Is Tim Hortons Being Outflanked?

Tim Hortons  (NYSE: THI  ) announced plans in 2013 to expand its brand throughout the U.S. The company is Canada's largest franchise quick-service restaurant, with a menu featuring coffee, specialty drinks, and a variety of baked goods and sandwiches.

Tim Hortons expansion into U.S. market
The king of Canadian coffeehouses currently operates 4,300 franchises, with a bit more than 800 in the U.S. But a successful southern strategy means competing with dominant players like Dunkin' Brands Group  (NASDAQ: DNKN  ) and Starbucks (NASDAQ: SBUX  ) .

Moreover, given the results of Tim Horton's third-quarter report, its move into the U.S. has been proceeding slowly. In fact, with only 13 new stores opened in the U.S. as of Sept. 30 (net of new stores and stores and kiosks closed), the coffee maker has a long way to go.

Tim Hortons continues to be successful north of the border despite the stiff southern winds. The company reported that systemwide sales grew by 5.3% in the third quarter of 2013. This growth, in turn, was the result of new restaurant development and same-store sales growth of 1.7% in Canada and 3% in the U.S.

Moreover, year-to-date systemwide sales grew by 4.5%. The company said this growth was "due to our targeted marketing initiatives, category extensions, and operational initiatives." However, Tim Hortons cautiously noted that anticipated growth in both the U.S. and Canadian economies had moderated, and this means the company is facing an "intensified competitive environment."

But the company did not acknowledge that the competitive environment is also due to the countermoves in play by its U.S. rivals. In any case, Tim Hortons will release fourth-quarter and year-end results before the markets open on Feb. 20, followed by a 10 a.m. conference call -- just in time for a coffee break for investors.

Starbucks' and Dunkin' Brands' expansion plans
In the meantime, Starbucks and Dunkin' Brands continue their expansion plans that may very well outflank Tim Hortons' southern strategy.

Starbucks is taking the challenge directly onto Tim Hortons' home turf. Starbucks teamed up with Target to open 150 new coffee outlets in almost every new Target store opened during last fall's push into Canada. While Starbucks' CEO noted in the company's recent earnings announcement that same-store sales were down, this was due in large part to consumers moving to the Internet during holiday 2013.

In any case, the Seattle-based coffee maker is still the dominant player in the Northeast. And the coffee-bean war between the two coffeehouses could turn out to be another Seattle blowout. In the meantime, Dunkin' Brands has started making a westward advance.

It is widely known stateside that Dunkin' Brands is a well-established franchise outfit. The company's business model lends itself to rapid expansion without the usual startup costs. As Tim Hortons slowly plots its southern strategy, Dunkin' is already heading westward as well as to Texas. Currently, there are 10,500 Dunkin' Donuts shops. Also under the Dunkin' Brands' name are Baskin-Robbins ice cream stores.

And so as not to be outmaneuvered, Dunkin' Brands announced plans last year to develop 50 Dunkin' Donuts franchises in a strategic alliance with two London-based franchise groups. Ultimately, Dunkin' aims to develop 150 shops in the United Kingdom over the next five years.

The bottom line
Tim Hortons is still the dominant coffee shop in Canada. While Starbucks' northern move is fresh, this could become a long-term threat to the home team. If the company is successful with its new locations, and Canadian customers take a liking to the La Boulange line of baked goods and sandwiches, Starbucks will have successfully made a counterstrike against Tim Hortons' southern maneuver.

Meanwhile, Dunkin' Brands is making simultaneous moves westward and across the pond. In other words, Tim Hortons faces a big challenge from Starbucks and Dunkin' Brands. Hortons has also acknowledged it is facing a weak consumer in a highly competitive U.S. market. In short, Tim Hortons is being challenged on its home turf and outflanked in its southern strategy. 

In the final analysis, both Dunkin' Brands and Starbucks are well established in the U.S., have plans for future growth, and have track records of solid revenue and earnings growth. These factors make Dunkin' and Starbucks better plays for investors with a long-term view -- bearing in mind the present pullback in the broader markets might be a temporary speed bump.

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  • Report this Comment On February 09, 2014, at 5:30 PM, GoalKeeper7 wrote:

    An interesting summary, but similar to American network television newscasts, the article is all about cosmetics and poor on content and quality.

    Target's advance into the Great White North is anything but something to proudly hitch your wagon onto. It seems to be a financial mess.

    Also, Starbucks already had a substantial Canadian footprint and good penetration.

    Customers differ substantially as well. Timmy's is a discount coffee player, largely catering to drive-thru business. Starbucks is a premium coffee house.

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