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Second Cup’s difficulties – since last year, the company has closed five stores – come amid increased competition from other chains. (Fred Lum/The Globe and Mail)
Second Cup’s difficulties – since last year, the company has closed five stores – come amid increased competition from other chains. (Fred Lum/The Globe and Mail)

Changes brewing as Second Cup suspends its dividend Add to ...

Canadian coffee chain Second Cup Ltd. suspended its dividend Tuesday, announcing that the company plans to spend its cash on refreshing its brand in the face of increased competition.

The company, based in Mississauga, Ont., released second-quarter earnings for the period ending June 28, in which same store sales declined 5 per cent over the preceding year. Total revenue declined for the second consecutive quarter, and earnings per share declined to 8 cents from 14 cents a year ago. Investors responded negatively to the news, with shares plummeting 10.3 per cent to close at $3.75 a share by the close of trading on Tuesday.

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In a statement, chief executive officer Alix Box wrote that the earnings are part of a larger process “to restore Second Cup to a leadership position with growth in sales and profitability.” The earnings report added that the board of directors saw the “emergence of attractive opportunities to invest capital” and “believed it is prudent to retain available cash resources” for that purpose.

With 357 locations, Second Cup is Canada’s second largest specialty coffee retailer. But with increased competition from McDonald’s Corp., as well as long-time rivals Tim Hortons Inc. and Starbucks Corp., the company has struggled in the ongoing coffee wars.

Ms. Box, a former Starbucks executive, was lured away from luxury retailer Holt Renfrew & Co. Ltd. in February in order to lead Second Cup’s transformation. The process is still in its early stages, as the company continues to restructure and lay out how it will renew itself in the months ahead.

In her statement, Ms. Box noted that that the company is developing a “store of the future” that promised to be “new and very different.” The company did not offer more details, other than that they plan to unveil the concept in downtown Toronto later this year, and to roll out the new store model in other locations at a later date.

John Archer, a senior adviser for retail consultancy J.C. Williams, says Second Cup’s effort is part of a broader push on the company’s part to innovate and remain relevant in a tough environment.

“It’s a lot more competitive out there,” said Mr. Archer in an interview, singling out the McCafé concept rolled out by McDonald’s, as well as a prototype store that Tim Hortons unveiled at a trade show last week, as examples of what industry players are offering.

He added that the coffee market is particularly competitive in terms of brands vying for young consumers, and Tim Hortons’s newly unveiled store is designed to evoke a more youthful, urban feel.

“They’re all looking at the younger demographic to get them in early,” he said, adding that coffee drinkers tend to be loyal to their favourite brand.

Among the recent changes at Second Cup is the appointment of former owner and CEO Michael Bregman as chairman of the board of directors, following a minority investment in the company in December, 2013. Mr. Bregman led the company through a growth period in the 1990s, taking Second Cup public in 1993.

While Second Cup’s competitors have rolled out aggressive strategies to increase their market share, Second Cup has been occupied with finding more stable financial footing.

The company has five fewer stores than it did one year ago. By contrast, Tim Hortons opened 261 more outlets, and McDonald’s Canada refurbished two-thirds of its 1,400 locations.

It’s not just the big players that offer competition. Mr. Archer observes that, small independent coffee shops are increasingly popular, from single stores to chains with 10 locations.

Despite these challenges, Mr. Archer says that Second Cup retains some brand loyalty among consumers. Investors, however, appear skeptical.

“It’s a good following, but it’s not good when you have earnings like that.”

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