Double Double Trouble
A little perspective as Tim Hortons braces for an unsavoury court case
I first heard about the much-discussed Tim Hortons class action lawsuit led by Arch Jollymore against the company’s corporate headquarters more than four years ago. At the time, I was visiting with Tim Hortons co-founder Ron Joyce at Fox Harb’r, his palatial five-star golf resort in rural Nova Scotia, for a magazine article. I’d come to know Joyce well while writing his autobiography, Always Fresh, so when he parked his Mercedes near the Fox Harb’r clubhouse and told me he would entertain some guests while I dined with some Tim Hortons franchise owners, I didn’t think much of it.
It was over a surf-and-turf dinner in the resort’s restaurant where I listened to franchise owners discuss how upset they had become by the state of the company. The ubiquitous chain, known throughout Canada as “Tims” or “Timmies,” had recently been taken public, and while sitting at a dark table, the restaurant owners talked about a clandestine newsletter that had been circulating among franchisees about the perceived problems facing the chain. Margins were shrinking, the newsletter said, and they were being forced to add new products that stretched their resources and staff. Many were still angry over the introduction of frozen donuts in 2002 that were shipped from Brantford and thawed at stores, replacing fresh-baked goods.
“We’re pissed off,” said one of the store owners at the time. It just wasn’t clear what they were going to do about it.
Two years later, Jollymore, Joyce’s cousin and a former executive within Tim Donut Limited, the company’s corporate entity, launched a $1.95 billion lawsuit. The Burlington resident’s lawsuit—which, he says, represents the concerns of many Tim Hortons owners—contends the use of frozen product had cost franchisees dearly, and that the proliferation of new menu items has compounded the problem and cut into profits. TDL, based in Oakville, initially called the suit “frivolous,” but now, after the story was featured on the cover of weekly news magazine Maclean’s, it appears Jollymore’s case might pose a real threat to the country’s largest restaurant chain.
The Maclean’s feature made it sound like a battle between Jollymore and a few loyal supporters versus a corporate head office fuelled by massive profits. It was only partially correct. The real battle over Tim Hortons is actually a split between old and new—a fracture between the older store owners who remember the era before Joyce sold the chain in 1995, and the newer, publicly traded corporation led by chairman Paul House and current chief executive Don Schroeder. That publicly traded entity has one purpose: to show growth on its bottom line as a means of attracting shareholders.
That bottom line is substantial—$2.24 billion in revenue in 2009, up nearly 10 percent from the year previous, and an operating income of $297 million. There are now 3,600 stores worldwide, with nearly 3,000 in Canada alone. The company was spun off from Wendy’s in 2006 at an opening price of $27 per share. Stock now trades above $37.
Joyce isn’t talking now—he chatted amiably with me when I reached him at his office, but wouldn’t discuss his cousin’s lawsuit—but he’s spoken in the past of his concerns about a publicly traded Tim Hortons and its reliance on frozen donuts. Joyce argues in his autobiography that the store owners are the true customer of TDL. If the parent company, which doles out the franchises, is equitable with its stores, then everyone wins. Certainly, Joyce says that was the case when he ran the operation. When the company was spun off from Wendy’s, a Tim Hortons outlet would make an average revenue of $1.7 million US, with margins of around 16 percent. These days, same-store growth has slowed—while same-store revenue was nearly nine percent in 2006, it slipped to less than three percent in 2009, according to the company’s annual report.
In a story I wrote at the time of Tim Hortons’ initial public offering, Joyce said stores had once made upwards of 20-percent margins, a windfall for the mom-and-pop shops that were often operated by pioneers who entered the business in the early 1970s. Margins fell under Wendy’s management, and Joyce was concerned they would continue to decline after the IPO, which is exactly what Jollymore alleges was the case. These days, those close to Joyce say stores are lucky to make 13 percent, a steady decline from a decade earlier. Given typical store sales of $2 million today, that means the average store profit has dropped from around $272,000 to $260,000 in four years’ time, despite increased overall revenues. Several store owners see that trend continuing.
And that’s where the real battle lies—between franchisees who remember the good old days under Joyce (before every city in Canada had a Tim Hortons on every block), and a parent company trying to deal with a maturing business and a much-discussed stock price.
Jollymore’s allegations will likely be put to the test in April (pushed back from its initial November 2010 date), when a judge considers the next step in the case. Tim Hortons asked for a summary judgment last November, arguing there is no case to try. Jollymore, on the other hand, is hoping the court will carefully consider the merits of his claim and send TDL a message.
In the meantime, Canadians and Canadian business owners continue to be fascinated by—and addicted to—Tim Hortons. In 2009, the franchise opened 131 new stores in Canada. Maybe Jollymore is correct and the gold rush has ended, but it will apparently take more than a class action lawsuit to convince Canadians that there won’t continue to be gold in their morning cup of coffee.