KARL MOORE - This is Karl Moore of the Desautels Faculty of Management at McGill University, Talking Management for the Globe and Mail. Today I am delighted to speak to Don Schroeder, who is the CEO of one of Canada's great iconic brands, Tim Hortons.
Good afternoon, Don.
DON SCHROEDER - Good afternoon.
KM - Your model is, you have a few corporate stores, but mainly franchisees. Why have you chosen that model and why is that better for Tim Hortons?
DS - I think we grew up with the franchise model, a husband and wife or a couple operating a business. Our business very much requires hands-on attention, it is virtually 24/7 and I don't believe you can pay a manager enough to make that commitment to the success of the operation of a restaurant, whereas if you have someone that has invested capital in it they have the motivation. It has worked out very well and given a lot of families a great opportunity to be part of a very successful chain and have their own successful small business.
KM - It sounds like some of them might work perhaps too much even, because it's almost 24/7. Well, that's 12 hours per person in a marriage or relationship but it sounds like sometimes some of them work seven days a week to keep it going. Do you ever see that occur?
DS - Certainly in the first 12-18 months in the opening of a new store [with]a new franchise or new restaurant owner coming into the system. The demand on their time to get the operation up - because they are hiring a completely new staff, three shifts - so they virtually have to be there, someone with an interest in it, 24 hours to make sure that you are properly assessing them and training them, and so on. Hopefully, by the end of 18 months, they have got a reasonable core base of staff that they can begin to build in and they don't have to spend as much time. But it is definitely not for everyone. It is a great opportunity but because of that time commitment it is not for everyone.
KM - If you have been running it for 20 years, you have a well-oiled machine, can you then spend six months of the year in Florida, in our Canadian winters? Is that possible in Tim Hortons franchises or is that just really unrealistic?
DS - Well, an average restaurant owner owns three, four restaurants, so by the time they get to that level they would have a good management team in place so that the amount of time they can spend away from the business has obviously increased - unlike when they were first entering into the business. Should they spend six months of the year in Florida? Financially they might be able to, some of them, but is that good for the business and we would encourage them not to do that. If you get to that stage sometimes you need to have a talk about, "Is it time to do something different?" But no, it is hands-on: you can be away from the business if you have a good management team but it still requires that focus.
KM - One of the things that you do which is different is that Tim Hortons actually owns the property where the franchisees are and this is quite unusual in the industry. Why do you take that tack?
DS - McDonalds follows that model to a large extent, but we own or control about 80 per cent of the real estate, we own about 22 per cent of the real estate and we control, on the head lease, about another 60 to 62 per cent of the sites. We do that for a number of reasons - we are landlords, it is part of our business model and part of what sets us apart from other franchise systems in terms of the profitability of the overall system. So we have good re-occurring streams of income - we have the royalties which we receive every month, we have rent which is generated as a result of controlling that real estate, and then we make money from the distribution systems and from our vertical integration opportunities. It collectively gives us a healthy and steady stream of income to operate and grow the system and the real estate is a big part of that and it ties us close to the restaurant owners as well.
KM - This has been Karl Moore of the Desautels Faculty of Management at McGill University, Talking Management for the Globe and Mail.