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Tim Hortons Case Analysis
1. CASE W14568 TIM HORTONS INC Ivey Publishing
SYRACUSE UNIVERSITY
Graduate School of Business
CASE ANALYSIS:
TIM HORTONS INC
Franceen Reeves
Strategic Management 645
29 May 2017
2. CASE W14568 TIM HORTONS INC 2
1. Is the quick service restaurant industry a profitable industry to be in? What are the key success factors
required to be competitive?
The restaurant industry is divided into two broad categories-‐‑-‐‑full and limited service. Limited-‐‑service
is further divided into fast-‐‑casual and quick-‐‑service (fast-‐‑food).
Profitability for the quick-‐‑service sector can be extrapolated from information provided about the
restaurant industry in general. Schnarr and Rowe state that quick-‐‑service posted $22.6 billion in sales
in Canada for 2013 (2014, pg. 2). Profit equals total sales revenue less total expenses (including cost of
goods and taxes). Typical net profit margins for the entire restaurant industry range from 3% to 6% per
year (Schnarr & Rowe, pg. 2). The expected net profit range is calculated below.
Quick-‐‑Service net-‐‑profit margin (2013): 3%($22.6B) = $678M to 6%($22.6B) = $1.356B
Porter’s Five Forces framework will be used to analyze factors impacting quick-‐‑service industry
profitability which can help to identify sources of competitive advantage and to forecast future
profitability.
Competitive Rivalry -‐‑-‐‑ High
• Industry fragmented; 50 largest companies account for 20% of revenues
• Competitors numerous; >900,000 locations in U.S, >81,000 locations in Canada
• Industry growth slow; forecasts predict consumer foot traffic will grow at less than 1%
• Quick-‐‑service offerings relatively low priced
o Coffee, muffins, and breakfast sandwiches range from ≈
$1.19 to $3.95
Bargaining Power of Buyers -‐‑-‐‑ High
• “Healthier and wealthier” than generations before
o Older demographic with more disposable income and becoming more health-‐‑conscious
o Millennials 18 – 34 years old with greater purchasing power and busier lifestyles
• Seek more variety and patron establishments that provide diverse options
• Can “integrate backward” by cooking meals for themselves
• Consumer knowledge and desire for knowledge increasing d/t digital technologies
Bargaining Power of Suppliers – Undetermined
• Not enough information to determine the degree of strength in supplier relationships but
important factors to consider from the case:
o Wholesale food prices increased 7.1% in 2013
o Labor costs account for “approximately 1/3 of every sales dollar”
§ Some locations unionized
3. CASE W14568 TIM HORTONS INC 3
Threat of Substitutes -‐‑-‐‑ High
§ High number of substitutes: grocery stores, convenience stores, other types of restaurants
o Fast-‐‑casual only segment to see growth in customer visits; 11% increase in sales in 2013
§ Consumers can easily and cheaply prepare meals at home
§ No consumer switching costs
Threat of Entry -‐‑-‐‑ High
• Anyone can open a restaurant given enough capital
o Debt and leasing arrangements typical to offset capital requirements
• Many quick-‐‑service restaurants in North America operate within franchise formats
o Most McDonald’s, Dunkin Donuts, and Tim Horton’s are franchised; 60% Starbucks
company owned and the remaining are licensed
o Benefits of franchising:
§ Lower operational costs and risks
§ Development of land and buildings by corporate HQ
§ Functional business support (e.g., marketing and advertising) which is a boost
for inexperienced restaurant owners
Sources impacting TH’s future profitability are those relating to competition from other restaurants and
consumer desire and trends. The strategy will need to be planned around these factors. A limitation in
using Porter’s framework as a sole analytic tool in determining reasons for industry profitability is that
the external environment has a relatively minor impact (<20%) on a firm’s return on assets (Grant, 2016,
pg. 68). However, it is still useful in helping to identify quick-‐‑service industry success factors (exhibit
1). Key success factors required for industry competitiveness are:
Demand-‐‑Side
• Cater to shifting consumer preferences for healthier foods by sourcing locally produced food
items, offering options for gluten-‐‑free products and nutritious children’s options
• Offer more choices of “ethnic” cuisine to increase variety and suit differing tastes
Supply-‐‑Side
• Offer variety and healthy menu options in the breakfast and lunch categories, both of which
drive competition (e.g., coffee, salads, wraps)
• Compete along dimensions other than price to gain superior competitive position
o Streamline services to provide for more convenience (e.g., offer mobile payments)
o Keep abreast of product innovation and refresh new offerings
o Maximize customer service; offer customized choices
o Commitment to stakeholders
§ E.g., Starbucks focuses on ethical sourcing and community involvement
4. CASE W14568 TIM HORTONS INC 4
Exhibit 1
Identifying Key Success Factors
*Adapted from Contemporary Strategy Analysis
Pre-requisites for success
What do customers want?
Analysis of demand
*Who are our customers?
*What do they want?
How does the firm survive
competition?
Analysis of competition
*What drives competition?
*What are the main dimensions of
competition?
*How intense is competition?
*How can we obtain a superior competitve
position?
KEY SUCCESS FACTORS
5. CASE W14568 TIM HORTONS INC 5
Tim Hortons’ (TH) management should use these factors as the foundation in which to structure its
competitive strategy. Restaurants whose only source of competition is along a price-‐‑dimension in an
already low-‐‑margin industry will only transfer the economic surplus to consumers which will hurt the
franchise owners’ bottom line. By developing a strategy around the key success factors listed above,
quick-‐‑service restaurants can provide value for their customers while reaping the benefit of creating
value for themselves in the form of profit.
2. In August of 2014, what is Tim Horton’s strategy? Is it working?
*Ratios represent percentages
Grant (2016) indicates using accounting performance metrics to evaluate a firm’s performance for the
purposes of assessing its current strategy (pg. 44). Key financial indicators for Tim Hortons is provided
for its second quarter of 2014, as seen in the figure above (Schnarr & Rowe, 2014, pg. 7). To evaluate
the extent of “Winning in the New Era’s” success, Tim Hortons performance in 2014 will be compared
to its historical performance prior to the new strategy implementation.
*Values taken from Tim Horton’s Income Statement and Balance Sheet –pgs. 11 and 12.
Return on Assets (ROA) demonstrates how effectively a firm utilizes its assets to produce profit.
(ROA) =
#$%
&#'()$
%(%*+
*,,$%,
2013 ROA =
$./0,2.3
$/,.44,0/4
= 17.6 2012 ROA =
$.56,622
$/,/0.,763
= 17.9
Return on Equity (ROE) measures a firm’s efficiency in using shareholder’s capital to generate profits
that are available to remunerate investors. A higher ROE suggests that a firm is able generate profit
without utilizing as much capital.
(ROE) =
#$%
&#'()$
*89
,:*;$:(+<$;=,
$>?&%@
2013 ROE =
$./0,2.3
$36A,05A
= 43.9 2012 ROE =
$.56,622
$36A,05A
= 41.8
Tim Hortons debt-‐‑to-‐‑equity, a solvency ratio that assesses a firm’s ability to pay its liabilities, in 2013
was 132.9 (Schnarr & Rowe, 2014, pg. 7). A lower ratio implies a more financially stable business.
Although TH’s ROA still ranks below the 2014 industry ROA average of 11.7 (Alvarez, pg. 41), their
new strategy appears to be working. Since its implementation in the beginning of 2014, Tim Hortons
ROA and ROE improved over the previous two years and are producing profits more efficiently. They
Key Financial Indicators at Q2 June 2014
Return on Assets (ROA) 20.5
Return on Equity (ROE) 53.0
Debt-‐‑to-‐‑equity 3.7
The company unveiled a new 5-‐‑year strategic
plan in the beginning of 2014 called, “Winning in
the New Era”. It focused on (a) driving same-‐‑
store sales by targeting segments of the day
category and marketing opportunities, (b)
investing to build scale and brand in new and
existing markets, (c) growing in new ways, and
(d) leveraging its core business strengths and
franchise system (Schnarr & Rowe, 2014, pg. 9).
6. CASE W14568 TIM HORTONS INC 6
also became more financially stable by decreasing their debt levels. This may be due to their
maximizing the throughput in the stores and pursuing new supply-‐‑chain opportunities.
3. Evaluate its strategic choices. What should be its immediate priorities?
Tim Horton’s strategic options (Schnarr & Rowe, 2014, pg. 10) can be divided into those that influence
the direction of the overall business versus options that may improve existing operations.
a. Innovate menu to increase customer traffic
b. Expand market and re-‐‑evaluate geographic positioning
c. Capitalize on food trends—food trucks/semi-‐‑mobile retail format
To better establish its priorities, the company first needs to identify its resources. The purpose of
resource analysis is to understand their potential for generating profit.
Exhibit 2
*Note: Tangible assets include financial and physical assets such as income producing fixed assets.
Intangible resources include intellectual property, reputation, culture, and relationships. Human
capital comprises the skills and productive effort of employees.
Tangible
•high quality, premium blend coffee
•4,546 stores -‐‑ 80% in Canada
•10 production/distribution facilities in Canada (1 U.S.)
•corporate innovation center and Tim Hortons University (training)
•Tim Hortons Children'ʹs Foundation
Intangible
•strong customer loyalty and brand awareness in Canada
•successful marketing "ʺRoll up the Rim to Win"ʺ campaign giveaway
•Tim Hortons Coffee Partnership in Central America
•sophisticated distribution system
•strong franchise system
Human
•CEO with lengthy food industry experience
•Franchise Advisory Board of restaurant owners
7. CASE W14568 TIM HORTONS INC 7
Tim Hortons’ resources will be appraised by utilizing the VRIO (Valuable, Rare, Inimitable, Organized)
framework.
Exhibit 3
Resource Appraisal
VRIO FRAMEWORK
Resource/Capability V R I O
Tim Hortons Training University
Store network
Corporate leadership
Franchise Advisory Board
Strong franchise system
In-‐‑touch marketing department
Premium grade coffee
Corporate Innovation Center
Strong customer loyalty/brand awareness-‐‑-‐‑CA
Number of distribution facilities -‐‑-‐‑ CA
Tim Hortons Coffee Partnership
Sophisticated distribution system -‐‑-‐‑ CA
*Note—CA denotes Canada
8. CASE W14568 TIM HORTONS INC 8
The purpose of a VRIO analysis is to measure the strength of a firm’s resources/capabilities relative to
those of its competitors (Grant, 2014, pg. 128). Tim Hortons resources will be evaluated against
information given about the resources/capabilities of its competitors-‐‑-‐‑McDonald’s, Starbucks, Dunkin’
Donuts—in the case. The following qualitative metric will be used:
• Does it add value by enabling exploitation of opportunity or neutralization of threats?
• Is it rare among competing firms?
• Is it hard to imitate? Is there a cost disadvantage for competitors in obtaining it?
• Is a firm organized to exploit the full potential of its resources/capabilities?
The resources that satisfy all four dimensions of the VRIO are the ones that are most likely to provide
Tim Hortons with a long-‐‑term competitive advantage. The company’s competitive advantage lies with
its robust distribution network in Canada, its focus on product innovation, and its strong brand
awareness in Canada.
-‐‑-‐‑-‐‑-‐‑-‐‑-‐‑-‐‑
Competitive advantage is the primary source of superior profitability. TH’s competitive advantage
examined against the industry success factors, as discussed in Q1, helps to determine its immediate
strategic priorities.
Their immediate priority is to (a) continue innovating its menu. The company has a strong capability
in innovation and is poised to take advantage of consumer demand for increasing variety of ethnic and
healthy offerings. By innovating, the company could further differentiate itself in the Canadian and
U.S. market, which will keep them in line with the first core idea of their strategic plan. Their next
priority should be to (c) capitalize on food trends which are similar in scope to product innovation. TH
can leverage their strong distribution system to take advantage of opportunities in semi-‐‑mobile retail
formats like coffee trucks used on university campuses. Although, outside its franchise system, the
opportunity meshes with the fourth core idea of its strategic plan.
4. Evaluate whether the proposed acquisition by 3G Capital is a good move for Tim Hortons.
M&A’s are complex processes that do not always yield positive results even when horizontal mergers
allow for an increased growth in market share. It is important for companies to realistically assess how
a proposed merger and acquisition (M&A) will contribute to their strategies. TH’s motivation for being
acquired is to hasten its plans for international expansion by taking advantage of Burger King’s (owned
by 3G Capital) global experience and to increase its earnings per share (EPS).
Grant (2016) states that research into the performance of M&A’s points to their generally disappointing
outcomes that have destroyed value rather than create it (pg. 392) and with M&A failure rates veering
around 70%. Before deciding to execute an M&A, a cost-‐‑benefit analysis can be performed (from the
perspective of TH’s management) to help identify those decisions that will increase the firm’s value. If
the value of the benefits in the M&A exceeds the value of the costs, then TH should move forward with
the decision. If the reverse is true, then the decision to move forward with the M&A should be rejected.
9. CASE W14568 TIM HORTONS INC 9
Exhibit 4
Cost-‐‑Benefit Analysis
No numbers were given for the proposed layoffs. However, some number of employees will be
affected when the two companies combine their headquarters in the same facility in Canada. The
assumption will be made then that any proposed layoffs will mostly affect employees at the corporate
level. Although this negatively impacts those employees affected, the decision will likely be viewed as
a cost-‐‑saving measure for the company.
Tim Hortons could suffer a failed merger considering the overall high failure rate of M&A’s. One
reason for failure is due to problems in integrating different organizational cultures. Since TH and BK
plan to operate as two separate entities, the integration issue is neutralized. However, various other
factors could lead to failure leading to an expensive termination fee.
(Cost of merger) $12.5B x (average termination fee) 3.5% = $437.5M
The current price offering as of August 2014 is $94/ share, which is a 39% increase over the previous
month’s average price. That means the share price prior to the merger announcement was $57.
(Shares issued) 141,329,010 – (Treasury Stock) 293,816 = (shares outstanding) 141,035,194
141,035,194 x $94 = $13.3B value to shareholders vs. 141,035,194 x $57 = $8B value pre-‐‑merger
Since the value of the proposed M&A’s benefits outweighs the costs, Tim Horton’s management should
move forward with the decision. This will allow them access to an expanded supply chain already
possessed by Burger King in the international market where TH is weak and to scale more quickly.
The move will make them the 3rd largest fast-‐‑food restaurant chain the world.
1. Job losses as a
result of the
merger impacting
local area
economy
2. Integration
issues leading to
M&A failure and
termination
fees~3.5%
Cost -
1. Shareholders to
be paid $94/share;;
39% higher than
last month's avg
2. TH to leverage
BK's international
experience;;
combined sales to
=$23B
Benefit +
10. CASE W14568 TIM HORTONS INC 10
References
1. Schnarr, K., & Glenn Rowe, W. (2014). Tim Hortons, Inc. Richard Ivey School of Business
Foundation. No. W14568. Ontario, Canada: Ivey Publishing.
2. Grant, Robert M. (2016). Contemporary Strategy Analysis. West Sussex, UK: Wiley Publishing.
3. Alvarez, Andrew. (2017). IBISWorld Industry Report 72221a. IBISWorld Inc.