Inside the brutal transformation of Tim Hortons
Since taking over the iconic chain in 2014, its new Brazilian owner, 3G Capital, has purged head office, slashed costs and squeezed suppliers. Shareholders are happy, but is 3G tearing the heart out of Timmy's?
It took less than a year for Tim Hortons' new Brazilian owner, 3G Capital, to erase more than 50 years' worth of corporate culture.
Preparation for the purge started even before 3G's Burger King—backed by Warren Buffett—bought Tim's for $12.5 billion in December, 2014, with the intention of merging the doughnut and burger chains. In the weeks before the deal closed, dozens of vice-presidents, directors and other senior staff were called in, one by one, to meet with Daniel Schwartz, then the 34-year-old CEO of Burger King who would lead the soon-to-be merged company, Restaurant Brands International Inc. In the room with him was Alexandre Behring, one of 3G's founding partners and RBI's soon-to-be executive chairman.
Each employee had just 15 minutes to justify their corporate existence, although Schwartz at times seemed distracted. Some of the meetings lasted as little as five minutes before the employee was politely invited to leave the room.
Some of them took buyouts. But once the merger was officially sealed on Dec. 12, other, more senior, managers began to disappear.
Then, early on Jan. 27, 2015, RBI executives gathered in a second-floor boardroom dubbed the "command centre." On a large screen was a detailed schedule that showed—in 20-minute increments—when hundreds of Tim Hortons employees were due to be fired.
At the allotted time, employees would walk into a room to find their direct boss and a human resources manager waiting for them. They would be thanked for their service and informed that either they were no longer required or their position had been eliminated. The boss would then leave the room (moving next door to await the next firee), while the HR person outlined the details of a generous severance package. Meanwhile, a "runner" was sent to pack up any essentials from the employee's desk—purse, medication—as they were escorted to the door.
"It was very mechanical," says one former manager. "It was like an assembly line. We finished early."
The job cuts continued for more than a year, with progressively less generous severance. By some estimates, through layoffs and voluntary departures, RBI has shed up to half of the head office and regional staff Tim Hortons employed before 3G came along (though RBI disputes the amount). Today, there is not one top executive left from the old guard, with the exception of David Clanachan, a 25-year Tim Hortons veteran who was shuffled into the mysterious role of chairman of RBI Canada, a division many franchisees didn't even know existed.
Clanachan didn't respond to interview requests, and the rest of RBI's executive team declined to be interviewed. Chief corporate affairs officer Patrick McGrade responded to a long list of questions sent by e-mail with a generic statement, stating that the company has "big goals to grow the Tim Hortons brand over the long term," allowing it to "make the right, data-driven decisions and prioritize in the best interests of the brand." RBI also offered up a few hand-picked franchisees and one young executive for on-the-record interviews. As for the 20 or so former employees, current franchisees and suppliers who privately agreed to be interviewed, almost all insisted their names not be used (many were under gag orders as part of their severance).
The interviews paint a picture of ultra-disciplined owners who are sticking to the same playbook they have followed at companies including Burger King, Anheuser-Busch, Kraft Foods and Heinz: massive layoffs, replacing legacy managers with hungry youngsters and, above all, a fanatical devotion to financial benchmarks and cost-cutting. (It remains to be seen whether this will also be the approach for RBI's latest acquisition, Popeyes Louisiana Kitchen.)
But cost-cutting can take the company only so far. Even Joshua Kobza, RBI's 30-year-old chief financial officer, admits that. "Most of the cost opportunities are sort of behind us at this point," he said on an analyst conference call this past October. "What we are really focused on at this point is growing the business, growing our sales and growing our restaurant footprint around the world, as we think that's going to be really what drives our growth."
Expanding stateside has long been the holy grail for Tim Hortons, but the chain has never really caught on in the United States, beyond border locations. Perhaps that's because the brand is a singular one, built not on the quality of its coffee and doughnuts, but largely on its ability to arouse patriotism in ordinary Canadians.
So the question for 3G is, will its analytics-driven overhaul of Tim Hortons—using the same template the private equity firm's founders have deployed at railroads, brewers and food makers—succeed in the long run, or is it in danger of cutting the heart out of a Canadian icon?
"The risk, in looking at Tim Hortons through the lens of efficiency alone, is to miss the greatest value of the asset, and that is the Tim's brand and its deep connection to the fabric of the country," says Joe Jackman, founder of strategic retail consultant Jackman Reinvents, whose clients have included Old Navy, Hertz, Rexall and FreshCo. "You can't cost-cut your way to retail nirvana."
At the Timmy's in a strip mall in Kitchener, Ontario, the regulars are oblivious to the regime change that has taken place at head office.
Four women sit at a table sharing a box of Timbits as they sip their coffee, while a three-year-old plays on a mobile phone beside them. A group of retirees that commandeers a long, communal table every morning is just leaving as Victor Rubinovski walks in. The 46-year-old unemployed labourer comes here each day after dropping off his daughter at school. The workers behind the counter know his order by heart—a medium double-double. Same goes for his two buddies, who work in nearby factories and meet him at his favourite spot by the window.
"I come because everyone else is here," says Rubinovski.
"To me, it's not the food. The coffee is good, but we come to hang out," adds Zetin Jakupovski as he slides into the seat next to his cousin.
"Every location has its regulars," says franchisee Graham Oliver, who owns nine Tim Hortons stores. Like many Tim's franchisees, Oliver is a second-generation owner. His father bought his first store in 1986, 22 years after Tim Horton, then a star defenceman with the Toronto Maple Leafs, opened the first Tim Horton Donuts in Hamilton.
The legend of the chain's early expansion is well known. It all began in 1967, when Horton teamed up with Ron Joyce, a former cop who often stopped in at the doughnut shop while on patrol. Together, they grew the chain on friendships and kinships, handing head-office jobs and franchises to friends, friends-of-friends and relatives. Many of them were former cops or hockey players, or natives of Tatamagouche, Nova Scotia, the farming, fishing and lumber town where Joyce grew up. (Oliver's mother, for instance, was Joyce's sister, Gwen.)
The web of closely knit people who ran both head office and many of the franchises helped create a loyal band of Tim Hortons evangelists in communities across Canada, particularly in its core of Ontario and Atlantic Canada. If something went wrong, franchisees could pick up the phone and talk to someone they knew at head office, where keeping franchisees happy was Job No. 1. As for suppliers, it wasn't uncommon to seal a deal with a handshake and nothing more.
Even after Joyce sold the company to Ohio-based Wendy's—another folksy brand—in 1995, management at Tim's remained largely unchanged. By the time the unhappy merger was unwound 11 years later, with Tim's being spun off as a publicly traded company, it had become a full-fledged fast-food chain, serving soup, stew, chili and sandwiches, and had more than 2,600 outlets across Canada. In the early 2000s, it surpassed McDonald's Canada as this country's largest fast-food brand.
Even so, its expansion south of the border, where it had nearly 300 stores, was stalled. Tim's started to feel the pinch of stiffer competition, and sales growth at existing stores began to slip. At the time, Tim Hortons "was not a devastatingly inefficient organization," says Alan Middleton, a marketing professor at York University's Schulich School of Business. Nonetheless, activist shareholders began demanding that it curb spending on its U.S. expansion, repurchase billions in shares and spin its real estate assets into an investment trust.
Enter Marc Caira, a Canadian who'd spent 36 years at Nestlé, seven of them as a top executive based in Switzerland. The Tim Hortons board had been searching for a permanent CEO for nearly two years, following the abrupt departure of Don Schroeder in 2011. They settled on Caira, the first true outsider to run the company. He moved swiftly to buy back shares and put a push on Tim's southward expansion, while streamlining the menu (good-bye, Timbit dutchies) and adding healthier-sounding items.
Just a year after taking over, Caira announced that Tim's was being sold to 3G-controlled Burger King.
It's safe to say that when the 3G deal was announced on Aug. 26, 2014, very few Canadians had ever heard of the Brazilian-backed private equity firm or the trio of billionaires who'd helped create it.
Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Herrmann Telles began working together in the 1970s. That's when Lemann—then a 32-year-old Harvard graduate and national tennis champion—created Banco Garantia. The investment bank was modelled on Goldman Sachs, where merit trumped seniority. Sicupira and Telles were among Lemann's first hires, and quickly became full partners. In a landmark deal, Garantia consolidated Brazil's top brewers to create AmBev (it went on to absorb Belgium's Interbrew, Bud-maker Anheuser-Busch and London's SABMiller to create AB InBev).
The trio teamed up with Alexandre Behring and a fifth partner to launch 3G in 2004. Their aim was to invest in American companies, importing many of the same ideas they'd implemented at Banco Garantia (the G in 3G). Their first acquisition was Burger King, where they established what's come to be known as the 3G way. The company, says Cristiane Correa, whose 2013 book Dream Big chronicles 3G's hard-nosed work ethic, "just knows how to do things one way, and they will repeat it indefinitely." Even 3G's Telles calls his own firm a "one-trick pony."
It all comes down to efficiency, which is practically a religion at 3G. Its first move is to fire the old guard—particularly those in the upper ranks—and replace them with young new recruits who embody what's called the 3Hs: hard-working, humble and hungry. (The partners also call it PSD: poor, smart, with a deep desire to get rich.) Employees are expected to put in gruelling hours—with clear financial targets, and little oversight or bureaucracy to hinder them—in return for huge potential rewards. At AmBev, for instance, salaries were slightly below market, but bonuses could equal up to 18 extra salaries a year, according to Correa. Anyone who used their entire bonus to buy shares in the company earned an additional 10% in stock, which was redeemable in five years—an incentive to stick around.
Then comes the cost-cutting. "Costs are like fingernails—you have to cut them constantly," Sicupira has been known to say. That can mean anything from ditching office printers to save ink and paper costs, to selling off assets in order to juice the bottom line. After acquiring Burger King in 2010, 3G sold off almost all of the 1,387 corporate-owned restaurants to franchisees, thereby shifting costs to them.
To help get rid of unnecessary ex-penses, 3G also perfected a process known as zero-based budgeting (ZBB), where departments build their budgets from scratch each fiscal year—and the budget must be lower than the year before. (ZBB has proven to be so effective at Kraft Heinz that it is surfacing at other food companies, including cereal maker Kellogg and Conagra Brands, which makes Chef Boyardee pasta.)
All these changes happen remarkably fast, says Correa, and the hard-driving culture is not one that everyone is comfortable with. When it comes to 3G, she says, "you either love it or hate it."
Around the time the merger officially closed in December, 2014, Burger King executive Elías Díaz Sesé—who'd been tapped to lead Tim Hortons—introduced himself to head office employees at an event venue in Oakville.
Many of Tim's senior executives had already left. And though Díaz Sesé was upbeat, the 500 employees assembled in the room were anxious. "Everyone was well aware of the 3G way," says one person who attended the meeting.
Díaz Sesé was dressed in khakis and a white oxford-cloth shirt, with a red Tim Hortons logo embroidered on the left side. Proudly, he announced that he'd be working right through Christmas to make his numbers. He mentioned that he'd been away from his wife and kids for roughly 200 nights in the past year.
"Those comments were a big culture shock for a lot of people," says one former worker who was there. "It was clear he was broadcasting that the philosophy was work first, not family first. I had heard banter among the executives of how many days they had gone without a vacation, and that was a badge of honour."
After the meeting, Díaz Sesé invited everyone to celebrate the merger with champagne. But employees were in no mood to raise their glasses—not after having read about the massive layoffs at other 3G targets. "The idea of celebration was somewhat insulting," says one, "as you knew what was to come."
The new owners wasted no time. Senior managers were ordered to decide over the holidays which of their direct reports were essential to their operations, and which ones weren't. Overseeing the downsizing was Heitor Gonçalves, whom RBI called its chief people and information officer. No one knew much about him, other than that he was a 3G stalwart.
It was Gonçalves who, on the day of the big purge, manned the command centre. A trailer for RBI's Accenture advisers was parked outside. The operation was conducted with 3G's customary efficiency. "It was planned down to the minute," says a former manager.
Even after that day, "almost every Monday, it felt like people were being let go," says a former employee. Managers spent hours preparing to lay off members of their team, only to be handed pink slips themselves. One HR manager broke down in tears and apologized while firing a manager she'd worked with for years.
"There was this constant fear among everyone who worked there," says a former employee. "Will I have a job tomorrow?"
The changes kept coming. In May, 2015, Tim Hortons abruptly closed its Dublin, Ohio-based U.S. head office without revealing how many jobs would be lost. A few months later, even as it beefed up its analytics department, it offered voluntary buyouts to almost 15% of its head office staff, though only about 3% took the offer, a spokesman said at the time. More layoffs followed.
As Ron Joyce puts it today: "The head office has been decimated."
In keeping with another plank of the 3G playbook, the headquarters in Oakville, Ontario, also got a stark new look. Tim's staff was so diminished that they could fit in just one of the two main low-rise buildings they used to occupy. Executives unveiled the new design over the weekend, encouraging employees to bring in their families for a tour. Gone were the bright colours and cubicles, replaced by rows of identical white communal tables, with no barriers between workstations. It could have been a call centre.
Some referred to the open-concept space as the "pen" or "cattle room." Recalls a former employee: "It creates this feeling—it's 5 or 5:30 in the evening. Normally, I'd be going home but, geez, if I stand up, all eyes are on me."
On one wall, close to where Tim's new senior executives sat at their own communal table, hung a series of digital boards, visible to many in the office. The boards tracked regional franchisee performance—from sales and other financial metrics to cleanliness and speed of service—in red, yellow and green. 3G calls it the GPS, which stands for, depending on who you ask, either Global Performance System or Grade Point System.
Soon, employees got their own personalized version of the performance-tracking system: a frame containing their Management by Objectives goals. Each item—say, reducing costs by 2% or opening seven new restaurants in a given region—is highlighted in red, yellow or green depending on how close employees are to hitting their targets, and they're updated regularly. MBOs became a pain point for some. "The notion of being open and transparent about targets and performance—that was definitely a dramatic change from the old culture," says a former employee.
Other than the MBOs, desks were barren—management advised staff to keep personal effects to a minimum.
RBI quickly put the six-seat Gulfstream corporate jet up for sale. A top executive sent out an e-mail outlining efficiency initiatives: Travel would be curtailed, and single-sided photocopies and colour printing were banned, except on rare occasions, such as external presentations. Garbage cans at individual desks disappeared, on the grounds that they encouraged waste, and were replaced by central bins.
Before one town hall meeting, each employee received a blue-and-white-striped button-down shirt, embroidered with the red Tim Hortons logo. Employees were encouraged to wear it to the meeting. Then, for two days early in 2015, an embroidery machine was wheeled into a room. Management suggested that employees buy new shirts, or bring in ones they already had in their closet, so the logo could be embroidered on them. Each department was given a time slot for when its staff could use the machine.
"It was very peculiar and pretty heavy-handed," says a former employee who declined to line up for his turn. "Employees were already loyal to the brand, and a logo on a shirt didn't make them more loyal."
Still, some recruits are thriving in-side the new Tim Hortons. Anthony Pagano, 31, is a mechanical engineer who spent about four years at RBC Capital Markets—where insane work hours, intense pressure and bonus-driven compensation are the norm—before joining Tim Hortons in early 2015 as a finance director. Within a year, he was promoted to international vice-president, overseeing the chain's overseas expansion plan—a crucial part of RBI's growth strategy.
After helping strike deals last year to launch Tim Hortons in the Philippines and Britain by teaming up with master franchisees, Pagano got another promotion. He's now president of Burger King's Asia-Pacific division. Within weeks of landing the new job, he was in Singapore.
Pagano likes the 3G way of doing things, and the company has been very good to him. "I've always been one to work hard," he says. "I've put what I've wanted to into the business to deliver on our objectives. Sure, there are some new faces at the table, but that helps us bring a fresh perspective to what we're doing."
Increasing the efficiency of a company is not a bad thing, of course. In fact, it may be just what Tim's needs to survive. As one former manager puts it: "A lot of what 3G's culture dictates makes a ton of sense. They're just strong business practices. What's interesting is how they do it—it's just the ruthless application of it."
Shareholders aren't complaining, though. In the first three quarters of 2016, RBI's profit more than quadrupled, to $227.2 million (U.S.), while total costs fell 12.5%. The company's share price spiked about 25% on the Toronto Stock Exchange in 2016, after gaining almost 15% a year earlier. At the end of January, RBI's shares were up more than 50% from when they began trading in December, 2014.
Tim's cost of goods sold (as a percentage of distribution sales), meanwhile, has dropped by more than 10% since the takeover, according to one analyst. And since being acquired by 3G, its selling, general and administrative expenses have declined to about $20 million a quarter (or just over $4,000 a restaurant), down from $40 million a quarter (or $10,000 a restaurant), according to a report by BMO Capital Markets retail analyst Peter Sklar. Over all, Tim Hortons and Burger King "are focusing on fewer but more impactful menu introductions. This has simplified the messaging to consumers and also simplified in-store kitchen operations," says Sklar.
Other efficiencies have been introduced at the store level. Franchisees used to have to buy four different lid sizes for their cups. Now, there are just two—one for small and medium, one for large and extra-large. That helps restaurant staff work faster and simplifies storage, says Dartmouth franchisee Adam Colburn.
He also sees a budding "entrepreneurial" spirit at Tim Hortons, which is shifting more responsibility for real estate and property development of new stores to franchisees. "It's kind of gone back to when Ron Joyce ran the company," says Colburn, who is eager to increase his store count.
Not everyone is thrilled with the changes, however. Some franchisees bemoan the installation of a new automated communication system that puts franchisee requests into an e-mail queue—no more just picking up the phone and getting a regional manager on the line. "If we have an issue, we can't talk to anyone," says one store owner. "In the past, it would be immediate. Everyone is overworked."
And though some franchisees, including Graham Oliver in Kitchener, say their profit and sales are up since the merger, others say they've been pinched in the past year or so as food and other costs rose, and margins were hit by special promotions and combos.
"It's a change—it's hard at first and messy in the middle, but hopefully gorgeous at the end," says 38-year-old franchisee Amit Seth, whose family owns 10 Toronto-area restaurants. His profits were flat in the first nine months of 2016, though he got a bump in December. "It is tough. It is a change in culture."
Suppliers are also feeling the squeeze. From the get-go, RBI made it clear it would be reviewing vendor relationships. And the company pushed for better terms, including extensions on bill payments to as much as 120 days from 30 days or less. Maple Leaf Foods, a major partner that supplied meat to Tim Hortons, declined to accept the new terms, and walked away. (A Maple Leaf spokesman wouldn't comment.)
"Everybody was scared for their business," says one former employee.
Former employees also say RBI has cut back on product research and development spending at Tim Hortons, offloading some of that work to suppliers. That's not uncommon in the fast-food world, but it can be risky. "Suppliers can do a great job with innovating and R&D, but you're limited to what the supplier is trying to develop," says Darren Tristano, president of market researcher Technomic. "That often doesn't work as well for consumers." And if Tim's keeps squeezing suppliers, they could start handing their best product ideas to its competitors.
Indeed, some domestic suppliers are becoming frustrated with RBI's rising demands, says Sylvain Charlebois, dean of Dalhousie University's faculty of management and a food specialist. "It's increasingly becoming difficult to deal with Tim Hortons."
The road ahead could be bumpy. Both Burger King and Tim Hortons have grappled with slowing sales growth at existing stores in their home markets as competition intensifies and consumers watch their spending. And Tim's has always had a poor track record expanding outside of Canada, except in the Middle East, says Charlebois. Tim Hortons is now borrowing a page from Burger King's international expansion strategy by teaming with master franchisees in new markets, counting on the new partners to spearhead growth with their local know-how. Late in January, Tim's announced it was moving into Mexico, its first foray into Latin America.
Back in the comforting hubbub of Tim Hortons coffee shops across the country, not much has changed—yet. Timmy's still attracts a diverse cross-section of Canadians, from students and hipsters to senior citizens and new immigrants. It's still seen as a safe and comforting place to stop during road trips, and a great place to take the kids for a hot chocolate after skating.
A lot of that is due to the power of Tim Hortons' marketing, which has focused on the chain's ability to unite Canadians, regardless of gender, ethnicity or socioeconomic status. One of the people responsible for developing that connection is Paul Wales, a former executive creative director at ad agency JWT, which produced Tim Hortons advertising for more than 16 years—a tenure that is almost unheard of in the ad world, in which corporations often change agencies every couple of years.
JWT's series of "True Stories" spots, in particular, struck a uniquely Canadian note. One told the tale of an African immigrant father waiting for the rest of his family to arrive at the airport, preparing them for their new Canadian life with snowsuits and a Tim Hortons coffee. Another featured a stern Asian grandfather watching his grandson play hockey and coming to a revelation about family ties—and fatherly pride—over double-doubles with his son.
Wales grew up in Hamilton, the birthplace of Tim Hortons, so he has personal ties to the brand—as a customer and as a father of three kids who participated in Timbits hockey and soccer teams. "It's truly a Pavlovian thing," he says of getting his daily double-double fix. "You would feel better even as you would be pulling up into the drive-through. You haven't even got your coffee yet."
But he has noticed that the focus of Tim Hortons' ads has shifted from branding to product and price—touting the latest combo, rather than pulling at Canadians' heartstrings. "It's important that while you communicate your retail offerings, you should also reiterate what the brand values are about," says Wales. "The True Stories, in particular, were a reflection of Canadian values. I was very proud of that campaign. There are not too many Canadian companies that reflected the authentic Canadian experience."
In addition to the new advertising strategy, RBI has cut back on regional personnel who helped franchisees promote local sports teams and other events, says Alan Middleton, the marketing professor at York University. Suppliers—now working with much tighter margins—may also become less keen to support Tim Hortons-branded golf tournaments and other initiatives.
Such shifts could, over time, erode customers' and communities' links to the brand. "That emotional connection might start to fade away," says Wales. "A new generation might not see that."
Some store owners have also been lamenting the move toward more hard-sell advertising. Adam Colburn, who sits on Tim Hortons' franchisee advisory council, hints that the company may bring back more of that "share of heart" advertising. "People miss it," Colburn says. "We miss it."
3G has never encountered a brand quite like Tim Hortons. It isn't just another coffee company. It is a Canadian destination, an integral part of many Canadians' day and a brand that defines us, to some degree, around the world.
"It really lives on hockey jerseys and at kids' camps and under the rims of coffee cups," says marketing expert Bruce Philp, founder of Heuristic Branding. It is, he says, "Canada's answer to the pub."
No one is questioning that the 3G way will successfully boost short-term profits. Streamlining operations, grinding down supply costs and replacing expensive legacy management with a younger, hungrier (and cheaper) team are proven methods for boosting profits. Tim Hortons needs to become more efficient if it's going to compete on a global stage, and recent financials show that, so far, the changes RBI is making are good for business.
But there's a danger the cost-cutting will go too far and start damaging the long-term prospects for the chain. As Tim Hortons drifts away from its deep Canadian roots, its brand could start to get diluted and begin to feel like every other fast-food chain. And let's face it: If Tim Hortons is evaluated solely on the basis of its food offerings—flash-frozen doughnuts, nuked eggs, bready bagels—it could lose its edge.
For all its successes, RBI has not yet demonstrated that it knows how to nurture a brand. Its other main holding, Burger King, could take lessons from Timmy's, not the other way around. But brands are durable—Tim's has built up many decades of goodwill—and it will be a while before that lost connection shows up in the bottom line.
If that happens, and Tim Hortons becomes just another faceless—albeit highly efficient—coffee chain, 3G will have changed forever one of this country's most beloved brands.
"There's no one big thing that's going to weaken them," says Middleton. "The danger with a strong brand faced with this kind of change is that you die the death of a thousand small cuts."