(Bloomberg) — Tim Hortons coffee and doughnuts are about as closely linked with the Canadian identity as hockey and universal health care, but the institution is under attack.
That’s the view of many of the chain’s franchisees, who are chafing under the corporate ownership of Restaurant Brands International Inc., the fast-food conglomerate that also runs Burger King and Popeyes Louisiana Kitchen. They claim that efforts to squeeze money from restaurant operators are destroying Tim Hortons’ nice-guy image and forcing them to scale back community programs, including youth hockey.
Restaurant Brands, which subsumed Tim Hortons in 2014, is backed by the Brazilian investment firm 3G Capital — famous for pursuing hard-nosed deals and then aggressively managing expenses. At Tim Hortons, corporate is now charging franchisees more for everything from rent to bacon, which they say is hurting their bottom lines, boosting prices at the register and irking customers.
“We won’t be able to give the service that we’re known for,” said franchisee David Hughes, who owns five Tim Hortons in southern Alberta. “These guys have turned everything into a profit center.”
Tensions between franchisees and corporate bosses are common throughout the restaurant industry. But the rift at Tim Hortons has been especially contentious. Hughes and about half of the chain’s Canadian owners formed a coalition in March called the Great White North Franchisee Association, aiming to amplify their concerns. Last month, the group filed a class-action suit arguing that Restaurant Brands executives have breached their obligations to local operators.
As Tim Hortons management charges higher prices for coffee and other supplies, restaurants have had to lay off workers, the franchisees say. Store owners are stocking up on bags of sugar at Costco, where it’s cheaper than what the corporate parent charges. Even knives and scissors are more expensive under 3G.
Daniel Schwartz, a 3G partner who serves as Restaurant Brands’ chief executive officer, said that the company has met with the Great White North Franchisee Association. But he doesn’t want to argue with franchisees in public.
“There’s been a lot of change,” Schwartz, 36, said in an interview last month. “With change comes anxiety and uncertainty.”
Tim Gilks, a former Tim Hortons executive who runs a commodities-consulting firm, says the company is now charging each restaurant about $13,750 more for coffee a year. While commodity costs have gone up for everyone, corporate is pushing prices well beyond that increase, he said.
Diners are noticing the changes, especially the higher menu prices, Hughes said. In Alberta, cups of coffee are now 2 cents more expensive than they used to be. That doesn’t sound like much, but coffee drinkers are creatures of habit — and even a small uptick may register with them.
Franchisees have been increasingly vocal since 2014, when 3G and Warren Buffett’s Berkshire Hathaway first combined Tim Hortons with Burger King. That deal created Restaurant Brands, which located its headquarters in Tim Hortons’ longtime home of Oakville, Ontario.
‘Business as Usual’
Wade MacCallum, who owns six Tim Hortons in Canada, said he was told things would be “business as usual” when Restaurant Brands took over. Instead, 3G has overhauled everything, he said.
“The 3G business model is based on cost cutting,” said MacCallum, who serves on the board of the franchisee association. “I don’t think there’s a part of the business they haven’t touched.”
It’s not just restaurant operations that are affected, franchisees say. Restaurant Brands also has cut local marketing from a franchisee-funded advertising pool. Hughes said his area used to get between $60,000 and $100,000 a year to spend on community programs such as hockey, camps for children, swimming days and local barbecues.
“You’ve got three or four generations that have been brought up with Tim Hortons,” said Hughes, who runs the Great White North group. “We were involved in the community. Restaurant Brands, they’re not interested in that. All those things that we are famous for — the kids’ camps — those are the things that make us different than everyone else.”
Restaurant Brands said that there’s a dedicated team that supports franchisees across North America, and the company has been focused on cultivating the Tim Hortons brand over the long term since it took over in 2014.
“We are very proud that in each year since, we have been able to grow same-store sales and franchisee profitability in both Canada and the U.S.,” the company said in an emailed statement.
Restaurant Brands also has rewarded investors, with the stock gaining 28 percent last year and about 30 percent so far in 2017.
But there have been recent signs of a slowdown. Tim Hortons’ same-store sales slipped 0.1 percent last quarter, missing analysts’ projections. That could add pressure to mend ties with franchisees.
The chain was founded more than 50 years ago by hockey legend Tim Horton, who first sold coffee and pastries for 10 cents each. The operation — known by customers as “Tims” — has since grown to about 4,600 locations globally, becoming a ubiquitous presence in Canadian shopping centers, airports and street corners from Vancouver to Halifax.
Tim Hortons is critical to Restaurant Brands, which got more than 70 percent of its revenue last year from charging the franchisees for food, equipment, royalties and rent. That makes it more lucrative than Burger King, whose franchisees don’t have the same purchasing deal.
Sales are also higher at Tim Hortons, which last year averaged $1.39 million a store, versus $1.16 million for Burger King.
In its lawsuit, the Great White North association is seeking C$500 million ($387 million) in damages. The group said it filed the complaint because of the parent company’s “lack of transparency and unwillingness to answer important questions.”
Last month, the association announced that about half of U.S.-based Tim Hortons store owners had also joined the movement. There are about 700 Tim Hortons shops in the U.S.
“We built this brand one store at a time, and it was based on that community thing,” Hughes said. “Somehow, we’ve got to get back to that.”
–With assistance from Craig Giammona
©2017 Bloomberg L.P.
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