What You Don't Know About How Tim Hortons Makes Moneyby
Burger King told investors on Tuesday that after buying Tim Hortons, Canada will be the new company’s largest market and “therefore the natural home for its headquarters.”
The question, some might wonder, is the largest market in what terms? Looking at the companies’ 2013 figures, it’s not based on locations—that would make the U.S. its largest market. The two chains combined will have more than 18,000 stores (roughly 4,500 Tim Hortons and 13,800 Burger Kings), of which 44 percent are located in the U.S., 21 percent in Canada, and 35 percent in other countries. The answer instead lies in dollars.
In revenue, Tim Hortons’s Canada business will contribute the majority. Burger King’s U.S. and Canada business together represented only 15 percent of the combined company’s total 2013 revenue.
How does Tim Hortons’s smaller Canada business produce so much more money? Unlike Burger King, which relies on franchise royalties and fees and real estate for 80.6 percent of its revenue, Tim Hortons has another important source of revenue: distribution sales. These are sales of products, supplies, and restaurant equipment shipped directly from the company’s warehouses or by third-party distributors to restaurants. It’s a model also seen in such pizza chains as Domino’s, which made 56 percent of its revenue last year from its supply-chain business.
As Tim Hortons explains in its annual filing:
“Manufacturing, warehouse, and distribution capabilities benefit our restaurant owners and are important elements of our business model which allow us 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.”
This business makes a big difference. Across all markets, Tim Hortons’s 2013 revenue was nearly $3.2 billion (of which 57.5 percent came from distribution sales), compared with Burger King’s $1.1 billion.
Of course, revenue and profit are not the same, and while Burger King’s gross profit margin was 88.9 percent last year (franchising is highly profitable), Tim Hortons’s was 34.4 percent, according to data compiled by Bloomberg. Both chains had gross profit of more than $1 billion. Burger King has experience developing an international franchise network, and it’s likely Tim Hortons will want to take advantage of this profit-making know-how as it increases.