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Shopping Centers Today -> June 2004
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STRONG BREW
Hortons pulls ahead of rivals back home, grows in U.S.
BY SUSAN THORNE
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| Hortons sells a lot more than coffee. It is the No. 1 breakfast chain in Canada, having overtaken McDonald’s last year in total Canadian sales. |  |
Last year Hortons served up C$2.7 billion ($2 billion) worth of comfort foods and coffee at 2,352 outlets across Canada. That compares with second-place McDonald’s Canada’s C$2.37 billion from 1,300 outlets.
Now “Timmy Ho’s,” as it is affectionately nicknamed, continues to expand in the United States. In 1995, when it had only eight U.S. units, the chain merged with Dublin, Ohio-based Wendy’s International. Today Hortons, still based in Oakville, Ontario, runs 183 restaurants in the United States.
Tim Hortons started out in 1964 as a doughnut and coffee shop in the Ontario steel-industry city of Hamilton. Within 20 years it had grown into a chain of 200 stores. About then the company began diversifying its menu offerings and introducing such innovations (for the time) as 24-hour drive-through service, nonsmoking facilities and the operation of units in hospitals, universities and airports.
Today customers line up at the self-serve counter for bagels, baguette sandwiches, chili, soup in a bread bowl and the signature “double-double” — a cup of house-blend coffee with double cream and double sugar. The younger crowd is particularly given to iced cappuccino and party packs of “timbits” (bite-size doughnut nuggets).
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“We have 22 percent of national quick-service restaurant sales and approximately 70 percent of the coffee and baked-goods category,” said Greg Skinner, the company’s corporate communications officer for Canadian operations. “And we sell one out of two bagels in the country.”
Tim Hortons is the No. 1 breakfast chain in Canada, Skinner says, and it’s working to topple McDonald’s from the top lunchtime position. Hortons managed to pull ahead of McDonald’s in total sales Canadawide in 2003, and its mostly franchised restaurants also compete at close range with such upmarket names as Starbucks on downtown main streets.
For a number of reasons, however, Starbucks cannot be considered a direct competitor; Hortons leans toward a more blue-collar demographic than Starbucks, for one thing, and though the two do compete in certain downtown sites, the more citified Starbucks is far less visible in many of Hortons’ drive-through areas. Their offerings differ too; Hortons does not serve expresso-based gourmet coffees, while its relatively wide menu includes hot foods.
Flexibility is certainly important in the Tim Hortons formula, says Blake Hudema, a retail consultant and president of the Vancouver, British Columbia-based Hudema Consulting Group. (Hudema Consulting has no business relationship with Hortons.) “Tim Hortons has been able to have a core group of products and then shift with the current trends,” Hudema said. “If bagels come into vogue, they offer bagels, if muffins are in fashion, they have muffins. And their great brand of coffee has let them capitalize on the re-emergence of coffee-drinking.”
Profit margins on favorite items are substantial, Hudema says. “Coffee is a very, very cost-effective product, and their doughnut pricing is brilliant,” he said. “They make a lot of money when you buy a single item, which costs almost as much as buying three or four, or if you buy half a dozen or a dozen. Tim Hortons makes a profit off the volume.”
As far as competitors are concerned, the company’s strategy relies heavily on putting the most restaurants it can where they will be most convenient to customers.
“Coffee is still our core product,” Skinner said. “It makes up more than half of Canadian sales, and we define our competition as anybody who offers coffee conveniently, with quick service at multiple locations.”
If that rival is a gas station, say, then Tim Hortons ensures that its own products are equally available to those customers. It has, for instance, set up outlets at Esso Tiger Express gas stations in Canada and Mobil stations in the United States.
“Once we out-convenience the competition, they’re not an issue,” Skinner said. “We just need to get more locations out there. Penetration solves our competitive problems each and every time. Our primary strategy is to outnumber and out-operate the competition.”
In the United States, Tim Hortons is entering new markets with its traditional full-line restaurants and later filling gaps with smaller, nontraditional units. From southern Ontario, the company has spread to the Great Lakes region of Michigan, Ohio and New York. It will be confining its growth to this region for the time being. The next expansion phase is likely to be in adjoining states, such as those in New England, says Chris Laganos, the company’s senior vice president of operations for the United States and Western Ontario.
The potential for growth in the United States is “unlimited,” he says. “We have over 2,300 stores in Canada, where there are 28 million people, so for the 290 million population in the U.S., a huge number of stores is possible.” The stats would suggest that. For 2002 and 2003, Tim Hortons’ average U.S. same-store sales growth was 7.2 percent year over year, versus 6 percent for its Canadian stores.
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The chain is putting a lot of pressure on the competition in the Buffalo area, says Arun K. Jain, a professor at the University at Buffalo (N.Y.) and chairman of its marketing department. “Tim Hortons has had phenomenal success, wiping out Dunkin’ Donuts and local small-time operations,” he said. “They have just taken over the market.”
Jain credits good coffee, well-chosen locations, friendly staff and clean, cheerful premises for this success. “And they’ve kept the price right — not too underpriced, not too overpriced, so they are cheaper than Starbucks.”
According to Jain, supermarkets that carry doughnuts and bagels don’t appear to hurt Tim Hortons. He says he has seen customers pop into a Hortons next door to a supermarket after completing their grocery shopping. “There’s somebody there [at the company] who’s a very sharp thinker,” he said.
Tim Hortons has sufficient capital to expand rapidly in the United States, but the pace of growth is limited by the company’s human resources capacity, Laganos says.
“You have to service the brand with people who are trained in the Tim Hortons culture,” he said.
For now, Tim Hortons is refining its model and strategy for entry into new markets. In February it experimented with the simultaneous opening of four stores in Rochester, N.Y. This multiple launch was meant to test the effectiveness of a highly publicized, geographically concentrated market entry, and the approach was quite successful, according to Laganos. The company could also expand through acquisition, as it did in Ohio and Michigan, where it bought 30 Rax and Hardees restaurants.
Expansion into shopping centers will probably proceed much as it has in Canada, where Tim Hortons can be found at 185 locations both on mall pads and within regional and community centers. “But we’re not heavily pursuing those locations for the time being,” Laganos said.
Systemwide sales on both sides of the Canada-U.S. border totaled $2.14 billion in 2003 ($141 million for the U.S. side alone).
Hudema says Canadian companies going into the United States have sometimes treated it as a single retail market, with disastrous results. Hortons won’t do that, he says, and the chain possesses the adaptability to change as it grows beyond the Great Lakes into other regions.
“Their ability to shift and move and to recognize individual and changing markets will help them as they advance further into the United States, where there are such major regional differences,” he predicts. “Maybe they can have a maple-dip doughnut in New England, a chipotle-dip in the Southwest and a Cajun-dip in Louisiana.”
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