3G Will Make Fat Disappear at Doughnut Chain Tim Hortons

Aug. 26 (Bloomberg) – Bloomberg’s Erik Schatzker discusses the Burger King acquisition of Tim Hortons and a possible sweetheart deal for Warren Buffett. He speaks with Matt Miller on Bloomberg Television's “In The Loop.” (Source: Bloomberg)

Now that 3G Capital’s Burger King Worldwide Inc. has struck a deal to buy doughnut chain Tim Hortons Inc., the Canadian company can expect to get lean. Really lean.

Brazilian private-equity firm 3G insists that executives at its businesses follow the investment group’s parsimonious practices. If its management of Burger King and HJ Heinz Co. is a guide, Tim Hortons will see jobs cut, offices made more Spartan and posh corporate travel disappear.

The hard-nosed strategy has delivered results. Since acquiring Burger King in 2010, 3G’s team has tripled the company’s profit margin to 61 percent, according to data compiled by Bloomberg, thanks to cost-cutting and selling stores to franchisees. 3G’s latest deal will create the world’s third-largest fast-food chain by merging with Canada’s biggest seller of coffee and doughnuts.

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“These guys will change consumer goods and food service forever and other CEOs know it,” said Ken Harris, managing partner at Chicago-based Cadent Consulting Group. “They are going to go in and streamline everything as fast as possible.”

The firm’s Brazilian founders -- led by the trio of Jorge Paulo Lemann, Carlos da Veiga Sicupira and Marcel Herrmann Telles -- have been working together for at least four decades, during which their combined fortunes have soared to $46.7 billion, according to the Bloomberg Billionaires Index. Lemann, Brazil’s richest man, is worth $24.9 billion.

Photographer: Brent Lewin/Bloomberg

Doughnuts at a Tim Hortons Inc. restaurant in Oakville. If 3G Capital's management of Burger King and HJ Heinz Co. is a guide, Tim Hortons will see jobs cut, offices made more Spartan and posh corporate travel disappear. Close

Doughnuts at a Tim Hortons Inc. restaurant in Oakville. If 3G Capital's management of... Read More

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Photographer: Brent Lewin/Bloomberg

Doughnuts at a Tim Hortons Inc. restaurant in Oakville. If 3G Capital's management of Burger King and HJ Heinz Co. is a guide, Tim Hortons will see jobs cut, offices made more Spartan and posh corporate travel disappear.

Burger King today said it will acquire Tim Hortons for about C$12.5 billion ($11.4 billion) in cash and stock.

Spending Limits

At Heinz, which 3G and Warren Buffett’s Berkshire Hathaway Inc. bought last year, employees were restricted to spending $15 a month on office supplies and told they couldn’t use mini-refrigerators to save on electricity, according to a memo obtained by Bloomberg News. 3G limits printing to 200 pages a month per employee and restricts color pages to “customer-facing purposes.”

3G also cut several hundred jobs at the company’s Pittsburgh headquarters, including 11 senior executives, and grounded corporate jets.

At Burger King, 3G did away with comfortable offices that top executives and their secretaries had enjoyed, which people at Burger King called Mahogany Row. Executives now sit in a bare-bones, open-plan office. 3G also ended an annual $1 million bash at a chateau beside an Italian lake held by the Europe, Middle East, and Africa division.

Stark Approach

Burger King employees were instructed to use Microsoft Corp.’s Skype to make long-distance calls instead of running up a mobile-phone bill. They were also urged to scan documents and e-mail them rather than use FedEx Corp.’s services.

While Burger King’s U.S. sales are sluggish, it has expanded outside North America and profits are soaring. There’s room for similar improvements at Tim Hortons, where the same margin stood at 25 percent last year, compared with 50 percent at Dunkin’ Brands Group Inc. Under 3G’s ownership, Burger King added 153 new restaurants outside of North America just in the second quarter.

When 3G took over Anheuser-Busch, which it acquired by folding it into the Belgian brewer InBev to form Anheuser-Busch InBev NV in 2008, executives were told they’d no longer get free cases of beer.

3G’s lean philosophy isn’t for everyone. When the firm bought Heinz, it offered buyouts to all managers in case people didn’t like their stark approach. 3G hires its managers young and teaches them zero-based budgeting. Instead of starting with last year’s budget as a baseline for the next year’s spending, managers start from scratch.

3G’s hiring philosophy is PSD, which stands for “poor, smart, deep desire to get rich.” The average executive at Burger King is 39, according to Cadent’s Harris.

When Tim Horton’s managers meet their new overlords at 3G, “They will have no idea what hit them,” Harris said.

A spokesman for 3G and Burger King declined to comment.

To contact the reporters on this story: David Welch in New York at dwelch12@bloomberg.net; Jonathan Levin in Sao Paulo at jlevin20@bloomberg.net

To contact the editors responsible for this story: Mohammed Hadi at mhadi1@bloomberg.net Larry Reibstein, Elizabeth Wollman

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