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A Tim Hortons coffee shop is shown in Toronto on Wednesday, June 29, 2016. (Eduardo Lima/THE CANADIAN PRESS)
A Tim Hortons coffee shop is shown in Toronto on Wednesday, June 29, 2016. (Eduardo Lima/THE CANADIAN PRESS)

Tim Hortons franchisee row spreads to U.S., threatens expansion Add to ...

Discontent among Tim Hortons franchisees over the parent company’s efficiency drive has spread south of the border, posing a threat to the fast-food chain’s plans for significant U.S. expansion.

An association that was formed last March to represent disgruntled franchisees – the Great White North Franchisee Association (GWNFA) – said in a statement on Monday it has set up a U.S. division to provide Tim Hortons store owners in the United States with a way to voice their concerns “about the increasing mismanagement” of the chain’s operations.

The move comes amid rising tensions between Restaurant Brands International Inc., which acquired Tim Hortons in late 2014, and its franchisees over complaints that head office is pushing some expenses to store owners and, in some cases, modifying products and operations to save money or boost corporate profit margins.

Read more: Inside the brutal transformation of Tim Hortons

Now, the franchisee revolt could jeopardize RBI’s big bet on U.S. expansion to help find new growth opportunities outside Canada, where Tim Hortons already blankets many markets.

“The U.S. franchisees have similar concerns as do the Canadian franchisees, and they centre around profitability,” Robert Einhorn, a lawyer at Zarco Einhorn Salkowski & Brito PA, a Miami-based law firm that represents GWNFA USA, said in an interview. “The franchisees have a number of issues where they feel that Tim Hortons is working against them, not with them.”

Last week, amid mounting push-back from franchisees, Elias Diaz Sese stepped down as president of Tim Hortons, and his responsibilities were taken over by Daniel Schwartz, chief executive officer of RBI, which also owns Burger King and Popeyes Louisiana Kitchen.

RBI carries a significant debt load, with nearly $10-billion (U.S.) in long-term borrowings, and relies heavily on cash flow from Tim Hortons to service that debt. Last year, the chain accounted for 57 per cent of RBI’s adjusted EBITDA, even though there are more than three times as many Burger King outlets. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)

Mr. Sese resigned on the day a Toronto franchisee of Tim Hortons, with the backing of the GWNFA, filed a $500-million (Canadian) lawsuit seeking class-action status on behalf of the chain’s roughly 3,500 Canadian restaurant owners against RBI and its top executives, claiming they misused money from the franchisees’ ad fund.

RBI executives have said they disagree strongly and deny all the allegations the franchisees have made about its business and the brand.

RBI said in an e-mailed statement on Monday: “Our franchise owners are the foundation of our system and we have always and will continue to seek their counsel and work in close collaboration with them to deliver a great guest [customer] experience every day across our restaurants in the U.S.”

RBI has refused to recognize GWNFA as the voice of franchisees, instead dealing with the franchisee-elected advisory board. But many franchisees say the company has too much control over the board and it has failed to represent their interests. On Monday, RBI reiterated it is “committed to continued collaboration with our franchise advisory board.”

John Gordon, founder of franchise restaurant specialist Pacific Management Consulting Group in San Diego, said the Tim Hortons franchisee dispute is becoming a distraction for RBI and its goal of expanding internationally.

“It becomes a tremendous diversion from the basic task, which is complicated enough, which is to run the restaurants properly for the franchisees and grow organically,” Mr. Gordon said.

Mr. Einhorn said the Canadian and U.S. associations will work together on common concerns including use of the ad fund; excessive amounts the company charges store owners for their supplies, such as coffee and bacon, “to expropriate franchisee profits”; imposing performance measurements that are designed to “enable expropriation without compensation”; alleged intimidation of franchisees; and limiting franchisees’ ability to sell their restaurants at fair market value.

The association said U.S. membership is made up of almost half of the U.S. franchisees, including those in Tim Hortons’ three main U.S. markets: Ohio, Michigan and New York.

Store owners’ concerns have severely weakened franchisees’ operations in both countries, with many of the U.S. restaurants operating at a loss, it said.

RBI executives have insisted that overall franchisee profits have increased since their company, which is controlled by Brazilian private equity firm 3G Capital, acquired Tim Hortons.

3G has also been involved in the takeovers of food companies Kraft and Heinz, as well as beer giants such as Anheuser-Busch, where executives have also overseen aggressive cost-cutting drives and, in the process, shaken up those entire industries.

RBI is focused on expanding Tim Hortons globally, including in the United States, where it has struggled for years. RBI has set up new master franchisees south of the border to shore up Tim Hortons’ U.S. restaurant count.

Still, tackling the U.S. market is not easy. Rivals Starbucks Corp. and Dunkin’ Brands Group Inc. have a stronghold on the café sector, controlling big swaths of territory, while Tim Hortons is not as well known except in areas close to the border, such as Buffalo.

Mr. Einhorn said RBI has worked with a franchisee association before. Burger King has a powerful one that has a say in determining prices of food and other supplies that restaurant owners must buy from head office. GWNFA would like Tim Hortons to emulate the Burger King model after franchisees complained the company is charging them too much for their supplies.

The National Restaurant Association, which represents Burger King franchisees, “is a very sophisticated and powerful organization that has gained a lot of leverage with Burger King,” Mr. Einhorn said.

He said the roughly 800 Tim Hortons franchisees would like to avoid a lawsuit although “we may be forced to resort to litigation” if the company does not provide detailed ad fund information.

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Follow on Twitter: @MarinaStrauss

Also on The Globe and Mail

How Tim Hortons became part of a fast-food empire which is now adding Popeyes to its menu (The Globe and Mail)

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