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In an increasingly competitive cafe market, Tim Hortons franchises like the one shown here at the corner of Simcoe and Richmond streets in Toronto will need to update their menu options to better serve customers.FRED LUM/The Globe and Mail

Tim Hortons Inc. is preparing to raise the ante in the coffee wars.

The company is testing new premium-espresso coffees in its restaurants in Vancouver and London, Ont., with plans to launch the coffees countrywide next year, possibly in the spring, industry sources say.

Currently, the chain's espresso-based coffees, including lattes and cappuccinos, are made from powdered mixes of coffee and milk, they say. But in today's hyper-competitive café sector, those mixes just don't cut it among increasingly discerning coffee drinkers, observers say.

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Tim Hortons's rivals are rushing to shift more upscale with their own espresso coffees, putting pressure on the Oakville, Ont.-based chain to improve its offerings. Starbucks Corp. is introducing higher-end java to draw more customers and bolster its profit margins, while McDonald's Corp. is moving to upgrade its McCafé restaurants and coffee products, investing in new Swiss espresso machines to help showcase those brews.

Now Tim Hortons is quietly taking steps to replace its espresso-based coffees with ones that are made from freshly ground beans and steamed milk. Parent company Restaurant Brands International Inc., which also owns Burger King, is instructing its Tim Hortons franchisees across the country to purchase a fancy new espresso machine for about $12,000 apiece to replace their existing machine.

"It's a huge shift in terms of their ability to offer premium, specialty hot-coffee products," said Erik Thoreson, principal at restaurant research specialist Technomic in Chicago. "As more and more consumers get used to being able to source a barista-made specialty hot coffee, they expect to see it at more and more restaurant locations, including Tim Hortons."

Sami Siddiqui, president of Tim Hortons Canada, confirmed in an e-mailed statement to The Globe and Mail that the chain is testing new premium, made-to-order lattes and espressos. He said they feature freshly ground Arabica espresso beans and freshly steamed Canadian milk in the lattes.

Tim Hortons has been racing to add new products to its menu, many of them at higher prices than its core coffee and doughnuts, as it battles to keep its top spot in an intensely competitive café market. Long a destination for a double-double – basic brewed coffee (with two creams and two sugars) – Tim Hortons faces burgeoning demand from younger consumers for espresso-based offerings.

Sales of Tim Hortons's current espresso-based brews are relatively weak, sources say.

Josh Kobza, chief financial officer at parent RBI, hinted in September of new developments on the espresso front. "We already have an espresso category, a specialty-beverage category, but I think there is a lot of work that we can look at doing over time to see if we can go further in that category," he told a conference.

Industry data help explain why Tim Hortons is gearing up for an espresso fix. Sales of specialty hot coffee in restaurants in Canada are growing at twice the pace as those of regular brewed coffee, according to Technomic. That's despite the fact that the number of cups of espresso-based coffee sold is only about one-tenth that of brewed java sold, it has found. Still, an espresso jolt is welcome in a $4.8-billion restaurant coffee market in which sales have been relatively stagnant.

As well, espresso coffees, such as lattes and cappuccinos, are priced about 75 per cent higher or more than regular brews, depending on extra flavour or topping charges, paving the way for Tim Hortons to generate higher profit margins if it keeps costs in line, Mr. Thoreson said. For example, a large brewed coffee at a Tim Hortons in Toronto costs $1.81 while a large latte or cappuccino is $3.39, which is 87 per cent more expensive.

It isn't clear if Tim Hortons will change its espresso-based coffee prices when it introduces its new offerings. Mr. Siddiqui said the chain is always looking for ways to bring its customers "great-tasting new products at a great value."

Last month at a franchisee conference in Orlando, Fla., Tim Hortons's executives presented the new espresso machines to its restaurant owners.

Jeff Dover, principal at food services consultancy FsStrategy, said Tim Hortons will have to train its staff to move its customers through the order counter quickly despite the extra steps required in making espresso-based coffees with the new machines. Grinding beans and steaming milk can take more time, he said.

As well, Tim Hortons will need to promote the upgraded espresso brews because "I have trouble seeing Tim Hortons as a specialty coffee brand," Mr. Dover said. "They're known for their core basic coffee." And some franchisees may resist having to pour money into new equipment, he said.

Still, in the battle with McDonald's and Starbucks, "there's definitely a market for the higher-end coffee," he added. McDonald's Canada has used freshly ground beans and steamed milk since it launched espresso coffees in 2011, a spokesman said.

This fall, McDonald's Canada and its franchisees invested $17-million in "new state-of-the-art Swiss equipment" to bring "European-inspired espresso beverages" to about 1,200 of its 1,400 restaurants, the company said. "Specialty coffee lovers across the country have told us they want an authentic and more sophisticated espresso blend – and we've listened," Anne Parks, McCafé menu director, said in September.

Douglas Fisher, president of food service adviser FHG International, said Tim Hortons needs to improve its espresso-based coffees, especially as McDonald's focuses increasingly on upgrading its McCafé program. About a year ago, McDonald's launched its first standalone McCafé restaurants in Canada.

Tim Hortons is looking for ways to boost its sales. In its third quarter, it posted a higher profit but its sales growth at existing restaurants declined – increasing by 2 per cent in that crucial same-restaurant sales metric compared with 5.3 per cent a year earlier.

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