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Tim Hortons outlets 'being destroyed' by cost-cutting, letter alleges

In late 2014, Tim Hortons was merged with U.S.-based Burger King, also controlled by 3G, to create Restaurant Brands International.

FRED LUM/THE GLOBE AND MAIL

Tim Hortons franchisees are banding together to push back against the parent company's cost-cutting campaign, saying that it is causing product shortages, declining quality and even safety concerns that are harming the brand.

A group of franchisees has formed the Great White North Franchisee Association to represent them in discussions with Restaurant Brands International Inc., which owns the Canadian fast food chain. In a letter obtained by The Globe and Mail and dated March 10, the group sets out a series of complaints about how the company is being managed under the direction of 3G Capital, a Brazilian private-equity fund that is the controlling shareholder in RBI.

The confidential letter alleges that the Tim Hortons brand "is being destroyed, along with [franchisees'] economic health" because of moves to slash head office staff, push new costs onto franchisees and take shortcuts to save money.

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Read more: Inside the brutal transformation of Tim Hortons

The group raises concerns about Tim Hortons using cheaper, lower quality products and equipment, including coffee pots that are made of "subpar or thinner glass" and break; hot holding trays that crack under heat; cups for Iced Capp frozen coffee drinks with thin walls that crush when lids are applied; and holiday mugs that were recalled due to poor quality and unavailable at the height of the Christmas season, according to the document.

In late 2014, Tim Hortons was merged with U.S.-based Burger King, also controlled by 3G, to create Restaurant Brands International. Since then, corporate staff at Tim Hortons has dwindled to what some insiders say is less than half of what it was before the takeover, with many former managers being replaced with young MBA graduates.

Those huge changes "have shaken the system, threatened the brand and affected the ability of franchisees to carry on viable businesses," John Sotos of law firm Sotos LLP, which represents the association, says in the letter, which is addressed to RBI chief executive officer Daniel Schwartz, Tim Hortons president Elias Diaz and company lawyers.

The savings from RBI's continued cost-cutting have kept shareholders happy, as the Toronto-listed shares are up 42 per cent in the past 12 months. The franchisees who have formed the new association have asked to meet with executives of Oakville, Ont.-based RBI in the next two weeks to try to resolve the contentious issues. In the meantime, most of the franchisees who sit on the Tim Hortons advisory board resigned Friday because it simply pushes through corporate decisions, association president David Hughes said.

The new association is backed by two prominent figures of the iconic chain's past: co-founder Ron Joyce and Don Schroeder, a former Tim Hortons CEO and franchisee whose nephew is a current store owner, each wrote a letter to franchisees supporting the association.

"The callousness with which RBI has treated hundreds of loyal and long serving members of the [Tim Hortons] corporate team as well as countless suppliers who for years had been committed to providing the system with new and innovative products, leaves me with the inescapable conclusion that, in the absence of some collective action, our family of storeowners will suffer the same fate," Mr. Schroeder said his March 10 letter, obtained by The Globe.

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In an e-mailed statement, Mr. Diaz said: "For more than 50 years, the Tim Hortons brand has been built by thousands of dedicated Franchise Owners. They 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 experience every day across our restaurants in Canada.

"Since the creation of RBI, franchise sales and profitability have grown each year.  We and our Franchise Owners have continued to support our communities through the Tim Horton Children's Foundation and many other local charities.

"As always, we are committed to continued collaboration with our Franchise Advisory Board, the members of which are elected by our Franchise Owners, to ensure that the Tim Hortons brand is healthy for the long run by focusing on what will help us serve our Guests and the iconic Tim Hortons brand now and in the future."

Mr. Joyce said in an interview franchisees are upset about the company's direction, which is forcing them "to protect their future and the system." He added in his letter, also obtained by The Globe, that what he has witnessed at Tim Hortons over the past couple of years "is troubling, to say the least."

Mr. Hughes, a franchisee in Lethbridge, Alta., said the new association is a national organization with experienced franchisees in every province, including members of current and past advisory boards, which meet to discuss policies and strategy. He didn't say how many franchisees have signed up for the association and couldn't be reached for comment. Mr. Sotos declined any comment.

Mr. Hughes said in a letter to franchisees, also dated March 10 and obtained by The Globe, that most of them stepped down from the advisory board because it "has become simply a tool for the franchisor to communicate pre-formulated decisions, rather than provide a forum for dialogue about matters affecting our business."

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To mobilize franchisees, the association has set up a week of cross-country meetings starting on Wednesday.

John James (J.J.) Hoey, a franchisee in Mississauga and an association organizer, said in an interview it has taken the position for now not to speak with journalists. "It's dangerous for us at this time to have any media" coverage, he said. "We don't want to scare anybody off."

Key allegations outlined by the Tim Hortons franchisees are:

  • Tim Hortons using franchisee contributions to its advertising and promotion fund for uses other than what the money is intended for and increasingly downloading those costs onto franchisees. For example, it says franchisees, rather than the fund, are having to cover the costs of about $30-million worth of product discounting. It suggests the ad fund covers salaries of staff who have no marketing roles. Exacerbating the concerns is a lack of transparency regarding use of the ad fund, a departure from past practice, it says.
     
  • Tim Hortons profit centre “re-engineering (and reallocation in its favour) has directly and materially diminished the franchisees’ share of system profitability.” It says the shift to single-source suppliers has “led to product shortages adversely impacting sales, customer retention and the ability to meet system standards. Cost-cutting measures are also evident in the compromised quality of newly introduced products and equipment, while the cost of goods has been ballooning.” It points to “unprecedented” markups on the cost of goods of up to 400 per cent in one instance, and double, triple or greater than industry markup norms.

    “The cheapening of product and equipment quality has affected customer perception and service efficiency, while increasing franchisee costs in material and labour. The equipment quality also presents a health and safety concern,” it says.

    At the same time Tim Hortons has downloaded lease and development risks to franchisees, thus enabling it to offer more franchise opportunities to others and leading to sales cannibalization and a drain on existing store profits. It has doubled the cost of store development to more than $1-million, “thus derailing the growth plans of many franchisees.”
     
  • A so-called GPS system of tracking franchisee performance has created “unattainable standards” which the company then uses to expel franchisees without fair compensation, it says. “The GPS system is an inflexible assessment tool that sets franchisees up for failure. Whether by design or otherwise, the franchisor exploits the GPS ‘tool’ in order to expropriate franchisees’ wealth with little or no compensation and to push unwanted franchisees out of the system rather than improve service levels.”
     
  • Tim Hortons’ general lack of transparency and accountability in its relations with franchisees. It accuses the company of undertaking construction of franchisee restaurants without firm bids and through “opaque dealings … When it comes to completion of construction, franchisees are often left without a clear breakdown of what they are paying for. Development costs have significantly increased without explanation for the increased costs.”
     
  • Tim Hortons appears to be moving towards a system that favours a small number of large franchisee corporate entities, it says. (The company has said in the past that is not its intention in Canada.)
Video: How Tim Hortons became part of a fast-food empire which is now adding Popeyes to its menu
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