The parent company of Tim Hortons Inc. is grappling with unhappy franchise owners and a public-relations debacle over how some franchisees responded to Ontario's higher minimum wage. Investors this week will get a chance to assess any potential damage.
Restaurant Brands International Inc., which is set to release its fourth-quarter results on Monday, is trying to address its Tim Hortons challenges and ensure its brand doesn't get tarnished while it works on expanding internationally.
"The company's relationship with its franchisees is a huge challenge for them," said David Kincaid, managing partner of consultancy Level5 Strategy Group. "The general relationship status with franchisees still feels strained and now this Ontario minimum-wage issue just strained it further."
RBI, based in Oakville, Ont., also owns the Burger King and Popeyes Louisiana Kitchen chains. The company is navigating the choppy waters of bad publicity from labour protests over the way some franchisees cut perks and benefits to deal with Ontario's 21-per-cent increase in the minimum wage. It's also facing a more competitive landscape as McDonald's Canada rapidly increases its breakfast and coffee offerings.
Investors already are feeling the pain. RBI's stock has fallen 17 per cent from its high point in late October. It's down 6.2 per cent so far this year.
Jason West, an analyst at Credit Suisse, pointed to the wage-related protests, competitive pressures and a harsh winter, which can keep consumers away, for possible sales weakness.
"Several negative factors are weighing on the stock currently," he said in a Jan. 24 report, trimming his outlook for Tim Hortons Canada's fourth-quarter same-restaurant sales (at existing outlets) and RBI's 2018 profit.
Last month, demonstrators at some Tim Hortons outlets in Ontario protested against franchisees who clawed back employee benefits and breaks to offset the expense of steeper minimum wages, which went into effect Jan. 1.
Franchisees countered that their hands were tied because they couldn't raise their prices to make up for the wage hike; the parent company makes decisions on pricing.
Mr. West estimated the higher labour costs could boost a franchisee's expenses by $70,000 to $100,000 annually, compared with roughly a $200,000 average cash flow. "Clearly, this is a major concern for franchisees, though this labour pressure could be largely offset by about 3 to 4 per cent [higher] menu pricing." (Franchisees have estimated higher wages and other labour law changes will cost them each $243,889.)
A source familiar with the franchisees said the company gave them no suggestion of price increases on an internal conference call last week. On Jan. 31, RBI "adjusted" prices "minimally" of some Tim Hortons sandwiches and chili to cover franchisees' increased ingredient costs, the source said. For example, it raised the price of the turkey-bacon club sandwich to cover the expense of a new "artisan" bun and "carved turkey," which replaced a whole-wheat bun and deli turkey, the source said. (The price increases were different across the country.)
At the same time, Tim Hortons's recent spate of discount offers is squeezing the franchisees' profit margins but not those of RBI, the source said.
RBI said in an e-mailed statement: "We regularly review our pricing strategy, just as we do all other aspects of our overall business strategy."
David Palmer, an analyst at RBC Dominion Securities, which lowered its fourth-quarter same-restaurant sales estimate for Tim Hortons Canada to 0.5 per cent from 1.5 per cent, blamed RBI's stock decline on "negative publicity in Canada," uncertain tax rates and threatened margins.
He said RBI is in danger of seeing its Tim Hortons margins pinched after having achieved higher ones by scaling back costs of distributing supplies to its franchisees.
But some franchisees have complained that RBI, controlled by Brazilian private equity firm 3G Capital, has been overcharging them for their supplies. The company has made some price concessions to the restaurant owners who say more are needed.
Almost a year ago, some disgruntled restaurant owners formed the Great White North Franchisee Association to fight 3G's tight-fisted management style, leading to legal actions seeking class-action status against the company.
Still, Mr. West said, "while there is certainly a negative tone around" the Tim Hortons brand in Canada, he is "not sure this has long-term implications for the stock."
He reduced his Tim Hortons Canada same-restaurant outlook to between 1 per cent and 0.5 per cent from 1.5 per cent and 2 per cent previously. He trimmed his 2018 profit-per-share estimate to $2.66 from $2.68.
Mr. Kincaid said the Tim Hortons brand may be able to withstand the bad publicity if the company invests in developing new menu offerings, tech and people.