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At 6 p.m. on a Friday last July, nine Dunkin’ Donuts restaurants throughout Manhattan closed shop quietly — a little early, but otherwise inconspicuously. Over the next 56 hours, an army of contractors and designers gutted, rebuilt and re-equipped the spaces. By Monday morning, sporting red balloons and free coffee, the stores reopened as Tim Hortons outlets.
The New York media jumped on the story, declaring a “donut war” and speculating how an unfamiliar Canadian brand would fare against not just big-name coffee chains like Dunkin’ and Starbucks, but with finicky, choice-saturated New Yorkers in general.
Laura Friedman, a 27-year-old professional who bought her morning coffee at the Penn Station Dunkin’ Donuts for months, says she was slightly annoyed to arrive that Monday morning to find her regular coffee no longer available. Though she still hasn’t been won over by Tim’s coffee, she says she’ll keep coming back, simply because it’s on the way to her morning train. As Friedman’s story shows — in New York City, location will be everything for Tim Hortons.
Tim’s N.Y.C. blitz has been an uncharacteristically splashy and swift debut for a chain that started inching south of the border 25 years ago — cautiously, strategically and with uneven success. Last month, in New York, Tim’s president and CEO Don Schroeder told analysts and investors at an industry conference that the chain is bulking up its efforts to grow in the United States — a plan that is integral to the future growth of a chain that Canadians love but most Americans still don’t know. With a market capitalization of $5.5 billion, Tim’s may be North America’s fourth-largest fast-food chain, but it still lacks the global reach of the top three: McDonald’s, Yum Brands (owner of KFC, Pizza Hut, Taco Bell) and Starbucks.
Tim’s slide into such prime New York real-estate resulted from an opportune fallout between Dunkin’ Donuts and the Riese Organization, a restaurant franchisee and real-estate company. After the two officially ended their 26-year relationship, Riese approached Tim’s to fill 12 spots formerly occupied by Dunkin’. It was a mutually beneficial opportunity: Riese needed a similar coffee concept to franchise to keep its high-volume of customers, while the locations offered Tim’s huge brand exposure in the biggest U.S. market at a time when the company was ramping up its foreign growth plans. Taking out several locations of a chief rival along the way was the cherry on the deal.
“This really is a brilliant arrangement,” says James Gregory, CEO of CoreBrand, a Manhattan-based marketing firm. “The customer is sort of forced into it. All of a sudden Dunkin’ Donuts is gone and there’s this other coffee shop, and the customer will think, ‘Well, I’m here now, so I might as well try it.’ If Tim’s delivers on the product, then they’ve got a customer for life.”
Tim’s now has 11 outlets scattered throughout Manhattan and Brooklyn. Along with Penn Station — a sprawling underground commuter complex some 500,000 people march through every day — its locations include choice spots like Madison Square Garden and 5th Avenue, with another slated to open in a Times Square ice cream shop as part of a co-branding deal it signed last year with Cold Stone Creamery. But it won’t always be able to count on such opportunities as it continues to expand south.
Tim’s first foray into the U.S. wasn’t much of a stretch, either. In 1984, it opened shop in Tonawanda, N.Y., a suburban community north of Buffalo, just 16 kilometres from the Canadian border — close enough to have at least some name recognition. Though it took years, the chain’s popularity grew, and today the metropolitan Buffalo area is home to about 100 Tim Hortons stores (plus 100 kiosks in Tops supermarkets), making it the company’s most developed U.S. market.
For a decade, Tim’s slowly built its presence in New York, Michigan and New England. Then, in 1995, the coffee chain merged with Wendy’s International, operator of the eponymous U.S. burger restaurants, giving Tim’s a renewed focus on branching south. Over the next several years, it continued to build in the areas where it had already established itself, while expanding into Ohio, Kentucky and West Virginia, following Wendy’s purchase of ailing sandwich chain Rax. In 2004, Tim’s significantly ramped up its U.S. store count when it acquired a bankrupt coffee chain, outbidding Dunkin’s parent company for 42 outlets in southern New England — an area Schroeder calls “Dunkin’ heartland.” “It was a challenge for us going into Dunkin’s backyard,” he admits. “They’ve been there forever.” Dunkin’s grip on the region proved hard to fracture, however, and by 2008 Tim’s had to shut down 11 money-losing stores.
Though Tim’s spun off from Wendy’s in 2006, the company continued growing its established U.S. markets, while plotting ways to break into new ones. Today, it has more than 550 U.S. locations across 12 states (still a far cry from Canada, where Tim Hortons operates nearly 3,000 stores, half of which are in Ontario). And while the coffee chain started showing a profit in the U.S. only last year, its same-store sales were up 3.1% in Canada and 4.3% in the U.S., at a time most U.S. fast-food chains were losing money. “We think we can do about 500 to 1,000 more stores in Canada,” Schroeder says. “But we know eventually those expansion opportunities will shrink, and we need that growth engine in the U.S. operating on all cylinders by then.”
That engine often has been slow to accelerate in new markets, despite Tim’s near domination in others. “What the Americans can’t get their heads around is, if Tim’s is such a great growth concept, why aren’t they opening 1,000 units a year, like Starbucks,” says Keith Howlett, an analyst with Desjardins Securities. In the fast-food industry, Tim’s low-cheque, high-frequency model is unique. Where a McDonald’s customer might spend an average of $8 per visit, a Tim’s patron could drop as little as 90¢ for a single donut. But Tim’s is counting on that customer to return, maybe again that day, or at least a few times during the week. “With this model, Tim’s needs a fair number of locations in a given area to give people the opportunity to visit in multiple ways, hence the drive-thru and 24-hour service,” Howlett says. “The model is slow to get in place, but once it’s inculcated, it’s not that easy to displace.”
Take Buffalo, Tim’s biggest U.S. success. From 1985 to 1991, the company opened only four stores; during the next five years it opened 15. “All of a sudden, it’s as if the lights came on, and you never know when that’s going to happen,” says Schroeder. “Every time we’ve gone into a new market we’ve struggled for a long time — in Quebec, Western Canada, even in southwestern Ontario. We are a 45-year overnight success story. … We know the formula works. Now our goal is to shorten the timeline between entering a new market and being profitable.”
To achieve that goal, in March 2008 Schroeder tapped gregarious Tim Hortons veteran Dave Clanachan as the company’s chief operations officer for its U.S. and international markets — the first executive position dealing solely with on-the-ground expansion strategies. Clanachan’s career at Tim Hortons has been an almost cliché old-school rise, having started out unloading trucks, working up to making donuts and eventually managing stores. It’s a career path that allows him a unique perspective: “We’re not the 800-pound gorilla that we are in Canada,” says Clanachan of the chain’s foreign presence. “We don’t come with the marketing budget of some of the big guys, so you really have to think back to your roots and how you developed the brand back then — getting out in the community and bringing the brand to the people.”
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