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Customers drink coffee inside a Vancouver Tim Hortons in Aug., 2014. Tensions between the café’s parent and its franchisees have emerged as it faces increased pressure from rivals such as McDonald’s.

Ben Nelms/Bloomberg

Executives at Tim Hortons's parent company face shareholders at its annual meeting on Monday amid secret talks with disgruntled franchisees and mounting criticism of the chain's cost-cutting efforts.

A group of franchisees formed the Great White North Franchisee Association in March to represent them in talks with Restaurant Brands International Inc., which owns the Canadian fast-food chain along with Burger King and Popeyes Louisiana Kitchen.

They have warned that RBI's aggressive hacking of costs has resulted in product shortages, declining quality and even safety concerns that are harming the brand.

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Read more: Inside the brutal transformation of Tim Hortons

RBI chief executive officer Daniel Schwartz met privately last Thursday with association president David Hughes, a franchisee in Lethbridge, Alta., to try to "mend fences," a source familiar with the matter said.

It was the second confidential meeting between the two sides in as many weeks, both initiated by RBI, which had previously refused to talk to the association, sources said.

"We've made our demands," said a franchisee association source, who spoke on condition of anonymity so as to not jeopardize the discussions. "They have to meet them."

"The franchisees have been dissatisfied with the answers they've received to date," another source added. Mr. Hughes declined to comment.

RBI's annual meeting will be the franchisees' first opportunity since the association was formed to air their grievances in a public gathering, potentially helping shareholders understand the extent of the problems and how they are affecting operations. At the heart of the struggle is RBI's move to push certain expenses on to store owners and, in some cases, to change products and operations to save money or increase margins.

The tensions have surfaced at the same time as Tim Hortons is feeling growing pressures from McDonald's Canada, which is now offering all-day breakfast and McCafé coffee, and other rivals in a low-margin sector.

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Tim Hortons spokeswoman Shannon Hall said it regularly meets with individual restaurant owners across Canada, but that its owner-elected advisory board – not a franchisee association – is its "chosen method of gaining valuable feedback from our owner community and we are committed to strengthening their voice and contribution to the brand."

The association says the advisory board is too influenced by the company and not a good representative of franchisees.

To boost sales, Tim Hortons is counting on its recently relaunched lattes – touted as "perfectly uncomplicated lattes" – and other espresso-based drinks with freshly ground beans and steamed milk rather than powdered ingredients. But a franchisee source said early signs suggest the program isn't hitting internal sales targets.

The source said Tim Hortons has projected restaurants would each sell 125 cups a day of the espresso-based drinks, but they're so far selling about 70 cups a day, adding that a product launch's strongest sales usually occur in its first 30 to 45 days, when marketing support is high.

Ms. Hall countered that the espresso sales are strong and that the numbers are inaccurate, but she said the company doesn't disclose those data.

The espresso program officially rolled out nationally on April 26 after Tim Hortons franchisees spent $12,000 each on a new espresso machine, plus $2,000 for its installation.

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Matthew Kelly, managing partner at consultancy Level5 Strategy Group, said it's too soon to weigh in on the espresso performance, but Tim Hortons may have to pour more money into marketing to spread the word of the new drinks and offer free samples.

Mr. Kelly, a former executive at Yum Brands Inc., which owns Pizza Hut, KFC and Taco Bell, said Tim Hortons's parent has to think of the long run in patching up relations with its franchisees.

"When you have these acrimonious relationships, it's just not good for anybody – it's a distraction," said Mr. Kelly, who worked extensively with franchisees at Yum. "And it often manifests itself in a less-than-ideal customer experience."

The franchisees contend RBI is profiting from overcharging them for their supplies of everything from coffee to sugar and bacon. They say the company unexpectedly dropped its long-standing commitment to rent relief last July to compensate for tough times and reinstated it this month without retroactive payments, which they say could be worth millions of dollars. And they say RBI is using the franchisees' advertising fund contributions for corporate matters other than marketing, contrary to the fund's intention.

RBI executives counter that franchisees overall are profiting from the new regime, which is controlled by the Brazilian investment firm 3G Capital. The firm is known for its extreme efficiency drives in its other businesses, such as beer titan Anheuser-Busch InBev.

Josh Kobza, chief financial officer of RBI, told a retail conference on Thursday it hasn't changed its pricing to franchisees since its takeover of Tim Hortons in 2014. (Ms. Hall later clarified that prices change from time to time based on changes in commodity prices or foreign exchange, for example, but the overall process for determining prices to franchisees has not changed since 2014.)

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"If you look at franchisees' profitability and their margins, they've continued to have really strong profitability growth and their margins have stayed the same," Mr. Kobza said. "So we are not changing what we are doing with respect to the supply-chain business in Canada."

Still, RBI is starting to get criticism from other quarters. Last week, an influential U.S. investment newsletter, Grant's Interest Rate Observer, published an article called "Rumblings from the great white north" that raised questions about RBI's strategy. "The bearish story on Restaurant Brands hinges on the franchisees: on their profits, or lack thereof, and on their complaints (especially the complaints of the Hortons franchisees)," Grant's wrote.

RBI's shares, which reached a record high last week, slipped about 1 per cent to $82.10 on Friday on the TSX. The stock has given investors a return of about 55 per cent in the past year.

RBI has posted profit gains, but its sales at restaurants open a year or more – a key retail measure – have been disappointing in the past few quarters amid stiffer competition.

The franchisee association got the company to delay introducing a new order-and-pay mobile app until later this year after threatening to seek a court injunction to stop the rollout, saying the franchisees weren't ready. And after complaining about what seemed to be arbitrary inspection rules to check up on franchisees' operations, the association got the company to review the program and give young staff inspectors more training.

"Their attitude has changed," one franchisee said. "They're more respectful. They treat us more as partners. They realized they made a mistake." Said another: "We think they are taking us seriously."

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The association has documented pricing for its suppliers it says is unfair; for example, it says Tim Hortons charges franchisees more than 25-per-cent more for coffee than McDonald's Canada charges its franchisees for the same commodity.

The Great White North association says RBI has refused to allow franchisees to nominate someone to fill a vacancy on the advisory board. "The situation clearly shows the disingenuousness in RBI's claim that the advisory board is a democratic mechanism to represent franchisees' interests," it says in a communication to its members.

The iconic Tim Hortons chain of coffee stores has a long history in Canada, growing from a single store in Hamilton. But now thought its growth and a series of mergers, its one pillar of a huge empire of brands that will now include Popeyes.
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