allow it to: improve product quality and consistency; protect proprietary interests; facilitate the expansion of our product offerings; control availability and timely delivery of products; provide economies of scale and labour efficiencies; and generate additional sources of income and financial returns. Tim Hortons have a unique, layered business model that adds to the scale and success of its system.

First, franchising takes account of more than 99% of Tim Hortons’ restaurant system. Tim Hortons have a long-standing history of building positive relationships and collaborating with its restaurant owners to grow collective business. Restaurant owners typically operate an average of 3 to 4 restaurants and have a significant stake in the success of the restaurants they operate. Second, Tim Hortons maintains a controlling interest in a significant majority of the real estate in the full-serve restaurant system in North America to maintain brand integrity and control development.

Third, Tim Hortons operates with a “we fit anywhere” concept that allows it to adapt brand presence to take advantage of both standard and non-standard development opportunities. Fourth, Tim Hortons leverages significant levels of vertical integration that exist in the system. MANUFATURING Tim Hortons has 2 wholly owned coffee roasting facilities in Rochester, New York and Hamilton, Ontario, to blend all of the coffee for restaurants.

Tim Hortons also own a facility that produces fondants, fills, and ready-to-use glaze, which are used in connection with a number of the products produced in its Always Fresh baking system. Until October 2010, Tim Hortons owned a 50% joint-venture interest in Maidstone Bakeries. Maidstone Bakeries continues to manufacture and supply all par-baked donuts, Timbits and selected breads, following traditional Tim Hortons recipes, as well as European pastries, including Danishes, croissants, and puff pastry.

Those products are partially baked and then flash frozen and delivered to system restaurants, most of which have an Always Fresh oven with the Company’s proprietary technology. The restaurant completes the baking process with this oven and adds final finishing such as glazing and fondant, allowing the product to be served warm to the guest within a few minutes of baking. The Company sold its 50% joint-venture interest in Maidstone Bakeries to its former joint-venture partner, Aryzta, for gross cash proceeds of $475 million in October 2010.

For additional information regarding Maidstone Bakeries, see “Source and Availability of Raw Materials” below. TIM HORTONS IN U. S We continued to focus on accelerating the time it takes to create critical mass for convenience and advertising scale in our most developed U. S. markets, primarily through deployment of the substantial majority of our U. S. restaurant development capital into core growth markets to increase awareness of the brand.

We also continued to seek other marketing means, such as community involvement, sponsorships, event site product agreements and other forms of communication, to supplement traditional advertising to reinforce our brand position with guests and to broaden our brand awareness as a Cafe and Bake Shop destination; and sought to complement our U. S. standard format restaurant development activity with non-standard formats and locations through strategic partnerships and relationships. In 1995, Tim Hortons merged with Wendy’s International, Inc. giving new focus and impetus to the expansion of the Tim Hortons concept in the United States. Tim Hortons locations can presently be found in Michigan, Maine, Connecticut, Ohio, West Virginia, Kentucky, Pennsylvania, Rhode Island, Massachusetts and New York, with responsible expansion continuing in these core markets. The Canadian operation is 95% franchise owned and operated, and plans in the U. S. call for the same key strategy to be implemented as expansion progresses. Currently, there are more than 3,000 restaurants across Canada, and over 600 locations in the United States.

In March 2006, Tim Hortons completed an initial public offering of the company and was fully spun off as a separate company as of September 29, 2006. Tim Hortons trades on the NYSE and TSX (THI). As one of the largest publicly traded quick service restaurant chain in North America based on market capitalization, and the largest in Canada, Tim Hortons has 4,264 system wide restaurants, including 3,436 in Canada, 804 in the United States and 24 in the Gulf Cooperation Council as of December 30th, 2012.

Since the early 1990s, Tim Hortons and Wendy’s formed a partnership, owned on a 50/50 basis, and jointly developed the real estate underlying “combination restaurants” in Canada that offer Tim Hortons and Wendy’s products at the same location, typically with separate restaurant owners operating the Tim Hortons and the Wendy’s portions of the restaurant. The combination restaurants have separate drive-thrus, if the site allows for drive-thrus, but share a common