How This Quick-Service Restaurant Meets Industry Challenges

As more companies see their businesses disrupted by advancements in technology and changes in customer tastes, the survivors will be those sufficiently flexible to adapt to a ever-changing business landscape. Canadian quick-service restaurant leader Tim Hortons is one role model for its peers.

Mar 13, 2014 at 3:54PM

Source: Tim Hortons

Restaurants face two key challenges -- changing consumer preferences and the increased use of technology. With respect to consumer tastes, smart food-service operators are going through a process of simplification to assist with the customer decision-making process. When it comes to technology, more restaurants are leveraging it to build brand equity and reach out to their customers. Tim Hortons (NYSE:THI), the largest quick service restaurant, or QSR, chain group, is well-positioned to turn these challenges into opportunities.

As the pace of life hastens, attention spans shorten, and many pass when there are too many menu options. Tim Hortons is working toward simplifying its operations to increase sales. First, it took 24 items off its menu in the fourth quarter of 2013. Second, it is targeting more meal combos, with the end goal being around 15% to 20% of total food orders to include at least three items. Third, it is introducing standard bills for its lunch sandwiches and testing a new soup and sandwich station to make the ordering process faster.

Another company that has utilized the "less is more" principle is Costco Wholesale (NASDAQ:COST). Costco carries approximately 3,700 SKUs (stock keeping units) per location, which is significantly less that what a Wal-Mart supercenter will carry. In addition to the benefits of higher inventory turnover and profit margins associated with SKU minimization, studies have shown that consumers spend more when companies make it easier for them to make decisions.

A research paper published by two professors from Columbia University and Stanford University titled "When Choice is Demotivating" found that people are more likely to purchase gourmet jams or chocolates when they are offered six choices, compared with 24 or 30 choices. Based on a 2007 Bain study, cutting down on the number of SKUs can reduce costs by between 10% to 35% and expand the top line by as much as 40%. As the pioneer of the warehouse club concept (and SKU minimization strategy), Costco has reaped the benefits of simplicity.

These types of studies seem to validate Tim Hortons' findings. It disclosed at its most recent earnings conference call that there has been a reduction in ordering times and even increased average checks, in certain cases, following the implementation of new initiatives to simplify operations.

Nyc Takeout Coffee Cup
Source: Tim Hortons

While Tim Hortons is the beverage leader in Canadian QSRs, accounting for close to three-quarters of caffeinated beverage sales, it hasn't stood still. Based on NPD research, the average Canadian coffee drinker consumes more than one roast type, with an increasing amount opting for dark/bold roasted coffee. With that in mind, Tim Hortons introduced a new variation of its current blend-Dark Roast Coffee in Columbus, Ontario, and Ohio in its most recent quarter. Another big trend in food consumption is the health and wellness trend. In response to that, Tim Hortons has reduced its sodium content in its soups by nearly a third.

The battle for restaurant guests is moving online and Tim Hortons has already built a strong presence in the digital space. As of February 2014, Tim Hortons' Facebook page is the top ranked in Canada with 2.4 million 'likes.' It also has 168,000 followers on Twitter. Recent trends have been encouraging as well, with its website experiencing 23% growth in web traffic over the past 12 months.

It is possible to draw parallels with another restaurant operator: Domino's Pizza (NYSE:DPZ). About 40% of Domino's revenue comes from the digital channel, of which a third are contributed by mobile apps. Domino's apps have been downloaded more than 11.3 million times as of February 2014 and a quick search on app stores indicates that it is rated higher than its peers Pizza Hut and Papa John's.

As more consumers research their purchasing decisions online and keep track of new developments of their favorite brands using the Internet, the strong online brand presence of Tim Hortons and Domino's will pay off. 

Foolish final thoughts
Given the pace of change in the restaurant industry, restaurant operators risk being deserted by their customers if they aren't well-prepared for these new challenges. Tim Hortons stands out for its strong digital presence and its willingness to adapt to customer preferences.

Is Tim Hortons the Fool's favorite stock?
Good stocks meet industry challenges head-on, instead of avoiding problems or denying that they even exist. Tim Hortons is a prime example of such a good company in the quick-service restaurant space. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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