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A Tim Hortons in Toronto. (Fred Lum/The Globe and Mail)
A Tim Hortons in Toronto. (Fred Lum/The Globe and Mail)

Can Tim Hortons fight off McDonald's attack? Add to ...

However necessary, the changes – particularly the expense for franchisees – are creating tension within the Tim Hortons chain. Said one franchisee, who asked not to be named: “There’s a lot of stress in the company.” One franchisee who left the company recently pointed to shrinking profit margins: “Stuff like this percolates when people are not making as much as they used to.”

Mr. House told analysts this week that the company does a lot for its store owners. “We do contribute,” he said. “We do it as a good partner ... We do a lot more than most franchisors do with their franchise communities. We will continue in that type of relationship.”

But the tensions with some franchisees underscore the divisions between Mr. Joyce and Mr. House, who succeeded the former as CEO until 2008, when he was replaced by another long-time Tim Hortons executive, Don Schroeder. But in May, 2011, Mr. Schroeder left suddenly, prompting an external search for a new CEO. Mr. House said on Thursday that the search for an external candidate by Tim Hortons’ board of directors is proceeding well, and a decision could be reached by early summer.

Tim Hortons is pleased with its performance in a tough environment and “the market share that we’ve been able to retain and how we are building our lunch business as a share of our business,” Mr. House said in November.

Last fall, Tim Hortons introduced Tassimo, the single-serve coffee that is taking the industry by storm, although some analysts feel Tim Hortons is late to the game. “Some people might say we’re a little late coming to the market,” Mr. House said on Thursday. “It was intentional. We wanted to come to the market with more than one platform,” which it plans to introduce this year.

To ease what some would consider an enviable problem – long lineups – Tim Hortons sees lots of opportunities to add more stores in Canada, resulting in some cannibalization of existing franchisees’ business, Mr. House said. It’s moving to more dual drive-throughs, which McDonald’s is also doing – finding that they increase service efficiency at its chain by about 40 per cent, a spokeswoman said.

But rivals aren’t standing still. Starbucks, with about 1,200 cafés in Canada, is set to open 150 in 2013, many of them within outlets of popular U.S. discounter Target Corp., which starts its highly-anticipated store rollout next month. Starbucks has got a boost from its new Blonde Roast, which is a milder brew that many compare to Tim Hortons’ coffee.

Cliff Burrows, president of the Americas at Seattle-based Starbucks, said in December that competition in Canada is comprised largely of Tim Hortons “pretty much in a head-to-head with McDonald’s. ... In some ways we have to make sure we double down on our strengths, focusing and winning through innovation.”

Starbucks Canada is betting heavily on its Blonde Roast, which already accounts for about 20 per cent of its brewed coffee sales, it said. The brew is important to the chain because 60 per cent of Canadians prefer a lighter roast coffee, its research found. Subway, for its part, has launched Starbucks-owned Seattle Best Coffee, along with breakfast fare.

Mr. House said all players are feeling the economic pinch, which contributed to Tim Hortons’ slowing same-store sales growth – up 2.8 per cent in Canada in 2012, below the 4 per cent lift a year earlier and also below the company’s target of a 3 to 5 per cent rise. “Subway – everybody – is trying to crowd into the coffee category, so the competition has intensified from many positions, and given that the economic conditions aren’t great, everybody is trying to find some share from somebody else,” he said last November.

For food services consultant Doug Fisher, Tim Hortons faces a threat not to its survival – “I don’t think this is the end of Tim Hortons” – but to its status as Canada’s unchallenged king of coffee. With its core business being squeezed by the likes of McDonald’s, Tim Hortons needs a new recipe if it wants to continue on a growth trajectory, says Mr. Fisher (who provided expert testimony to the franchisees suing Tim Hortons).

“They certainly need some refreshment within the organization.”

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