Restaurant Brands quarterly profit more than doubles as Tim Hortons results perk up

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One year after acknowledging that Tim Hortons franchisees had seen their profits decline significantly, parent company Restaurant Brands International Inc. QSR-T says its coffee shop owners’ earnings have perked up.

The Tim Hortons franchisees have still not regained the profitability they had in 2018, when the average restaurant made $320,000 in earnings before interest, taxes, depreciation and amortization. But the coffee-and-doughnuts chain did get a 27-per-cent improvement in average EBITDA in 2023 compared to the prior year, rising to $280,000.

Toronto-based Restaurant Brands International (RBI) reported on Tuesday that its own profit also jumped, by 15.9 per cent for the full year in 2023 compared to the prior year. For the fourth quarter ended Dec. 31, the company’s net income more than doubled, to US$726-million or US$1.60 a share compared with US$336-million or 74 US cents in the same period the prior year. That increase was mostly driven by an income tax benefit, as well as improved income from operations at its restaurant banners, which also include Burger King, Popeyes Louisiana Kitchen and Firehouse Subs.

The deterioration of restaurant profits compared to 2018 led to renewed tensions last year between the company and some of its Tim Hortons franchisees. After an independent group called the Alliance of Canadian Franchisees spoke out about their concerns, the company sent default notices to the restaurant owners serving on the alliance board and terminated the franchise contract of its president.

Now, the company says both sales and profitability are growing. Tim Hortons comparable sales – an important metric that tracks sales growth not tied to new store openings – grew by 8.4 per cent in the fourth quarter. Both traffic and Tim Hortons’ share of sales in its category were up compared to the prior year, the company said.

There are a number of factors that have led to improvements at Tim Hortons, according to RBI. For example, customers have taken to a wider variety of menu items, including cold beverages, which recorded 19-per-cent sales growth in the quarter. Foods such as bowls and wraps have also pushed up sales in the afternoon and evening by 7 per cent compared with the prior year – a period when those sales had also grown by 18 per cent.

The all-important drive-through, which accounts for the majority of Tim Hortons’ customer traffic, improved its speed of service by 9 per cent. That was helped by an option in the mobile app that lets people both earn loyalty points and pay for an order with one tap. On average, Tim Hortons has shaved roughly two seconds off the time it takes a customer to move through the drive-through – that might seem small but can contribute to fewer customers driving by when they see a long line, and higher customer satisfaction that drives repeated visits.

“Actually, there’s a nice correlation between, the faster we are, we are also perceived as friendlier,” Axel Schwan, president of Tim Hortons Canada and U.S., said in an interview on Tuesday. “It’s not necessarily intuitive, because you would think the faster you are, then maybe people feel rushed. But actually, that’s not the case because our guests really expect that when they come to Tims. I know it’s going to be fast.”

While the Alliance of Canadian Franchisees welcomed the sales growth trends, the dissident group’s executive director, Dave Lush, said the jump in average profitability RBI reported on Tuesday did not represent the experience of some of the group’s members. The alliance represents roughly one-quarter of Tim Hortons franchisees, Mr. Lush said, slightly fewer members than it had last year.

“We were taken off guard,” he said. “We’re not looking for a fight with them. It’s just that our results, in my collective group, don’t match this.”

A small number of Tim Hortons franchisees have left the system in the past year. Out of nearly 3,900 locations in Canada – whose owners tend to sign 10-year agreements – 690 restaurants were due for a new agreement in 2023. The company declined to sign 13 agreements, chief corporate officer Duncan Fulton said.

“The relationship between the company and the franchisees is very strong,” he said.

The results are part of company-wide efforts to improve restaurant owners’ profitability, a priority that chief executive Joshua Kobza emphasized when he was appointed to the top job last February. In late 2022, the company also appointed Patrick Doyle, who is known for leading a turnaround at Domino’s Pizza Inc., as its executive chair. Over the past year, average franchisee profitability grew 30 per cent across all its restaurant banners, in their home markets.

“We are more aligned with our franchisees than I think we have ever been,” Mr. Doyle said on a conference call to discuss the results. He added that the company’s efforts to improve profitability are not “one and done,” and will continue.

“We are not happy yet with where we are,” he said. “We are very happy with the progress, but more to be done, and we are going to keep hammering away on it.”

RBI has also been working to revamp the struggling Burger King chain. Last month, the company announced a US$1-billion deal to buy its largest Burger King franchisee in the United States, in order to accelerate its turnaround plan. Over the past year, three large operators filed for bankruptcy protection in the U.S. while others closed restaurants.

But RBI reported signs of improvement on Tuesday, with the average Burger King location earning US$205,000 in 2023, or 46 per cent more than the prior year. Its “Reclaim the Flame” plan has included spending more on marketing, restaurant renovations, and new technology and equipment. Those investments have helped drive traffic up slightly – the first time since the second quarter of 2021 that the burger chain has reported positive traffic. Burger King reported comparable sales grew by 6.4 per cent in the U.S. in the fourth quarter, compared to the prior year.

Franchisee profitability has also improved at the Popeyes Louisiana Kitchen and Firehouse Subs chains, according to the company.

RBI’s fourth-quarter revenue grew by 7.8 per cent, to US$1.8-billion.