A new fight is brewing between Tim Hortons and franchisees, as some restaurant owners say their profits are being squeezed by rising food and supply costs. The mounting tension at the Canadian coffee chain is another stark example of conflicts in the food sector stoked by a surge in the rate of inflation.
Relations are deteriorating four years after Tim Hortons settled two lawsuits with franchisees. The Alliance of Canadian Franchisees – a group formed in 2017 as the Great White North Franchisee Association to represent restaurant owners’ concerns – says that its membership increased significantly last year as frustrations mounted. The alliance has a new board of directors, which includes Jeri Horton-Joyce, the daughter of founder Tim Horton.
“Our owner-members want meaningful action, urgently, and further dialogue on the issue of profitability,” said Dave Lush, who took over as the association’s executive director last October. Mr. Lush, who has led franchise businesses in the past including Speedy Corp., added the situation has “reached a crisis state” for many.
The franchisees’ complaints hang on an urgent question in the food industry: Who should absorb the effects of inflation, as the cost of basic goods has soared? The Alliance says Tim Hortons has raised prices for items including food and paper products, the majority of which franchisees are required to buy from the company. Meanwhile, menu prices – which Tim Hortons also dictates to restaurants – have not risen enough to cover the costs. Franchisees are not arguing for passing more costs to consumers, Mr. Lush said, but question whether Tim Hortons has raised the prices for its goods more than is necessary.
“That compression between the cost of goods and the sale price has been occurring over the last several years,” Mr. Lush said. But inflationary pressures have caused a significant recent drop in profitability, he added, which an increase in sales has not offset. Parent company Restaurant Brands International Inc. reported comparable sales for Tim Hortons in Canada rose by 11.1 per cent in its third quarter. The company will report fourth-quarter earnings on Tuesday.
“All restaurants across Canada and around the world have struggled with a series of unprecedented challenges in recent years which have had significant impacts on profitability,” Tim Hortons spokesperson Michael Oliveira wrote in a statement on Friday, adding that its franchisees are more profitable than many comparable restaurant owners in Canada. “Tim Hortons restaurant owners benefit from our supply chain efficiencies and on the whole, buy items for less than what other restaurant brands pay for similar products.”
Mr. Lush said the group is also concerned about an increase to franchisee contributions to Tim Hortons’ advertising fund. Mr. Oliveira responded that an ad fund contribution of 4 per cent of sales is part of franchisee agreements, and that a decrease to 3.5 per cent was a temporary measure.
The Alliance met with the parent company three times in 2022, but came away with no resolutions to those issues, Mr. Lush said. Mr. Oliveira responded that the company has held regular meetings with franchisees in recent months.
“We do not recognize the association as a legitimate voice of franchisees and we continue to be disappointed that some members of the association have refused many opportunities to attend important system meetings to hear our plans and discuss the latest about our business together,” Mr. Oliveira wrote.
Restaurant Brands settled two lawsuits with the franchisees in 2019, after a public dispute.
“It’s our belief that RBI has not adhered to both the practical application and the spirit of the settlement agreement,” Mr. Lush said.
With the recent growth in membership, the group now represents the owners of nearly one-third of Tim Hortons’ roughly 3,900 locations in Canada, Mr. Lush said, though he did not specify how many franchisees are members. The average Tim Hortons franchisee owns four locations, according to RBI.
The franchisee group’s board of directors has also been replaced over the past year, with all of its members now made up of franchisees.
The Alliance is a separate group from the 19-seat franchisee advisory board that works with RBI to represent the views of its roughly 1,500 restaurant owners. Franchisees in each region elect representatives to that advisory board in an anonymous vote. Mr. Oliveira wrote in the statement that the Alliance’s “views on how to approach the current challenges faced by the restaurant industry globally do not reflect the large majority of most Tim Hortons franchisees.”
Mr. Lush said his members anticipate that Restaurant Brands will release figures on average franchisee profitability during its earnings report on Tuesday, though the company declined to confirm or deny that plan. The last time RBI reported such figures was for 2018, when RBI said the average location made $320,000 in earnings before interest, taxes, depreciation and amortization (EBITDA). The Alliance disputes those figures, saying they do not reflect all of the expenses that franchisees face or their true profitability. Mr. Oliveira responded that EBITDA is a “well-established metric of restaurant profitability.”
“Obviously we can produce people who say, ‘I’m doing okay.’ At the same time, people will step forward and say, ‘I’m not,’ ” Mr. Lush said. “It’s the number of people who are not, that has grown dramatically.”