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The October 2010 issue of Report on Business magazine.
The October 2010 issue of Report on Business magazine.

How Tim Hortons will take over the world Add to ...

Besides the coffee lab, there is another top-secret facility-this one in Brantford, Ontario-dedicated to ensuring the uniformity of the Tim Hortons experience. It's what BMO Capital Markets analyst Peter Sklar calls "the operational cornerstone of Tim Hortons' 'Always Fresh' philosophy." Inside the 400,000-square-foot Maidstone bakery, an army of bakers produce enough partially cooked and flash-frozen doughnuts, Timbits, pastries and buns to supply every Tim Hortons franchise.

The ascendance of this operation has required a slightly Orwellian redefinition of "fresh." For 37 years, standard Tim Hortons stores were equipped with in-store kitchens, where staff bakers produced batches of fresh, hot doughnuts twice a day. Shortly after Joyce sold his Tim Hortons stake in 2001, the company brokered a deal with Ireland's IAWS Group to build the $75-million Maidstone facility. Then-CEO House promised franchisees that the conversion-which cost store owners between $35,000 and $50,000-would boost their bottom line. Instead of letting unsold doughnuts go stale during downtimes, operators would be able to zap new batches as needed, in a glorified microwave oven. Voilà-"fresh-baked" in two minutes. And though the cost of producing one doughnut would change from eight or nine cents to 12 cents, that increase would be offset by a reduction in operating costs-no highly paid bakers on the payroll, less discarded product.

It would also guarantee a steady stream of profit for head office-$22 million in 2009.

Do franchisees have any say in such radical changes to their business? They do, through the 16-member Franchisee Advisory Board. And according to member Miles Mattatall, who owns 14 franchises in the Hamilton/Niagara area (and who is the son of the very first Hortons franchisee), they do sometimes express their opposition to head office, like when the company began to ban smoking in stores in the 1980s. "I thought it was going to kill the business," says Mattatall, who received death threats from irate regulars. "Actually, the stores we took smoking out of increased in sales-they became much more friendly for everyone else." But Mattatall insists that franchisees were universally on board with Always Fresh. "The product is better-quality," he says. "I have been on the board a long time, and I never had anyone call me and say, 'I didn't want to do this.' "

Still, it's clear some franchisees have become disillusioned with Always Fresh. Arch Jollymore, a former high-ranking executive at Tim Hortons (and Joyce's cousin), is seeking certification of a class-action lawsuit against the company. At issue: the impact of the Always Fresh conversion on franchisee margins. Jollymore and his wife, Anne (who owns a store in Burlington in her own right), are alleging breach of contract, negligent misrepresentation, and breach of the duty of good faith and fair dealing. They are seeking damages of $1.95 billion.

According to the Jollymores' statement of claim, franchisees got no compensation from head office for the outlay involved in converting to Always Fresh, and received "minimal compensation" for their existing kitchen equipment. And the cost of producing a doughnut climbed not to 12 cents but to 20 cents, "largely because of the inflated price at which the Brantford plant sells the frozen product to the franchisees." Income as a percentage of sales, the plaintiffs claim, has decreased by 3.5%. The lawsuit also insists that margins on lunch items are virtually nil, yet franchisees are required to have more staff on hand during lunch hours.

None of the allegations has been proved in court. Tim Hortons has filed a mountain of documents disputing the Jollymores' claims and is seeking to have the case dismissed at a hearing that is scheduled for next April.

Schroeder makes no apologies for the switch to frozen goods. "The business and how it operates today is different from how it operated prior to Always Fresh," he concedes. But that's a small price to pay for a steady stream of perfection: "The French crueller is the most difficult doughnut to make from scratch," says Schroeder. "The product that comes out of Maidstone is outstanding, and it comes out the same every time."

Yet the Always Fresh system itself is going through a major change. In August, Tim Hortons sold its 50% stake in the Maidstone plant to Swiss bakery giant Aryzta (which had swallowed IAWS) for $475 million. The news came as a surprise. When Arytza invoked the buy/sell provision in the joint-venture agreement back in May, most analysts figured Tim Hortons would have no choice but to buy Arytza out or risk ceding a crucial part of its supply chain to foreign owners. Instead, Tim's has divested its share, though it will continue buying its products from Maidstone for the next seven years.

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