BUSINESS

A DYNAMIC DUO

Wendy’s puts the bite on Tim Hortons

ANDREW WILLIS August 21 1995
BUSINESS

A DYNAMIC DUO

Wendy’s puts the bite on Tim Hortons

ANDREW WILLIS August 21 1995

A DYNAMIC DUO

Wendy’s puts the bite on Tim Hortons

BUSINESS

John MacKenzie had a problem with his Tim Hortons doughnut store in Truro, N.S. The franchise was on a small plot of land, with no room for a drive through window. As a result, sales were flat. But just down the road, near a major highway, was a Wendy’s Old Fashioned Hamburgers outlet with a big parking lot. So 18 months ago, MacKenzie went to Ron Joyce, co-founder and owner of Tim Hortons, with an idea about mixing Timbit doughnuts with hamburgers. With Joyce’s blessing and approval from Wendy’s head office, MacKenzie built a Tim Horton’s kiosk next to the Wendy’s and supplied it with doughnuts from the kitchen of his other store. Business boomed. MacKenzie says his tiny drive-through now sells about $600,000 of coffee and doughnuts each year, as much as the average full-sized Tim Hortons. “We gave people all sorts of reasons to get off the highway,” says MacKenzie. He adds, “Now, Tim

Wendy’s chief executive Gordon Teter says the combined company will build freestanding stores, and both divisions will continue to open outlets in such new locations as department stores, or operate small kiosks in schools and hospitals. The hamburger chain plans to open up to 60 stores a year in Canada, plus about 30 combined stores. Tim Hortons, meanwhile, is projected to grow at a rate of 200 stores a year in Canada. It is also slated to branch out in U.S. cities such as Seattle, Detroit and Boston. Tim Hortons already has 11 stores in Buffalo, but that is considered to be far below market potential. Canada boasts a doughnut shop for every 11,000 citizens. In the United States, however, there is only one doughnut shop for every 68,000 people.

The decision to sell Tim Hortons was also driven by Joyce’s strategy for a smooth transfer of power at head office. Joyce says with his 65th birthday looming in Octo-

Hortons is busy morning and night, while Wendy’s traffic is lunch and dinner. We’re the perfect mix.”

The success of this and other ventures with Wendy’s over the past three years paved the way for a deal last week that saw Joyce, the 64-year-old chief executive and sole owner of TDL Group Ltd., the Oakville, Ont.-based parent company for Tim Hortons, sell his chain in exchange for 16.2 million shares in Wendy’s International Inc. of Dublin, Ohio, a stake worth $408 million. Joyce joins the Wendy’s board of directors and becomes the company’s single largest shareholder with a 13.5-percent stake. In addition, Wendy’s assumed $170 million of TDL debt.

The takeover came as no surprise to Tim Hortons’ 21,000 employees across Canada. The two chains have a close relationship that began at a 1991 golf game between Joyce and Wendy’s founder Dave Thomas at his private club in Florida (Thomas won the match). That bond has been nurtured by co-operative ventures like MacKenzie’s in Truro and 13 other combinations of Tim Hortons and Wendy’s restaurants built in the past three years. Says Joyce: “I’ve had a few moments of heartache over this, but I believe you could not find two companies with more similar philosophies than ours.”

The philosophy is based on a shared vision of putting doughnut and burger outlets on even more Canadian streets—and on Joyce’s desire to aggressively push into the U.S. market. Tim Hortons opened its 1,000th store in Ancaster, Ont., early this month and the target at head office is to have 2,000 outlets by the year 2000—with particular emphasis on growth in the western provinces and Quebec. Joyce expects Tim Hortons’ sales to jump from $603 million in 1994 to $1 billion by 1997. Wendy’s sold $1.9 billion of hamburgers, fries and Frosty desserts last year at more than 4,500 outlets worldwide.

ber, he wanted to ensure a new management team was ready, and play a little more golf. Gary O’Neill, who owns 22 Tim Hortons and four Wendy’s outlets around Moncton, N.B., says that he and other franchise owners recently started to press Joyce on the issue of succession planning. “We were asking what will happen to the chain if something happens to him,” says O’Neill. “Well, what has happened is the best thing we could possibly get."

For his part, Joyce, who is twice-divorced and has seven children, will continue working at Tim Hortons as senior chairman. But he also plans to spend more time on sailing and golf: Joyce recently moved from Burlington, Ont., to Calgary, where he owns 15 per cent of the Cal-

gary Flames National Hockey League team and has a home near the Bearspaw Country Club. The Tatamagouche, N.S., native left home at 15 and joined the Hamilton police force in 1956. In 1964, Tim Horton, an all-star defenceman for the Toronto Maple Leafs and Buffalo Sabres, opened his first Tim Hortons doughnut store in a converted gas station near the Dofasco Inc. steelworks in Hamilton. A year later, Joyce decided to indulge an urge to run his own business, and quit the police force to manage the shop, and he says: “After 31 years in doughnuts, I’m very tired of jokes about being an ex-cop.”

Joyce and Horton became business partners in 1967, although Horton kept playing hockey. By the time Horton was killed in an auto accident in 1974, the two men jointly owned more than 40 doughnut outlets. A year later, Joyce bought out Horton’s widow, Lori, for $1 million and a Cadillac Eldorado, a deal that Horton has since attacked in the courts as being unfair. Joyce has won a series of legal battles against Lori Horton, and he calls the dispute between them, “both unfortunate and unnecessary.” Still, she remains bitter. “I’m only

happy that Ron Joyce is out. Tim’s name is in better hands with Wendy’s,” she told Maclean’s last week.

But no one can deny that under Joyce’s leadership, Tim Hortons has made doughnut history. The deep-fried ring of batter with a hole in the middle first appeared in New York City in 1739. In the 1960s, Tim Hortons was the first to introduce apple fritters and dutchies to Canada, still among the most popular of the 36 available doughnut versions. Tim Hortons is now the largest Canadian doughnut chain, with 36 per cent of the market.

According to fast-food industry experts, Canadians currently eat doughnuts at three times the rate of Americans. Robin Garrett, director of research at the Canadian Restaurant and Foodservices Association, says that there are a number of reasons for Canada’s relatively high rate of doughnut consumption. A cold northern climate has made coffee Canada’s Number 1 beverage, and Garrett says, “what goes better with coffee than a doughnut?” She adds that coffee and doughnuts are also an affordable and somewhat addictive snack.

This love affair is sweet news for doughnut shop owners. For one thing, profit margins are high. Even with recent price hikes in ingredients, a medium-sized cup of coffee, including two shots of cream and sugar and a stir stick, costs about 14 cents to produce. That socalled double double at Tim Hortons retails to coffee drinkers for $1.10 with GST. For every dollar in sales, the average Canadian doughnut shop generates 14 cents of profit, according to a 1994 survey by the Canadian Restaurant and Food Services Association. By contrast, the restaurant industry’s average profit margin was five cents of profit on the dollar—hamburger outlets like Wendy’s turn a 4.9-cent profit on every dollar of sales.

The only sector that comes close to matching the generous profit margins of doughnut chains are salad, soup and sandwich restaurants, with 9 cents of profit on the dollar. As a result, those are items that Tim Hortons and other doughnut shops have put on the menu increasingly in the past decade, as they try to cater to the public’s growing concern with healthy eating (the average doughnut has 200 calories and almost as much fat as a hamburger) and also try to bring in a more steady flow of customers for lunch and dinner.

But at the same time, competition is also growing. The market niche of doughnut retailers is increasingly being challenged by rivals such as the Toronto-based Second Cup Ltd, with 225 stores, and Starbucks Coffee Co. of Seattle, with 71 stores in Canada. They are making steady inroads with coffee drinkers by selling cappuccinos, fancy baked goods and exotic coffee beans. Joyce insists that Tim Hortons will stay competitive by staying tightly focused. The chain flirted briefly with cappuccino machines in a few stores, but Joyce says, “we found our customers didn’t care for it. What people are looking for is a good, fresh cup of coffee and the Tim Hortons menu.” With Ron Joyce still walking the beat, it is a safe bet that the union of Tim and Wendy will continue to thrive on coffee and doughnuts.

ANDREW WILLIS