Aug. 26 (Bloomberg) -- Tim Hortons Inc. may give Burger King Worldwide Inc. a fresh avenue for overseas growth while reinvigorating a breakfast business that has trailed behind McDonald’s Corp. for years.
Burger King, which said today it’s acquiring the Canadian coffee-shop chain, has struggled to compete with McDonald’s Egg McMuffins and Starbucks Corp.’s scones and lattes. While the companies don’t currently have plans to mix products from the two chains, Tim Hortons would bring a coffee brand that’s coveted by Canadians -- along with a smaller group of Americans. Burger King may also be in a position to open Tim Hortons locations in the 98 countries where it operates.
While the Tim Hortons deal has drawn attention for its potential tax benefits -- it would let Burger King cut costs by relocating to Canada -- the two businesses plan to share some services and practices. The Tim Hortons brand could eventually find its way into Burger King menus as a way to appeal to diners who want higher-end coffee, said Christopher Geier, the partner-in-charge at Sikich Investment Banking in Chicago.
“This is obviously a pretty strategic acquisition for them to try to get back on track and try to find more customers in the breakfast space,” he said.
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., has committed $3 billion for preferred equity to help finance the deal. Omaha, Nebraska-based Berkshire won’t participate in managing the restaurant business.
By purchasing Tim Hortons -- a Dunkin’ Donuts-style chain with about 4,500 locations -- Burger King is creating the world’s third-largest fast-food business. The deal also puts the merged company’s headquarters in Canada, potentially saving on corporate taxes. Burger King is paying about C$12.5 billion ($11.4 billion) for the coffee chain, the companies said in a statement today.
The business will have about $23 billion in sales, including franchisees, and more than 18,000 restaurants in 100 countries. 3G Capital, the investment firm with a 70 percent stake in Miami-based Burger King, owns the majority of the shares of the new company. The two businesses will operate as stand-alone brands, though there may be food buying, marketing and administrative cost savings.
Burger King could use some help livening up its menu. The company ranked below fellow burger sellers Sonic Corp., Wendy’s Co. and Culver’s in food quality and menu variety, according to a study this year from Nation’s Restaurant News and WD Partners. McDonald’s also topped Burger King in menu variety, though it ranked lower in food quality.
Burger King’s revenue fell 6.1 percent to $261.2 million in the second quarter, while same-store sales in the U.S. and Canada inched up less than 1 percent. Industrywide U.S. fast-food sales rose 0.7 percent to $196.1 billion last year after increasing 0.8 percent the year before, according to research firm IBISWorld Inc.
The sluggish growth at home has pushed Burger King to rely more heavily on countries outside North America. The company has said it’s adding restaurants in China, France, India and South Africa. Tim Hortons, meanwhile, remains concentrated in the U.S. and Canada. At the end of last year, there were 38 Tim Hortons in the Middle East, as well as 196 self-serve kiosks in Ireland and 59 in the U.K.
Tim Hortons would probably enter new countries where Burger King has already sold franchises, said John Gordon, principal at Pacific Management Consulting Group in San Diego, who advises restaurants and franchisees. Some countries, however, are heavier tea drinkers, which could prove a challenge, he said.
For now, the company doesn’t plan to combine brands or sell Tim Hortons coffee at Burger King -- something that might require building more awareness among its customers. Only 30 percent of Americans have heard of the name, according to YouGov BrandIndex. That compares with more than 90 percent for Starbucks and Dunkin’ Donuts.
In the U.S., there’s mounting competition for breakfast customers. McDonald’s started selling egg-white breakfast sandwiches last year and gave away free coffees to entice more customers in the morning. Starbucks also is adding new breakfast food, including Greek yogurt smoothies.
Restaurants increasingly need to sell appealing fare during all hours, said Allen Adamson, chairman of North America for brand consultant Landor Associates in New York.
“They can’t just be a dinner or lunch place anymore,” he said. “But buying your way into breakfast isn’t that easy.”
Wendy’s found that out the hard way after trying to hawk homestyle potatoes and chicken biscuits in the U.S. The Dublin, Ohio-based chain got out of the breakfast business last year after the fare didn’t sell well.
Tim Hortons was co-founded by Canadian hockey player Tim Horton 50 years ago in Hamilton, Ontario. In 1976, the restaurant introduced its bite-sized doughnut holes known as Timbits, which became a signature product. Wendy’s acquired the chain in 1995 and then spun it off as a public company in 2006. More recently, Tim Hortons has introduced crispy chicken sandwiches and dark-roast coffee in a bid to broaden its appeal.
Tim Hortons, based in the Toronto suburb of Oakville, has a cult following among Canadians and expatriates who live in the U.S. The company -- often referred to as “Timmy’s,” ranked No. 5 among Canadian brands, according to Interbrand. That puts it ahead of Lululemon Athletica Inc. and Bank of Montreal.
The company accounted for 25 percent of the Canadian fast-food market last year, taking the biggest share, according to Euromonitor International. It was followed by McDonald’s, with 15 percent. Burger King had just 1.8 percent of the market.
Even if it does try to use the Tim Hortons brand to gain more breakfast clout, Burger King won’t have an easy time competing with the mighty Egg McMuffin. The company faces an uphill battle for morning customers, Adamson said.
“A simple acquisition isn’t going to be a Band-Aid for Burger King to get them into the breakfast business,” he said.
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