Tim Hortons CEO Says ‘Must Win’ Battle for U.S. Consumers
“The U.S. for me is what I call a must-win battle,” Caira, 59, said in an interview today at a Tim Hortons coffee shop near the company’s Oakville, Ontario headquarters. Caira took over as CEO in July.
In Canada, “my view is this battle is in a new reality, and that this new reality is lower growth, more consumers being value conscious, more competitive intensity,” Caira said.
Tim Hortons’ U.S. growth strategy has been criticized by Highfields Capital Management LP of Boston and New York-based Scout Capital Management LLC. which have said there hasn’t been sufficient return on the $664 million the company invested in the past decade. The investors own 2.6 percent and 5.7 percent of Tim Horton’s shares respectively, according to data compiled by Bloomberg.
Caira said his “capital light” growth strategy in the U.S. will rely on franchisees being able to hold multiple restaurants in a small area and buy advertising in local media as he tries to revive growth in a chain approaching saturation at home.
Tim Hortons had 3,468 restaurants in Canada at the end of June, nearing the 4,000 restaurants past management flagged as the maximum the country can handle.
Caira said he will reevaluate the 4,000 number to see if it’s still appropriate. The current focus is boosting profitability at existing restaurants facing more competition as Starbucks Corp. (SBUX) and McDonald’s Corp. (MCD) expand in the country, he said.
Tim Hortons shares rose 0.8 percent to C$59.08 at 4:00 p.m. in Toronto. The shares have gained 21 percent this year compared with a 3.1 percent advance in the Standard & Poor’s/TSX Composite Index.
Tim Hortons, which claims to sell eight out of 10 cups of coffee in Canada, is already a leader among quick-service restaurants for breakfast and is catching up to the leader in lunch, Caira said, declining to name the competition.
“We’ll get to dinner,” Caira said. He did not say when or what the menu could look like.
Tim Hortons, named after a Toronto Maple Leafs defenseman who scored 115 goals in 22 years in the National Hockey League, has seen revenue growth slow from the double digit pace in much of the last decade. Sales grew 9.4 percent last year compared with 12.5 percent in 2011 and 14.2 percent in 2004, according to data compiled by Bloomberg News.
Caira, who came out of retirement to take up the top job at Tim Hortons after his previous post as an executive at Nestle SA (NESN), the world’s biggest food maker, said he saw other revenue opportunities attaching the Tim Hortons’ brand to consumer products for sale in stores, like it does with single-serve coffee.
“If you work in an office, why should you not have some Tim Hortons’ products in your office?” he said. “I come from an industry where from a technology standpoint, vending machines have come a long way. Why can’t you have Tim Hortons in vending machines?” Such moves would add incremental sales and value, he said.
The company said sales at stores open at least 12 months would end the year below target when it announced Aug. 8 second quarter-earnings rose 14 percent to 81 cents a share from a year earlier, above analysts’s estimates compiled by Bloomberg.
New beverages to appeal to younger customers, like milk-based and juice-based drinks, along with marketing focused on health and wellness are other ways Caira says he can boost revenue. The U.S., however, is still the company’s best hope for growth, he said.
“The U.S. will grow faster than Canada,” the CEO said.
Caira introduced the “capital light” U.S. growth plan in August, along with a buy back of C$900 million shares, after Highfields and Scout led a campaign to boost shareholder value.
Scout called the moves then a “good first step.’”
With 807 locations, Tim Hortons’ U.S business made up about 18.8 percent of its total store network in the second quarter and accounted for 32.6 percent of capital expenditures, while bringing in only 6.1 percent of revenue according to data compiled by Bloomberg.
“We are going to invest capital in the U.S. but we’re going to do it in a different way,” he said. “We’ll be looking for partners that not only have the capital, but more importantly understand the market, and have access to things we don’t have access to, ie. real estate, ie. media.”
Caira said U.S. expansion may mean entering master-franchise agreements whereby the franchisee has the rights to sell franchises within a certain geographical area.
Caira said “he had a good discussion” with Scout after he took over. He said there currently are no plans for more buybacks.
“In this new reality we have to grow faster than we did in the past,” he said. “We’re going to look at everything and we’re going to see where we need to invest and how we need to invest. And out of that will be a financial strategy that will show how we disburse the cash that’s remaining.”
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