To say that Tim Hortons is popular north of the border may be a bit of an understatement. When Burger King announced it would merge with the company and form Restaurant Brands International (NYSE:QSR), a gasp of horror blew across Canada as many in the media shuddered over the prospects of the beloved national coffee slinger "falling into foreign hands." One commentator even went so far as to compare Tim Hortons to a precious vase about to be juggled by its new owner.
With more than 3,500 locations in Canada, the restaurant chain has a deeper penetration of the Canadian market, with about 1 location for every 10,000 Canadians, than any restaurant has in the U.S. The chain accounts for an astonishing 42% of all quick-service transactions in its home country. Based on the testimony above, it also has larger share of the national identity than any U.S. restaurant chain could ever dream of.
Not surprisingly, Tim Hortons has long aspired to build a similar following in the U.S., a country with a similar market but nine times the population. Management has called the market a "must win" in its most recent annual report.
Tim Hortons opened its first U.S. location outside of Buffalo in 1984 and has since expanded to about 900 stores. And there have been missteps along the way -- in 2004, the company bought a coffee-and-donut chain with 48 locations but was forced to close it six years later due to relentless competition from local favorite, Dunkin' Brands (NASDAQ:DNKN).
Since then, the company has focused its U.S. efforts on markets near the Canadian border like Buffalo, Rochester, and Detroit, and the vast majority of its stores can be found in New York, Ohio, and Michigan. Profits in this market have been negligible with just over $5 million in operating income in 2013.
Now, following the merger with Burger King, Tim Hortons may have its best opportunity ever to hit the jackpot in the American market.
What the King can do for Tim
Burger King has promised to invest in Tim Hortons and to ramp up its expansion both in the U.S. and abroad but has provided little detail on how it plans to do so. Burger King's strategy with its own stores could offer a roadmap -- current management, which took over in 2010, jettisoned the "King" character, sold company-owned stores to franchisees, and sped up foreign expansion, opening around 700 stores last year.
Before the merger, Tim Hortons set a goal of opening 300 new locations in the U.S. by 2018 and has signed development agreements for restaurants in new markets throughout the Midwest and Northeast. In order to boost its U.S. performance, the company has also upgraded stores, adding cozy interiors, sometimes with fireplaces and flat-screen TVs.
This coffee market may be too hot
Tim Hortons singular strength in Canada may be a weakness elsewhere -- the company was a first mover, allowing it to dominate the market. As a result, the chain is beloved in its home country, but details that may resonate in Canada, such as the stores being named after a Canadian hockey player, are meaningless in the U.S. and other countries.
The chain certainly struggles in the U.S. with brand recognition, a top priority if it hopes to succeed with its expansion plan. The company needs to build brand awareness while also differentiating itself from a crowded market full of heavy hitters like Starbucks, Dunkin' Donuts, and McDonald's.
Starbucks and Dunkin' Donuts also have their own ambitious growth plans, promising that this market will get even more crowded in the future.
Tim already tried this once
Wendy's owned Tim Horton's for 11 years (from 1995 to 2006) and intended to expand the company in the U.S. through co-branded restaurants. That never took off, however, and Burger King has insisted there will no be co-branding between the two companies, saying the merger will be a sharing of people rather than products. Burger King won't even serve Tim Hortons coffee in its restaurants, which would be an easy way to introduce Americans to its core product.
There seems little reason to believe then, despite the newly formed company's deep pockets, that Tim Hortons will have any newfound success in this country. Burger King may be able to reuse its old playbook to grow Tim Hortons internationally, expanding into new markets through franchising, but the steep competition in the U.S. and failed attempts in the past make it clear that the U.S will not be the most fertile ground for Restaurant Brands International.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of Starbucks. 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.