Question

Two of the biggest competitors in Canada’s quick-service (QSR) coffee retail sector are Tim Hortons and McDonalds.

For this assignment you will complete a review of the both Tim Hortons and McDonalds in the Canadian coffee market. Please be sure to examine all elements of their loyalty program, including digital and instore application/execution, as well as their product offering, pricing strategy and ethical practices to understand how they drive market share in the competitive QSR coffee market.

What sourcing considerations do you think these retailers have employed to increase their competitive strength in the market. Provide examples of any ethical practices they have employed and how they are communicating that to consumers

Answer 1

Key Economic Variables:

Industry: Tim Hortons competes in the Full-Service Restaurants industry, as defined by NAICS 722110, and includes key competitor McDonalds (Full-Serive Restaurants, 2012). This report will focus on the North American segment. Industry size: Full-Service restaurant industry has revenues of $7.6 billion and $82.2 billion in Canada and the U.S respectively (Datamonitor, 2012). Industry concentration: Highly fragmented, 70% of establishments are independent (Shields, 2008). Industry lifecycle: Growth stage. Although the market is showing signs of saturation, new locations are continuously being opened. Market is growing at a rate of 3.1% per year, and is anticipated to be worth $8.8 billion in Canada and $93.6 billion in the U.S by 2016 (Datamonitor, 2012). The industry is experiencing moderate growth. This industry grows whether or not the overall economy is growing. The U.S market is much larger than the Canadian market and represents much greater potential for industry competitors as well as Tim Hortons. As the industry is highly fragmented and still growing, industry members must increase their competitiveness, as growth will attract new entrants.

External Analysis: Political/legal: Nutrition labeling is becoming more prevalent in major U.S cities, however in Canada a bill calling for improvements in restaurant labeling was defeated in 2007 (Beck, 2012). Economic factors: Entire food service industry continues to grow even in poor economic condition (DiPietro, 2011). Historical over-supply of coffee has driven down the price of this input (Argenti, 2004). Social: increasing obesity rates, especially in the U.S, is sparking debate among policy makers and social interest groups (Burton, 2009). There is an all-time high level of distrust against corporations (Argenti, 2004). Legal and regulatory issues are much more prevalent in the United States, however industry members and Tim Hortons must monitor progress or changes in Canada. Industry members can expect to perform well financially even in harsh economic climates. With increasing obesity rates and public distrust of corporations, industry members must establish trust and good will among consumers with expanded CSR and public relations initiatives.

Porters 5 Forces:

1. Bargaining power of buyers: Moderate-Strong. There is a lack of switch costs within a given price range, and choice is dependant on consumers taste which can change daily. There is a high price elasticity of demand as industry offerings are not essentials (Datamonitor, 2012). Consumers are small and numerous.
2. Bargaining power of suppliers: Moderate-Strong. Keeping costs down is important for industry members, and maintaining reliable relationships with suppliers of quality goods is important for success. Supplier inputs are essential. Suppliers are large and few (Datamonitor, 2012).
3. Threat of new entry: Fierce. High reliance on franchising for distribution of industry members reduces entry costs. This industry does not require a large capital outlay (reflected by high fragmentation) and is experiencing moderate growth. Industry member retaliation is high and the brand strength of major competitors is high (Datamonitor, 2012). Threat of substitution: Moderate. A wide variety of other forms of foodservice and food retailing exist. These offer consumers more control over their diet and health concerns are an increasingly important to consumers (Datamonitor, 2012).
4. Rivalry among competing sellers in the industry: Strong. Consumers are price sensitive and have low switch costs. Suppliers are large and few relative to industry members. Low capital investment for franchising models, fragmentation, the use of franchising, and moderate industry growth increases the threat of new entry. Rivalry among industry members is strong and can be expected to increase. Overall, the industry is relatively unattractive as the competition is extremely strong, however the size of the market in the U.S and its growth suggest that Tim Hortons can expect new competitors to enter the industry.

Forces driving industry change: Changing social concerns, values, lifestyles: There has been an increased trend towards eating out (Scourboutakos, 2012), however customers are also becoming more health conscious. Some industry members, such as McDonalds, have faced numerous class action lawsuits over the past several years due to health concerns (Buchholz, 2003). Industry growth rate: The market is growing at a rate of 3.1% per year, and growth is anticipated in the next several years in both Canada and the US (Datamonitor, 2012). With consideration that the majority of competitors are independent, making up 70% of the market (Sheilds, 2008), the growth can be expected to attract many new independent competitors or franchisees as people seek a low-cost method of entry. Tim Hortons has begun to focus on growing their share of the lunch market with the introduction of high-quality, hot Panini sandwiches (Q3 2012 Tim Hortons, 2012), and offering consumers various healthy meal choices. Further, Tim Hortons extensive use of a franchised business model will allow them to increase their market penetration in both Canada and the U.S, as proprietors will continue to seek a cost-effective method of entry into this growing industry.

Strategic Group Map: The strategic group map, based on the relationship between Price/Quality and Geographic Coverage of the competitors. Starbucks and McDonalds are the most favourably positioned competitors, each occupying a unique segment of the market (differing only on the Price/Quality relationship of their offerings). Tim Hortons competes very closely with Dunkin Donuts, and is slightly larger despite generating most of its business in the smaller Canadian market (Heffes, 2010). Tim Hortons offers slightly higher quality products than Dunkin Donuts, and as it does operate in both Canada and the U.S, has greater North American market coverage.

KSF:

Marketing related: Industry is characterized by substantial investment in brand capital (Dahlstrom, 1999) and brand power is considered the greatest weapon in the industry (Datamonitor, 2012). Brands with strong relationships with their customers are better positioned to withstand problems caused by service failures (Kathryn, 2006) and bad publicity. Distribution: The size of the network is key to success. Increasing distribution and coverage depends on the ability to attract partners such as franchisees. The use of franchising can be a source of competitive advantage, creating first mover advantage (Yolanda, 2011). Operations: quality control, cleanliness, and standardization are important for customer satisfaction, which generates long-term benefits including brand loyalty and sustained revenues (DiPietro, 2011). Tim Hortons has done an excellent job of marketing their brand to the point where they have become part of peoples’ lives and lifestyles in Canada (Summerville, 2002). Tim Hortons has been able to successfully distribute their products across Canada, making themselves the country’s largest restaurant chain (Staios, 2011) with 99% of stores being owned and operated by Franchisees (Heffes, 2010, p.23). Tim Hortons managed to open 44 new restaurants in Canada and 22 in the U.S in Q3 2012. Tim Hortons has been working diligently to improve customer experience in their restaurants with various new improvements to interiors and exteriors, as well as the addition of free wifi (Q3 2012 Tim Hortons, 2012). Tim Hortons has done extremely well matching the industry’s key success factors to their business, which has resulted in their current success. Tim Hortons must build off of these successes in order to remain a market leader in an industry that can be expected to become more competitive.

Competitor Analysis:

Tim Hortons’ main competitor in both the Canadian and U.S markets is McDonalds (Heffes, 2010). McDonalds is an extremely international brand with operations in 117 countries (Datamonitor, 2012), and a strong presence in both Canada and the U.S. Tim Hortons receives direct competition in the U.S. from Dunkin Donuts, who utilizes a business model extremely similar to that of Tim Hortons and has similar offerings in the U.S. market. Tim Hortons will have difficulty differentiating from Dunkin Donuts as they continue to expand into the U.S. Starbucks is a high-end offering competing indirectly with Tim Hortons. Starbucks’ main focus is on coffee, however they also offer a wide range of healthy snack alternatives. This is aligned with shifts in consumer lifestyles and therefore does create a strong, albeit indirect form of competition. Independent restaurants and chains represent the majority of the market, however individually they are small and lack geographic coverage and brand reputation. They also represent a form of indirect competition. Tim Hortons must focus its efforts on differentiating from their major competitors, McDonalds and Dunkin Donuts, as they continue to expand into the U.S.

Mission: Deliver superior quality products and services for our guests and communities through leadership, innovation, and partnerships (Tim Hortons, 2009).

Vision: “To be the quality leader in everything we do” (Tim Hortons, 2009). Tim Hortons’ mission is aligned with its vision. Their vision is guiding the firm to be a leader in quality, however it does not specify what products or markets they will serve. Senior management in the firm is committed to the notion that it must constantly widen and adapt its offering to remain relevant to its consumers (Heffes, 2010). With that, this lack of clarity does not present a strategic issue.

Value Chain:

Supply of raw materials: Tim Hortons is involved in grass root projects in local communities where they source their coffee to help farmers produce higher quality coffee more efficiently. Tim Hortons has developed a clear set of outlines for all suppliers to ensure they meet regulatory and ethical standards. Manufacturing: Tim Hortons owns several roasting plants in Rochester, Hamilton and Oakville. Distribution & Warehousing: Tim Hortons owns and operates distribution centers that are able to serve its restaurants in Ontario and Quebec, however it primarily relies on third party distributors to serve the rest of Canada and the U.S (Tim Hortons, 2011b). Restaurants: Over 99% of Tim Hortons’ full-serve restaurants are owned and operated by franchisees. A significant part of Tim Hortons’ business model includes renting restaurant locations to franchisees. Tim Hortons owns 83% of the real estate in its full-serve restaurant system (Tim Hortons, 2011b, p.5). In 2011 Rents and royalties accounted for approximately 36% of total Revenues (Tim Hortons, 2011a, p.47). Marketing: Tim Hortons has established itself as a part of everyday life in Canada (Tim Hortons, 2011b), and is widely recognized, but less so in the U.S. (Heffes, 2010). In Canada, Tim Hortons has achieved nearly universal brand recognition (Tim Hortons, 2011a, p.10). Tim Hortons has been pressing in the U.S market, and has made its product available at certain NHL, NBA, and college football stadiums (Tim Hortons, 2011a, p.10). Profit margin: Tim Hortons’ Net Profit Margin was 13.52% for the 2011 fiscal year (Tim Hortons, 2011a, p.79)

Tim Hortons has been extremely effective in Canada. Further expansion into the U.S may require more control of distribution channels. Tim Hortons should continue to apply its unique business model including land ownership to continue to generate revenues from property rents.

VRIO:

Tim Hortons’ brand image supplies them sustainable competitive advantage, however only in Canada. In the U.S their brand image is valuable, but it is not rare. Tim Hortons will have to continue to develop their brand image in the U.S in order to grow in this market. Tim Hortons distributes its products through a highly franchised model. Franchising permits expansion at low cost, and a higher percentage of franchised outlets has a positive correlation with network size (Yolanda, 2011). This however, is not rare, as key competitor Dunkin Donuts utilizes the same method on a similar scale (Dunkin Brands, 2011). Tim Hortons has been able to generate substantial revenues by owning the majority of its physical stores. This is valuable and unique, however it is easy to imitate. As this has proven to be effective, it is likely that competitors will begin to mimic this strategy in the future.

Financial analysis:

Tim Hortons has experienced strong financial growth between 2007 and 2011 with revenues growing from $2-$2.8 billion. Tim Hortons has also experienced improvements in Net Income over the same period, except over the past year. Net Income grew from $297 million in 2007 to $385 million in 2011. Despite this overall improvement, Net Income has been cut in half between 2010 and 2011, declining sharply from $647 million in 2010. 2010’s Net Income was not driven by substantial revenue gains, but rather by lower operating costs and a higher Net Profit Margin. On average Tim Hortons’ Costs/Expenses have increased steadily with Revenue, suggesting no substantial increases in efficiency. (Tim Hortons, 2011a, p.79-80). Tim Hortons’ Revenues, Net Income, and EPS have been compared with key competitors McDonalds and Dunkin Brands. All three firms have experienced growth in revenues over the past 5 years, with McDonalds’ growth and totals leading the industry. McDonalds has also experienced consistent, but modest growth in their EPS, which increased from $1.93 to $5.27 (McDonalds, 2011, p.7). Tim Hortons has been less consistent ranging from $1.43 in 2007 to $3.58 in 2010, and dropping to $2.35 in 2011 (Tim Hortons, 2011a, p.79). Dunkin Brands has performed poorly with a consistently negative EPS. Tim Hortons’ Net Profit Margins have consistently hovered around 13%, except for 2010 when they were 25% (Tim Hortons, 2011a, p.79). McDonalds has been able to increase their efficiency and grow their profit margins from 10.51% in 2007 to the 20% range between 2009 and 2011 (McDonalds, 2011, p.7). Dunkin has been, again extremely inconsistent and is trailing the industry. Despite strong gains, Tim Hortons has a weak Working Capital Ratio, which at its highest was 0.955 in 2010, but dropped to 0.214 in 2011, which is aligned with historical figures. As current liabilities exceed current assets, Tim Hortons is consistenly lacking liquidity. Tim Hortons consistently maintains a Debt-to-Equity ratio below 0.5, however it has increased in 2011 to 0.396 from 0.303 in 2010. This suggests that Tim Hortons’ borrowing has increased and signals increasing levels of debt. Tim Hortons has an aggressive four-year strategic plan, including international expansion strategy (N.a, 2012), controlling current and total debt will be important to sustain this growth. Increasing revenues and general increases in Net Income suggest that to-date, expansions have been successful.

SWOT ANALYSIS :

Issues to address: • Leverage their brand strength and performance in Canada into the larger U.S market. • Increase the efficiency of their operations over time to help increase their Net Profit Margin. • Continue adapting offerings to meet market demands. Do this in a way that capitalizes on socio-political changes in the U.S. to establish stronger position and make the brand unique relative to comeptitors such as Dunkin Brands.