‘We also must win in espresso’: Tim Hortons charts new phase in multi-year turnaround

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Tim Hortons’ parent company is charting a new phase in its campaign to revive the coffee chain, looking to push into lunch, dinner and cold drinks after spending two years rehabilitating the brand’s reputation for coffee and breakfast.

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For years, Restaurant Brands International Inc. (RBI) struggled with frustrated franchisees and flagging sales at Tim Hortons. The company tried boosting the brand with a barrage of flashy, “on-trend” menu add-ons that only further complicated kitchens, slowed down drive-thrus and led to more grumbling among restaurant operators.

Just before the pandemic, RBI acknowledged its menu experiments weren’t working and vowed to go back to basics instead. The plan was to improve on what Tim Hortons was known for — mainly coffee, doughnuts and breakfast — while also modernizing the chain’s digital operations and loyalty program. But within months, pandemic lockdowns started, morning commuters disappeared and sales at Tim Hortons plummeted. Between April and June of 2020, Tim Hortons same-store sales growth — a retail metric that gives a clear picture of year-over-year performance by ignoring results from recently opened stores — shrunk by almost 30 per cent.

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“When’s the last time you ordered a coffee and a bagel at 6 a.m. to be delivered to your house?” RBI’s chief corporate officer Duncan Fulton said at the time.

But despite the pandemic challenges, RBI is now claiming victory in “phase one” of its back to basics plan. At a conference for investors on May 3, Tim Hortons executives boasted that the chain grew its market share in hot brewed coffee in Canada to 72 per cent last year, compared to 70 per cent in 2019. Tim Hortons’ market share in the fast-food breakfast category grew to 59 per cent in 2021, compared to 57 per cent in 2019, which is “the highest it has been in over five years,” according to Axel Schwan, president of Tim Hortons’ North American operations.

Schwan said the chain was able to grab market share because of a series of changes to its menu and product quality, including the switch to fresh-cracked eggs in breakfast sandwiches, the “wildly successful” Timbiebs line of Timbits in partnership with Justin Bieber, and the rollout of new coffee-brewing machines and water-filtration systems.

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“As you all know, the taste of water changes city by city,” Schwan told investors. “It was important we deliver the same taste profile no matter where you live or travel to.”

Phase two of the back-to-basics plan is focused on “accelerating growth,” partly through branching out from the chain’s coffee-and-doughnut roots, he said. He forecast annual same-store sales growth in the “mid to high” single digits for 2022.

On May 3, RBI reported gains in both sales and profit at Tim Hortons for the first quarter of 2022, ended March 31. Same-store sales grew by 8.4 per cent in the quarter, shy of forecasts of 9.6 per cent, according to Bank of Nova Scotia analyst Patricia Baker. Same-store sales in Canada grew by 10.1 per cent, compared to a decline of 3.3 per cent last year.

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Sales jumped to US$1.56 billion, up almost 13 per cent from US$1.38 billion this time last year, according to an earnings report. The jump in sales slightly surpassed pre-pandemic sales levels in the first quarter of 2019, when Tim Hortons’ sales were US$1.55 billion. Digital sales now represent 36 per cent of total sales.

In a research note for investors, Citibank found Tim Hortons’ Canadian sales to be “disappointing” with sales “down five per cent versus pre-COVID levels.” Citi suggested the Tim Hortons investor conference following the earnings release was meant “to reset the narrative on what happens from here.”

At the investor conference, Tim Hortons chief marketing officer Hope Bagozzi said her team is looking to expand further into afternoon and evening meal sales, which currently only account for about 30 per cent of sales — well below the chain’s peers that depend on lunch and dinner for more than half of sales.

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Tim Hortons’ share of the so-called “pm” category is only four per cent, she said, leaving a lot of room to grow. Bagozzi is also planning for Tim Hortons to evolve and become less reliant on hot brewed coffee.

“While brewed coffee will always be pivotal to our business, to continue to build our credibility as a beverage leader we also must win in espresso, which is a $650-million market in Canada,” she told investors. “Cold beverages represent a $4.5-billion market in Canada and they’re critical in our efforts to modernize the brand and be relevant to that younger guest.”

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The turnaround is happening at a time of runaway inflation, and RBI is facing major increases in ingredient prices. CEO José Cil said the company takes a measured approach in passing on cost increases through higher menu prices, to make sure the hikes don’t push costumers away.

“We do a lot of work, we do a lot of research, we spend a lot of time thinking about and testing where we can go from a pricing standpoint,” he said at the investor conference, adding that Tim Hortons has kept its price increases in line with inflation as measured by the Consumer Price Index, which hit a 31-year high in March at 6.7 per cent.

Tim Hortons’ adjusted EBITDA was US$231 million in the quarter — the highest earnings of all RBI restaurant brands, including Burger King and Popeyes Louisiana Kitchen.

RBI booked adjusted net income of US$295 million on revenues of US$1.5 billion in the quarter, compared to profits of US$257 million in the first quarter of 2021. RBI’s adjusted earnings per share increased almost 10 cents, to 64 cents.

• Email: jedmiston@nationalpost.com | Twitter: jakeedmiston