A Strategic Analysis for Tim Hortons
Presently, Tim Hortons is regarded as the leading publicly traded restaurant chain in Canada. Not only is it Canada's leading quick-service restaurant brand but also the fourth largest publicly traded restaurant chain in North America based on market capitalization. They have the number one market share in breakfast and snacking day parts and a solid number two share in the lunch day part in Canada (1). However, Tim Hortons needs to pay more attention towards their growth and development into U.S. and other markets worldwide in order to become a true spearhead in their industry. Moreover, they can lessen the risks related with expansion by engaging in partnerships with other successful firms.
Analysis/Rationale
Although, as mentioned above, Tim Hortons is possibly the leading publicly traded restaurant chain in Canada, it enjoys its success due to its inhabitation of a much smaller market in comparison to markets in U.S., India, and China. To be the best of the lot, Tim Hortons cannot exclusively depend on a single market. In this day and age, there are solid opportunities for them to become the world’s best, through new emerging markets with high probability for huge profits. There are increasing trends of coffee drinkers in China and India, two countries with enormous fondness for Western style drinks and meals and Tim Horton's expansion in those countries will play to their advantage. That is the main reason why McDonalds, the equivalent quick service restaurant industry to Tim Hortons, is earning massive profits from both China and India. Entering into partnerships also ensures that the firms are able to share the risks of failure; thereby reducing their burden. Thus, the partnership of Tim Hortons with Kahala Corp is a great idea, since it links together both Tim Hortons and the Cold Stone Creamery concepts stores in U.S. In this situation, with the benefit of sharing risks of failure; in Kahala Corp, Tim Hortons have a partner who has enough knowledge about the U.S market, and how it works. Similarly, Tim Hortons need to ensure that they engage in further partnerships with other firms with the purpose of offering fresh and innovative Tim Hortons products that consumers are able to purchase outside of Tim Hortons stores. This move will evolve their brand image and their competitors will feel increased competitive pressure.
Even with the motivation to expand globally, financing will be a tough challenge for Tim Hortons. Financial investments and cash are vital components needed to develop their brand image in other countries; however these investments can also turn out to be extremely risky. For that reason, engaging in partnerships will reduce their financial load and the overall risk. It is also very crucial for Tim Hortons to find vastly reputable and ethical firms to be linked with, since their image will be tied with those firms.
Integrated Strategy
The expansion of Tim Hortons should happen gradually with accuracy and precision. Since they already have a solid market share and leadership position in Canada, they need to form reasonable objectives and not have an enormous anticipation during the course of their global development. The strategy which Tim Hortons needs to follow when entering into China and India is broad differentiation strategy, due to the massive population. Majority of population in these two countries consist of people with low income; though it also holds a growing middle class. Attracting a wide range of customers and buyers would prove much more profitable for Tim Hortons instead of simply appealing to a niche market. So far, this approach has been effective for them in Canada, and it may as well assist them in foreign markets. However, substantial research of their prospective customers’ values, lifestyles and beverage preference must be completed before Tim Hortons enters into these new markets. In order to satisfy majority of the consumers in foreign markets, items offered such as coffee, baked goods, other hot beverages, and meal items need to be redesigned according to consumers’ needs and fondness in the region/country they are living in. For instance, Tim Hortons should stock wide variety of teas and additional milk beverages in India, since majority of the people like to drink tea and other milk based beverages in that country. Moreover, not stocking up on breakfast items will lessen costs, since there isn’t a breakfast eating routine in India. Most people just drink tea there in the morning. Thus, this reduction in costs due to the lack of breakfast items in stock can be shifted to other areas.
Tim Hortons will also be able to attract the remaining niche consumers steadily once they establish a strong position in the foreign market. They need to ensure that they don’t fully exhaust their resources while trying to expand. For simply this reason, it’s very crucial for them to join in a partnership with another organization in order to share the burden and reducing the risk factor. Additional debt will be really difficult to handle alone especially if they wind up being unsuccessful. Likewise, Tim Hortons should ensure that they maintain their strong hold in Canadian market, while in the process of developing their brand image worldwide. If due to some unfortunate reasons Tim Hortons is unable to successfully expand globally, their strong position in Canadian market will assist them to get back on track. Furthermore, Tim Hortons emphasis on growth and development, as well as product enhancement should not contain any short turns or cost cuts. Being a “quality leader in everything we do” must be associated with every aspect during the worldwide expansion.
Appendix
Key Economic and Industry Variables
Economic
Grocery stores sell 79% of coffee consumed at home. (1)
Economy is in a retrieval period; therefore the lack of disposable income for consumers.
Higher costs of milk for coffee and baked goods, as well as food inflation present strong challenges to the company’s revenue growth.
Industry
Very few major competitors in the industry. These competitors include Coffee Time, Country Style, McDonalds, and Burger King.
Tim Hortons holds an impressive share of Canadian coffee segment at 62%, in addition to 76% for baked goods segment of Canadian market. (1)
Canadian coffee industry is currently concentrating on specialty coffees and iced coffee.(3)
There is a rising trend towards specialty coffee like espresso’s and lattes. (6)
Key Drivers for the Industry:
Expansion/Growth
An important driver in the quick service restaurant industry is growth and development in the form of local and worldwide expansion.
Industry rivalry is organized around competing for market share by opening up new outlets at key locations.
Product Innovation
Most quick service restaurants in the industry now offer a product selection when it comes to drinking coffee, which is much broader than the old-fashioned cup of coffee.
Alliances/Partnerships
Partnerships are related with industry’s focus on growth and product innovation.
They assist firms in reaching out for new customers and allow them to be more innovative.
It also helps firms in entering new channels of distribution, such as grocery stores.
Technology
Introduction of MasterCard PayPass/Tim Cards allows consumers to quickly pay and go; improves efficiency and customer satisfaction. (1)
Technology is also affecting this industry because of the progressively stylish and user-friendly homemade coffee machines.
Porter’s Five Forces
Rivalry Strength:
There is strong rivalry from several typical quick service restaurants, in addition to large quick service restaurant chains.
McDonalds has increased competitive pressure by entering into the breakfast and coffee line; offering superior quantities for identical prices.
Tim Hortons popular “roll up the rim” campaign is being copied by Country Style and Coffee Time.
Competitors such as Coffee Time, McDonalds and Country Style might cause tough competition for Tim Hortons, but Tim Hortons will continue being the leader since it owns 40% of the quick service restaurants in Canada.
Potential New Entrants:
There are hardly any barriers of entry for potential new entrants in the quick service restaurant segment.
Any new entrant can join the quick service restaurant industry whenever they like, but it will be very challenging for them to earn huge profits since most of the market share is controlled by large firms.
Substitute Strength:
At present, the strength of substitute companies is low because of the organic nature of the products, such as tea/coffee.
Supplier Strength:
Due to the “Tim Hortons Coffee Partnership”, supplier strength is relatively low. Tim Hortons has established a solid partnership with its farmers in South America.
Tim Hortons can also change suppliers at any time they prefer since there are several other suppliers they can cooperate with at the current market price for coffee beans.
Buyer Strength:
The buyer strength is quite strong.
Acquisition occurs in high volumes and these acquisitions push suppliers to satisfy their consumer.
As one may conclude, it is certain that buyers have more power than suppliers in the industry. Moreover, the competition between the rivals is quite intense since all of them are trying their level best to achieve a higher market share in the industry by offering similar products and promotions.
Positioning map of the industry
The strategic group map to the left illustrates that the size of the circle indicates the quantity of revenue that is earned from selling coffee and other breakfast and snacks related items. Tim Hortons outperforms its competitors in the range of breakfast and snacks related items that are offered with coffee, in addition to the number of locations. Nonetheless, there is still a strong rivalry between Tim Hortons and McDonalds; particularly concerning the amount of sites at which they have their quick service restaurants established.
Key Success Factors
Strong brand image: known as possibly the most renowned brand in Canada.
Product quality is remarkable. Items are constantly freshly baked; coffee is delivered to consumers within twenty minutes after being prepared or not served at all. (1)
Customer loyalty is vital for Tim Hortons: A proud commitment to continue to have close relations with the public, as well as their franchisee. (1)
As customer tastes grew, so did the range of products at Tim Hortons: Product innovation has been performed sufficiently through expansion of their menu items, in order to satisfy customer’s growing change of tastes. Recent additions to the menu are items like Chicken Salad Wrap and the hot Breakfast Sandwich (eggs, sausage or bacon, processed cheese on a toasted homestyle biscuit). (3)
Tim Hortons continues to relish large economics of scale through various store locations throughout Canada.
Conclusion about the attractiveness of the industry
Quick service restaurant industry is a very attractive industry to enter in. The reason why this industry is so attractive is due to its low start-up expenses and very few barriers to entry. Tim Hortons has been a very successful company in this industry. Their continuous expansion at numerous locations all over Canada is the reason behind them outshining all their competitors and enjoying economies of scale.
Company’s Resource and Competitive Position
Mission: “Our guiding mission is to deliver superior quality products and services for our guests and communities through leadership, innovation and partnerships.” (1)
Vision: “Our vision is to be the quality leader in everything we do.” (1)
Tim Hortons mission and vision statements have both strengths and weaknesses. Their strengths are that both statements are focused, simple and easy to communicate. Their weaknesses are that their mission statement is too flat and vision statement lacks inspiration. Furthermore, both these statements don’t assist the company in having a distinctive identity.
Value Chain Analysis: Primary Activities
Supply Chain Management:
“Always fresh” Tim Hortons’ capability to keep their “fresh today” donuts served in every single outlet is a source of their competitive advantage, and a noteworthy accomplishment in supply chain management.
Unlikely for Tim Hortons to change its competitive strength of freshness although it may extend its supply chain in U.S or worldwide.
Distribution
In Canada, Tim Hortons chain's operations are built on a regional warehouse distribution structure to make sure that their food offerings were fresh. (6)
They have also established a “three-channel” distribution system in which Tim Hortons transfers frozen foods, fresh foods and baked goods over longer distances in refrigerated transports. (6)
This three-channel distribution system will expand their supply competency.
Customer service
Customer service is really vital for Tim Hortons; 24 hour drive-thru facility which is perfect for those consumers who don’t have time to come inside the restaurant.
Outlets in shopping malls, gas stations, universities and even near military bases. (1)
Market Research and Planning
Planning to open outlets in seven Wal-Mart stores in Canada. This will assist Tim Hortons in forming a base to enter U.S Wal-Mart operations. (1)
Value Chain Analysis: Support Activities:
Primary activities of Tim Hortons have led them to superior profit margins, which gives them an opportunity to further invest in their product R&D activities.
Tim Hortons emphasize a great deal on their quality control. They ensure that all the products are fresh baked and their coffee is delivered within 20 minutes.
Building strong brand image and supplier relations is also significant for Tim Hortons.
Competitive Advantage:
Brand name and company image, including its popular motto “Always Fresh” is the most important competitive advantage for Tim Hortons.
Large number of stores also allows them to take advantage of economies of scale in marketing and supply.
Financial Analysis
*Total Revenue includes sales, rental fees, royalties and franchise fees.
According to the graph, it is clearly visible that the management of Tim Hortons is not great at controlling the rise in their cost of sales. Their percentage change in costs of sales from May 2006, June 2007 and August 2009 is greater than their percentage change in revenue from sales for the same periods.
Tim Hortons revenue from sales have been steadily on the rise since 2006. However, it takes a fall in 2008, and then goes back up in 2009. Economic industry crisis could be the reason for this fall, since Tim Hortons in general have been successful in increasing their sales revenue over period of time. Another problem for Tim Hortons is that their percentage change in net income has been declining. It is nowhere close to being as large as it was in 2006. There may come a time when their net income will not increase at all, and stay still. That could be the reason why their P/E ratio has been on the decline, as shown in the chart below.
An advantage for Tim Hortons is that their working capital has been on the rise, which shows that they have many liquid assets to establish their business. This rise in the amounts also means that Tim Hortons can expand their business, as well as enhance their product quality even more. According to the net profit margins in the table below, it can be seen that Tim Hortons are not converting revenues into actual profit, which means that they’re not able to minimize their costs successfully. This is the reason why their net profit margin ratio has been on the low since 2007. On the other hand, McDonalds’ net profit margin is 20.04% greater than Tim Hortons, which shows that they are much better in controlling their costs and maximizing their revenues into profits.
2007
2008
2009
Working Capital
$75,522
$98,976
$152,567
Net profit margins
14.24%
14.05%
13.31%
P/E ratio
25.7
21.42
19.34
SWOT Analysis
Strengths:
Canada’s largest quick service food chain with leading market share in the industry.
Reputation for having remarkable product quality.
Strong brand name and company image.
2,733 outlets in Canada, 345 outlets in the United States. (6)
Great customer service.
Weaknesses:
Not a solid worldwide existence.
Some stores accept cash only, and no debit or credit cards.
No real difference between competitors such as Country Style, Coffee Time; similar products offered.
Opportunities:
Expanding into new and emerging foreign markets.
Joining alliances and partnerships will be really helpful while expanding globally.
As part of their expansion strategy, Tim Hortons should also target smaller communities.
Focus on creating further new and innovative products in order to attract more consumers in Canada and especially worldwide.
Threats:
Increasing consciousness about health and diet; causing shift in buyer preference for healthy products.
Intense competition from industry rivals, as well as other non-traditional coffee providers such as Burger King, Subway and McDonalds.
Stylish and user-friendly homemade coffee machines.
Issues that the company should address:
Tim Hortons should start offering healthier ‘non-fat’ products in order to satisfy society concerns as regards to living a healthy life.
Focus on growing and developing their existing product line to meet broader range of customers’ preferences.
Tim Hortons should apply extra efforts on an aggressive movement into entering other foreign markets, where there are huge number of coffee drinkers.