Tim Hortons' toughest foe

Date: FEB 23rd, 2008

Topic: Franchise News

Megan Khatcha-dourian likes the Tim Hortons ads she's seen on TV and she's got a shop near her home here where she can stop in to grab her morning cup of coffee. But she's only tried it once.

"I'm a Dunkin' Donuts girl," says the American Civil Liberties Union employee. "I grew up on Dunkin' Donuts."

That's been the challenge for Tim Hortons since 2004 when the Oakville, Ont., coffee-and-doughnut franchise, then owned by burger giant Wendy's International, bought 42 New England stores out of bankruptcy from the Bess Eaton chain, beating a bid from Dunkin' Donuts.

New England is Dunkin' Donut's territory. With 2,100 stores in the region, there's practically a store on every corner -- just like Tim Hortons in most of Canada.

In Providence -- the doughnut capital of the United States with one shop for every 4,226 people -- Ms. Khatchadourian has two Dunkin' Donut locations to chose from that are closer to her home than the Tim Hortons store.

"It definitely is a Dunkin' world out here," says Amy Vitale Posch, who works with Ms. Khatchadourian in downtown Providence.

Business has been so tough going at the old Bess Eaton shops in Connecticut, Massachusetts and Rhode Island that Tim Hortons cautioned in a securities filing last year that some may have to be closed.

The company doesn't break out the numbers for each region, but it is believed to be losing money on its southern New England stores, unlike its more-established markets along the U.S.-Canadian border in upstate New York, Michigan and Ohio. Tim Hortons, which has 398 U.S. locations, also has stores in Maine, Kentucky, Pennsylvania and West Virginia.

The company reported a loss of $4.8-million in the United States last year, reflecting the drag on its bottom line from the struggling southern New England shops and the investment in new stores in new regions, which take time to turn a profit. Company-wide profit rose nearly 4% to $269.6-million on revenue of $1.9-billion.

Tim Hortons chief executive Paul House acknowledges the difficulties in New England. "The reality is New England is not performing at the level of the rest of the stores in our U.S. chain," he said in an interview. "Our plan for the U.S. is to do what we did in Canada: to stay a regional player and go into markets and just grind away."

Tim Hortons' biggest hurdle here is a lack of brand recognition, especially compared with Dunkin' Donuts. This week, for the second year in a row, the Canton, Mass., coffee and-doughnut-chain ranked No. 1 in customer loyalty in the coffee category in the Brand Keys Customer Loyalty Engagement Index, ahead of McDonald's, Starbucks and Krispy Kreme.

In a bid to percolate more interest in its brand, in December, Tim Hortons rolled out a test run of 15 self-serve kiosks in Shell gas stations around Rhode Island.

Tim Hortons decided to try the kiosks after seeing success with a similar product in Ireland, where, over the past couple of years, the company has installed more than 100 self-serve coffee-and-doughnut kiosks in Spar convenience stores. Late last year, the company expanded into about 15 outlets in the United Kingdom.

"In a new market, it's a great way to get in and [build brand awareness] before building your first freestanding store," says Mr. House, who announced on Tuesday he's is stepping down as CEO but will remain active at the company as executive chairman.

In Rhode Island, where Tim Hortons already has 46 stores, (Dunkin' Donuts has 164 stores in the state) the test run is an attempt to tackle Dunkin' Donuts' dominance.

At a local Shell station here, customers at the self-serve kiosk at the back of the store can brew their own Tim Hortons cappuccino or latte, hot or cold, "from-bean-to-cup" in 20 seconds at the touch of a button. The station also has separate machines for more standard Tim Hortons' brew and for flavoured coffee, as well a rack of doughnuts and other baked goods.

Andrew Delli Carpini, chief executive of Colbea/East Side Enterprises LLC, which owns the Shell stations, says customers used to picking up a pot were a little confused about pushing the buttons at first, but they've been quick to catch on. Coffee sales doubled last month, compared with a year ago, when the 15 Shell stations served a regional coffee, he says.

Doughnut and pastry sales, however, remain a little stale. "There's a stigma around self-serve, even though the product is delivered fresh every day," says Mr. Delli Carpini.

Self-serve products generally have a reputation in North America of being inferior.

Dunkin' Donuts recently raised the ire of some of its franchise owners from New England and New York for agreeing to sell self-service coffee in Hess gas stations.

Dunkin' Brands Inc. spokesman Stephen Caldeira said their concerns are overblown, noting that most of the Hess self-serve coffee locations are planned for up and down the U.S. east coast, outside of the company's core New England core market. The initiative, he said, is part of Dunkin's strategy to be the No. 1 U.S. coffee company. Dunkin' Donuts currently has shops in about 35% of the United States.

Tim Hortons plans to be cautions about watering down its brand with kiosks. They definitely won't appear in Canada, where the company is by far the dominant brand.

But Tim Hortons doesn't have much to lose in Rhode Island. "If no one knows the brand, then you're not diluting anything," says David Hartley, an analyst with BMO Capital Markets in Toronto. "It's all about awareness any way you can get it."

That's especially important amid the stepped-up competition these days, with Starbucks mulling $1 cups of coffee and free refills, McDonald's improving its brew, and Dunkin' Donuts taking a page out of Tim Hortons' book and offering lunchtime fare-like sandwiches.

"We're seeing a lot of blurring and cross-segment competition," says Darren Tristano, executive vice president at Chicago-based food-service research firm Technomic Inc. "Just look at McDonald's and Starbucks. A year ago, no one would have said they were competitors."

Besides introducing kiosks, Tim Hortons has been advertising on television and slipping coupons for free coffee into newspapers, both costly, but effective marketing.

Neil Young, who works for the state health department in Providence, says he learned about Tim Hortons from TV ads but didn't get tempted to drop by a store until he got a "free-coffee" coupon in his newspaper.

"I've been back about three times in the last couple of weeks," he says while on a lunch break. "I like the sandwiches and the coffee."