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Tim Hortons aims to improve returns, add 800 Canada, U.S. stores

A row of Tim Hortons coffee cups are lined up for customers at Penn Station in New York, July 13, 2009. REUTERS/Brendan McDermid
A row of Tim Hortons coffee cups are lined up for customers at Penn Station in New York, July 13, 2009. REUTERS/Brendan McDermid

By Susan Taylor

TORONTO (Reuters) - Canadian coffee and doughnut chain Tim Hortons Inc said on Tuesday that it will open at least 800 new restaurants over the next five years under a strategic plan to secure its dominance in Canada and boost returns in the United States.

Facing mounting competition from tough rivals such as Starbucks Corp and McDonald's Corp , the company said it plans to reduce capital intensity while improving returns to shareholders and on assets.

"They certainly are addressing competitive and market dynamics head-on, which is a change, or shift, in strategy," said Raymond James analyst Kenric Tyghe. "The message going forward is they're going to (leverage) that strong brand through more deployment of an analytics-rich, loyalty program."

Tim Hortons, which boasts that it sells nearly eight of every 10 cups of coffee bought in Canada, said its plan reflects the use of technology and data to drive marketing, menu and loyalty programs along with changing consumer preferences for healthier food and a shift in demographics.

The company said it will open 500 more restaurants in Canada by 2018, including new formats in offices, sporting venues and healthcare settings.

Tyghe said that target exceeds market expectations.

ROOM TO GROW?

Some analysts have questioned whether the brand, viewed by some as a Canadian symbol on par with hockey and the Maple Leaf flag, has room to grow at home.

Barry Schwartz, a portfolio manager at Baskin Financial, which owns about 142,000 Tim Hortons shares, disagrees that the Canadian market is saturated.

"It's a religious institution in Canada and clearly there is a need for them," he said. "Every drivethrough is lined up and every store is lined up."

The company also said it aims to improve and speed up service while attracting customers beyond breakfast and snack times, and to boost the average bill through such means as combination offers.

Market research will play a big role in guiding that growth.

Based on a survey of some 2,200 customers in Canada and 2,900 in key U.S. markets, Tim Hortons has identified nine types of customer demand.

Chief Marketing Officer Bill Moir said the company now dominates four segments, including the "coffee fix" and breakfast on the go, and that it may target five others, such as family time and craving satisfaction.

Tims, as it is affectionately known in Canada, has already started to simplify its menu, pulling less popular items, such as mixed berry smoothies, while testing new products, like dark-roast coffee.

A "MUST-WIN" REGION

Tim Hortons, which last week issued its 2014 forecast, said that from 2015 to 2018 it is targeting earnings per share at a compounded annual growth rate of 11 percent to 13 percent and cumulative free cash of about C$2 billion ($1.81 billion).

The financial targets reinforce that 2014 is a "reset year," with growth poised to accelerate, Tyghe said.

The company has previously found it difficult to translate its Canadian success in the United States, but it said it will open about 300 new restaurants in priority U.S. markets by the end of 2018.

That expansion includes a "capital light" model, in which franchisees deploy capital and local market knowledge, Tim Hortons said. The company said it has signed its first such development agreements, for 95 restaurants over the next five years in Missouri, Ohio, Indiana and North Dakota.

"This agreement was sooner than we had anticipated and a clear positive for the segment," Scotia Capital analyst Patricia Baker wrote in a research note.

By 2018, Tim Hortons expects to reach annual operating income of up to C$50 million in the United States, which it calls a "must-win" region.

The company said it would further expand in the Middle East, but did not say how many restaurants it will open there. It will also develop plans that will allow it to enter new international markets in 2015.

As of the end of 2013, Tim Hortons had 4,485 locations, with 3,588 in Canada, 859 in the United States and 38 in the Middle East.

Shares of the Oakville, Ontario-based company rose 60 Canadian cents, or 1 percent, to C$58.54 on the Toronto Stock Exchange on Tuesday afternoon.

"What I like about (Tim Hortons) is the free cash flow and the valuation of the business compared to some of the faster-growing peers in the U.S. like Dunkin Donuts, Starbucks, Chipotle or Panera Bread," Schwartz said. "Tims is doing just as well."

($1 = 1.1069 Canadian dollars)

(Reporting by Susan Taylor; editing by Jeffrey Benkoe, Paul Simao and G Crosse)

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