Tim Hortons finds tepid reception in U.S.

Critics say coffee, doughnut chain digging self into a hole

7/19/2013
BLOOMBERG NEWS
TIM-HORTONS-1

The Tim Hortons chain of coffee shops is a juggernaut in Canada, where it has more locations than McDonald’s. However, the brand, named for its hockey-legend founder, hasn’t caught on in the United States — it has captured just 2.7 percent of the market since its debut here in 1984.

BLOOMBERG NEWS

The Tim Hortons chain of coffee shops is a juggernaut in Canada, where it has more locations than McDonald’s. However, the brand, named for its hockey-legend founder, hasn’t caught on in the United States — it has captured just 2.7 percent of the market since its debut here in 1984.
The Tim Hortons chain of coffee shops is a juggernaut in Canada, where it has more locations than McDonald’s. However, the brand, named for its hockey-legend founder, hasn’t caught on in the United States — it has captured just 2.7 percent of the market since its debut here in 1984.

NEW YORK — New York City tourist Raeann Boynton stares at the Tim Hortons restaurant menu on 53rd Street and says she’s not impressed.

“If I have the option to go to Starbucks or Tim Hortons, I’m going to Starbucks,” said the 17-year-old student from New Orleans, who ordered an iced capuccino at Tim Hortons during a recent holiday. Starbucks has “much more variety, and it’s more convenient since there are so many of them.”

Tim Hortons’ failure to catch on with consumers like Raeann in the United States, where the coffee and doughnut chain’s Canadian charm means little in a crowded fast-food market, is causing growing unrest among its shareholders.

Activist investors say the $664 million U.S. expansion over the last decade has been a waste. At stake may be a forced retreat from a market that promises the Oakville, Ont., company potential growth as it reaches saturation at home.

“They are meeting the point at which they won’t be able to open any more stores in Canada,” said Jim Danahy, chief executive officer of Customer LAB, a Toronto retail consulting firm. “They know long-term growth will have to come from the U.S.”

Tim Hortons recently faced criticism of its U.S. strategy from activist investors Highfields Capital Management LP of Boston and New York’s Scout Capital Management LLC, which hold 4 and 5 percent of the company’s shares, respectively. Both investment firms pressured the company to scale back U.S. expansion, and instead direct capital to share buybacks.

“The company’s consistent and long-standing underperformance should long ago have been a wakeup to Tim Hortons’ board and management,” Scout said in a letter on June 25. “We urge you to curtail the use of the company’s cash flow to fund real estate or new store capex [capital expenditure] in the U.S.”

Scout Capital declined to offer further comment, Josh Pekarsky, a spokesman for the company, said in an email July 16. Highfields Capital didn’t respond to a voice mail asking for comment.

With a U.S. market share of only 2.7 percent, according to retail consulting firm Technomic Inc., Tim Hortons, which opened its first U.S. store in 1984, hasn’t been able to replicate the institutional status that it enjoys in Canada, where it claims to sell eight of every 10 cups of coffee sold. The chain was founded in Hamilton in 1964 by late National Hockey League player Tim Horton, the man credited with inventing the slap shot. The chain plays off its founder’s hockey roots, sponsoring minor hockey development programs, and can be found in practically every city in the country.

The company has 3,453 locations in Canada, more than McDonald’s Corp. Tim Hortons has 13 locations in the metro Toledo area.

Even with the slow growth in the United States, investors have pushed the shares higher. Tim Hortons has risen 21 percent this year, compared with a 1 percent gain in the Standard & Poor’s/​TSX Composite Index, Canada’s benchmark equity gauge. Starbucks of Seattle has gained 27 percent, while McDonald’s of Oak Brook, Ill., has risen 13 percent.