The loneliness of a fast-food franchise

Despite big investments to spruce up stores and expand menus, once-thriving restaurant chains are suddenly struggling to get ahead

by Tamsin McMahon

Simon Hayter

Analysts were understandably skeptical this month when Tim Hortons interim CEO Paul House blamed the company’s disappointing third-quarter financial results partly on “capacity issues” at some of its restaurants. Canada’s iconic coffee-and-doughnut chain reported that it’s on track to miss its annual growth target in part because lineups at some of its stores were simply too long. “In some ways, it is not good news, but in other ways, it is good news in the sense that . . . we’ve got lots of business,” House told a conference call last week.

It’s a remarkably positive spin on what has been an off year for the ubiquitous coffee chain. Sales growth at existing Tim Hortons stores has been below two per cent for the past two quarters, while growth of 2.3 per cent at U.S. stores fell well below its target of five per cent. What growth the company has seen has been from customers spending more at each visit, even as traffic to its stores declined. The report wasn’t all bad news. The chain did manage a $105.7-million profit for the quarter, up two per cent from a year ago.

If it’s any consolation for Tim Hortons, it is hardly alone. The fast-food industry has been a sea of bad financial news recently. McDonald’s reported that monthly sales declined 1.8 per cent in October, the chain’s first monthly drop in a decade. Burger King, which began publicly trading this year after a two-year hiatus, reported that net income fell 83 per cent in the third quarter as it continues to sell off stores in the U.S. Wendy’s revealed third-quarter earnings that missed analysts’ targets. In Canada, A&W said its year-to-date sales have dropped one per cent compared to 2011. It’s an unusual predicament for an industry that traditionally benefits from tough economic times. Even if the average customer cuts back on fine dining during a recession, fast-food chains rarely have trouble selling burgers and fries. Problems have more often been of their own making, from dirty restaurants to bad menu choices, like McDonald’s ill-fated pizza experiment in the 1990s.

But North American fast-food chains are under a two-pronged assault these days. On one side is the rise of so-called fast casual chains, like Panera Bread Co. and upscale burger joint Five Guys Burger and Fries, which offer fresher fare in comfy surroundings at a slightly higher price. (In contrast to the big-name chains, Panera Bread reported 28 per cent third-quarter growth.)

On the other side is increasing competition from within the fast-food industry itself at a time when people are demanding more choices and better value for their dollar. It’s become a full-on food brawl. Both McDonald’s and Subway have tried to lure customers with free coffee. In response, Tim Hortons offered a rare morning discount in September: coffee and a breakfast sandwich for less than $2. “Everybody is trying to crowd into the coffee category,” House said. “So the competition has intensified from many positions, and given that the economic conditions aren’t great, everybody is trying to find some share from somebody else.”

McDonald’s spent an estimated $1 billion this year to renovate its Canadian stores, adding couches and fireplaces and expanding its McCafe menu of specialty coffees and health-conscious smoothies. That followed an overhaul of its U.S. stores a year earlier. But even as McDonald’s boasted it was stepping up its game, so was everyone else. Burger King launched an international push to stack its menu with new salads and its own gourmet coffee line, which it promoted in star-studded ads featuring Jay Leno and David Beckham. Wendy’s revamped its logo this year for the first time in 30 years and is in the midst of an image makeover to add flat-screen TVs, natural lighting and more comfortable chairs to its restaurants. A&W refreshed its logo, upgraded more than 100 of its restaurants with more modern furnishings and launched a discount menu of “Buddy Burgers” for under $3.

Tim Hortons has also jumped on the trend, looking to expand its range of offerings and make its stores more attractive. So far this year the coffee giant has upgraded 2,000 of its stores with free wireless Internet and added a line of panini sandwiches to its menu.

The competition has been particularly intense for fast-food chains in Canada as the ongoing economic woes in the U.S. have driven American companies north of the border in search of growth. Missouri’s Panera Bread has opened six locations in Ontario. Texas-based Five Guys has more than 50 locations across the country. Chipotle Mexican Grill, the gourmet burrito chain, set up four locations around Toronto and plans to open another one in Vancouver by year’s end. California burger chain Carl’s Jr. now has two locations in B.C., and Colorado’s Smashburger opened its first location in Calgary in the spring. “Canada is now outperforming the U.S. market from a restaurant standpoint,” says food industry analyst Robert Carter of research firm NPD. “When the restaurant owners look around to determine where they need to expand, Canada is a very attractive solution.”

The problem for big-name chains like Tim Hortons and McDonald’s, says Darren Tristano of food industry consultancy Technomic, is that in many cases they’ve already done so much to streamline their operations and expand their market share that there’s little room for them to grow. “At some point you’ve optimized your selling opportunities, and without increasing prices or moving to a more expensive menu it’s difficult to continue to achieve high levels of growth,” he says. “That’s one element where we’re seeing major brands hitting the wall.”

Overall retail prices have climbed as much as eight per cent a year for the past few years, while restaurant prices have inched up by closer to three per cent. That’s left fast-food chains scrambling to add new items to raise the average cheque price while tinkering with their discount menus to keep prices low. McDonald’s opted to remove a slice of cheese from its double cheeseburger rather than raise the cost of the burger.

Fast-food chains have responded to demands for more fresh food by adding a slate of salads, veggie burgers and yogourt to their menus. But even as half of all consumers report that they choose their restaurant because it offers low-calorie options, Tristano says research shows most people still end up ordering from the traditional menu.

Although health-food items have been a money loser for fast-food chains, restaurants can’t afford to drop them from their menus since the mere idea of a low-calorie menu gets people coming through the door. It’s part of what Tristano says is growing demand from consumers for a more customized meal, one they want served in less time for less money.

Tristano thinks the future growth area for fast food may not be inside a restaurant at all. Already Tim Hortons and Starbucks offer their branded coffee in grocery stores. McDonald’s announced last month that it’s going to start selling its ground coffee in stores. Tristano predicts the company might also start offering its branded smoothies and Egg McMuffins in the supermarket and could even launch a catering service, offering its breakfast menu to corporate morning meetings. Burger King has already begun experimenting with home delivery as it searches for every little ounce of extra revenue. “It’s not like these restaurants can go and charge more money,” Tristano says. “Consumers pull back when that happens. So they’re kind of stuck.”

Catering fast-food burgers and fries may seem like a stretch, but short of another round of free coffee and discount breakfast specials, it may just be the fast-food industry’s best shot at luring its fickle customers back.




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The loneliness of a fast-food franchise

  1. Thanks to the new pannini line at Tim’s, I spent 25 minutes in a drive-thru waiting for a cup of coffee because all three cars in front of me ordered them. If the store can’t get them out quick, don’t offer them through the drive-thru.

    • Timmy’s always seems chaotic behind the counter. No wonder the lines are so long.

      • yep yep totes agree bro :)

  2. Tim Horton’s has now removed it’s lasagne and egg salad off the menu. Good thing the lasagne was bland. I believe A&W and DQ is overpriced for what you get.

  3. Tim Hortans Has gone to pot since Paul House has taken over, Sadly,

    long time head office employees have seen a down turn in office moral. Unlike Ron Joyce, Paul House is disconnected from his staff and greedy man. This down fall was seen my many in house as soon as he took over. He is without any any interest in company growth.

  4. In addition to ones comment re growth. Tim Hotons has had many opportunities for growth during Pauls reign. That means even when Don Schroeder was CEO. Paul was controlling Dons decisions. Diversification opportunities for company growth came and went. Yet, the lack of desire to think of company growth and indecision, gave loss to those opportunities. Paul House has doubled his salary (with excuse he is working twice as hard), after letting Don Schoeder go (without cause) and yet Paul is in conflict of interest by allowing himself to continue being on the Board of Directors and taking “conveniently temeporary” CEO position. He has now much too much power. And sadly, it is power in the wrong hands. All are afraid of loosing their position on the board to challenge him. It is the greedy power trip. And now sadly the result is the downfall (not unlike Nortel) of an iconic Canadian Company. Shame on you Paul!
    How will you be remembered? There needs to be a governing body that oversees the Board of Directors actions, Yet there is nothing of the sort.
    That is how large company corruption occurs.
    Sorry Tim! You where a great part of Canadian history, yet ‘some’ just don’t really care.

  5. Yummm mcdonalds

  6. DDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDD

  7. piece of shit suck my dick

    • dylan shut up

  8. d? nah that’s dylan

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