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Tim Hortons retreats in U.S. battle Add to ...

Don Schroeder's decision to close Hortons stores in New England represents his most visible move to date in the pursuit of a bigger goal: to narrow the performance gap between his lagging U.S. coffee shops and his shining stars in Canada.

The chief executive officer is tackling the U.S. market one area at a time. Over the past 20 years or so, it had opened more than 600 stores in about a dozen states, with its primary markets being Buffalo, N.Y.; Detroit, Mich.; and Columbus, Ohio, where the chain already has traction.

But Wednesday's announcement that Tim Hortons will close 54 locations - 36 restaurants and 18 full-service kiosks, almost all of them in Connecticut, Rhode Island and Massachusetts - is an admission that there's a limit to how far the chain can go.

"It won't work everywhere," Mr. Schroeder said. Yet he also insisted: "We are in the U.S. to stay."

The latest store shutdowns, the company's first major market retreat, isn't deterring Mr. Schroeder from a broader plan to take a leaf from his Canadian playbook. In this country, the company struggled for years in new markets such as Quebec and Western Canada before taking off, he said.

Now he's set to move more quickly in the U.S. market, reducing the time it takes to launch stores and make them profitable to between three to five years, from seven to 11 years, he said. The company plans to open 300 new U.S. stores over the next three years.

But he faces a big catch-up job in his U.S. eateries. In the first six months of this year, operating profit margins in those outlets were weak - just 0.3 cents for every dollar in revenue, a fraction of the 23.1 cents on each dollar in sales at outlets in Canada.

"It just shows that the U.S. is going to be a tough market for them," said Brian Yarbrough, retail analyst at Edward Jones in St. Louis. "It tells me that most of their new store openings are going to be in the markets they're [already]in."

Tim Hortons grappled with crushing competition in New England, where Dunkin' Donuts is an entrenched brand. Elsewhere, it takes on U.S. fast-food titans McDonald's and Burger King and their frequent coffee giveaways and other promotions, Mr. Yarbrough said. It puts into questions how Tims can expand in the U.S. beyond its core base - as well as the company's longer-term plans to open stores internationally, he said.

For Mr. Schroeder, the big opportunity lies in nine key states in the U.S. Northeast and Midwest that have a combined population three times larger Canada.

He will focus 70 per cent of Tim Hortons' U.S. capital investment in those existing markets, while the rest will be poured into nearby areas, he said. "The success is tied to convenience and getting critical mass."

The strategy so far is working in the chain's most established U.S. restaurants, he said. While in Canada the average store generates about $2-million of sales, in Buffalo it yields $1.8-million of sales, in Detroit $1.1 million and in Columbus $970,000.

Still, Mr. Yarbrough said the comparative numbers underline the big gap that remains between its sales in Canadian stores and those in even some of its best U.S. markets.

Mr. Schroeder also pointed to the shortening time period for new U.S. stores to achieve profitability. In Buffalo, it took 10 to 11 years for the chain's outlets to turn a profit, he said. More recently, in Rochester, N.Y., it took seven to eight years and, today, new U.S. stores will be in the black within three to five years after their launch, he predicted.

Yet even that is a far cry from the 18 months it takes for a new Canadian outlet to turn a profit.

Critics say his task is easier in locales that are close to the Canadian border, benefiting from the cross-border traffic and the Canuck halo effect. But Mr. Schroeder recalled his frustration more than a decade ago when Tims' stores struggled in Buffalo, in stark contrast to the outlets across the border in Fort Erie, Ont.

"Being close to the border - there's nothing magical about that," he said.

It's not the first time that Tim Hortons has been forced to shut stores in New England. It closed about a dozen locations in 2008 after it concluded that the performance of a local chain of coffee shops it had acquired four years earlier wasn't living up to expectations.

In its third quarter, the company recorded a $20.9-million accounting charge to reflect the impaired value of its assets. That will be followed by an additional charge of up to $30-million in the fourth quarter. In its third quarter, the company's U.S. segment had an operating loss of $17.5-million. Excluding the charge tied to the store closings, however, it would have reported a $3.4-million operating profit.

 

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