In their bid for better profits, Tim Hortons Inc. and its new Brazilian private-equity owner are counting on an obscure cost-cutting process called zero-based budgeting that is appreciated by investors – but often dreaded by employees.
"We share our common culture of ownership and accountability and that means that we share things like zero-based budgeting," said Joshua Kobza, chief financial officer of Restaurant Brands International Inc., the new parent of Tim Hortons and Burger King Worldwide Inc.
"And so we've put that in place at Tim Hortons as well and that's allowed us to achieve savings and refocus the organization and our resources on the real key priorities," Mr. Kobza told analysts, adding zero-based budgeting was "a meaningful contributor to bottom-line results" in the first quarter.
Zero-based budgeting entails managers planning each year's budget as if beginning from scratch, rather than the conventional way of rejigging a previous year's spending. It forces managers to analyze expenses annually, shifting spending to higher-performing initiatives from those that yield fewer profits.
3G Capital Partners LP, the Brazilian firm that bought Tim Hortons in December, is known for its razor-sharp focus on expense slashing through zero-based budgeting. It sparked such anger among workers at what is now called Anheuser-Busch InBev SA – parent of Labatt Brewing Co. Ltd. – almost a decade ago that it led to protests over layoffs at the beer maker.
But 3G has since applied zero-based budgeting at a string of companies it has snapped up, including H. J. Heinz Co. and Burger King, leading to generally improved results but deep budget cuts. More of the same is expected at Kraft Foods Group Inc., 3G's most recent proposed acquisition.
"It's loathed by employees but it works," said David Kincaid, founder of branding consultancy Level5 Strategy Group and a former Labatt executive. "It's change, and people don't like change."
At Tim Hortons, the process was in play in its first quarter. The chain chopped 350 jobs, or about 15 per cent of its 2,300 staff, at headquarters and regional offices. It put up for sale its Gulfstream 100 jet and scaled back other spending.
"This is such a 3G strategy," said Robert Carter, executive director of market research firm NPD Group Inc. "It sends a notice to suppliers and vendors who are working with Tim Hortons, with Burger King, with Heinz: 'This is the new reality.' … I imagine it's going to force some synergies on companies that touch their businesses."
Still, it's encouraging that Tim Hortons is still investing in new product innovations, store remodellings and new sites, Mr. Carter said.
Restaurant Brands of Oakville, Ont., reported a first-quarter loss of $8.1-million (U.S.), or 4 cents a share, but when adjusted to exclude one-time items, its profit was $83.6-million, or 18 cents. Revenue came to $932-million. Shares of Restaurant Brands fell nearly 3 per cent in Toronto on Monday.
Cost-cutting played its part in improving Tim Hortons's operations: The chain's selling, general and administrative expenses fell 32 per cent to $27.1-million from a year earlier (if the companies had been combined), the parent reported. Tim Hortons's cost-of-sales dropped almost 1.6 per cent to $419.6-million.
Daniel Schwartz, chief executive officer of Restaurant Brands, said the company enjoyed its best sales lift (at outlets open a year or more) in three years at Tim Hortons and in almost seven years at Burger King. He was referring to same-store sales, which are an important measure of a retailer's health. Those first-quarter sales rose 5.3 per cent at Tim Hortons and 4.6 per cent at Burger King.
Tim Hortons drew customers with new menu items including expanding its lunch business by launching, for instance, a line of crispy chicken sandwiches, he said. For breakfast, customers ordered more of its new dark roast blend. And the coffee chain is building more stores in non-traditional urban areas, he said. Those are sites such as universities and hospitals, Mr. Carter said.
Revenue from the Tim Hortons's portion of the business slipped 1.2 per cent to $682.4-million – dampened by foreign exchange fluctuations – but would have been 11 per cent higher than the previous year if the dollar's value had been constant, the company said.
Consultancy Level5's Mr. Kincaid said zero-based budgeting has helped shore up profits at Labatt, Heinz and Burger King, working well in the slow- or no-growth segments of fast food and beer.
Zero-based budgeting puts pressure on managers to scrutinize "every line item" of costs every year, Mr. Carter said. "Everything is under the microscope."
But the budgeting also can make managers more cautious about taking risks, Mr. Kincaid said. "Personally, I worry that you get so caught up in the short-term performance that you lose sight of the opportunity to help build your category."