Headlines·Coffee Wars

Tim Hortons challenged in coffee market it once dominated

A refreshed vision for Tim Hortons begins to take shape this week as the company releases details on its financial results, and how it plans to remain innovative in the highly-competitive Canadian coffee market.

Tim Hortons will reveal strategy in two stages starting Thursday with year-end financials

Analysts expects that customer service improvements are in the works and renovations are in the works for Thursday's year-end announcement.

A refreshed vision for Tim Hortons (TSX:THI) begins to take shape this week as the company releases details on its financial results, and how it plans to remain innovative in the highly-competitive Canadian coffee market.

The quick-service chain will reveal the strategy in two stages, starting on Thursday with its year-end financial results.

The, next week, recently appointed chief executive officer Marc Caira will take the stage at the company's investor day to outline the next steps for Tim Hortons.

The Oakville, Ont.,-based company (TSX:THI) faces on onslaught of challengers in the coffee industry, a corner of the Canadian market it once seemed to effortlessly dominate.

While promotions like its annual Roll Up the Rim contest still generate plenty of attention, the number of people buying food and beverages at its restaurants has been slowly declining over several years. Working against it are cheaper alternatives like McDonald's, and the wider range of coffee flavours offered by Starbucks and Second Cup (TSX:SCU).

Analysts don't anticipate much will improve when the fourth-quarter results are posted Thursday. Bad weather in Ontario and Quebec caused power outages and store closures in December, which hit the entire retail industry hard during the peak Christmas shopping period.

Average earnings per share expectations are targeted at 77 cents, according to a survey of analysts by Thomson Reuters, while a dividend increase from the current quarterly payout of 26 cents is also likely, several analysts predict.

Tim Hortons needs to innovate, analyst says

"Our outlook for Tims is unchanged heading into the fourth-quarter release, as negative traffic in Canada remains a concern," Barclays analyst Jim Durran said in a note.

He expects the company will need to innovate, focus on better customer service and utilize more advanced technology at its stores if it wants to grow.

Tim Hortons also faces challenges with its own operations, as it contends with higher-priced food items that take longer to prepare.

During peak hours, the backlog of sandwiches and hot food items often causes a bottleneck of customers waiting for orders. The snaking lineups have become part of the regular business day at some of the company's more popular restaurants and drive-thru locations.

That image has pained executives like Caira, who told The Canadian Press last fall that service at the counter is the "moment of truth" that determines whether a customer is pleased enough to make a return visit.

"Future battles are not going to be won, in my view, with who has the best strategy or who has the best innovation," he said.

"The companies that will win will be the companies that can execute flawlessly at the store level."

Menu could get new look

After much anticipation, Caira will make his case to investors on Feb. 25 during his first detailed presentation about the strategic plan that stretches until 2017.

RBC Capital Markets analyst Irene Nattel expects that Caira will emphasize customer service improvements that are in the works and his plans to speed up renovations.

Tim Hortons has lagged behind other fast food chains, which have redesigned their stores with couches and fireplaces that encourage customers to stay longer. The company only recently introduced free Wi-Fi to its restaurants and still doesn't offer outlets to power laptops and charge mobile phones.

The menu at Tim Hortons is almost certain to get a refreshed look, as Caira said one of his priorities was to reconsider everything from the coffee cup sizes to doughnut selection in an effort to craft a product lineup that didn't simply mimic his competitors.

One of the most drastic changes being considered was creating a second Tim Hortons coffee blend — a first for the company. Also on the table was the possibility of a loyalty program that rewards the most frequent coffee drinkers.

Before he joined Tim Hortons, Caira held various executive roles at Nestle's global operations where he helped expand the company's hot and cold beverage division. He has said his experience with Nestle meant he arrived at Tim Hortons with an open mind and thinking like a customer.

Investors could also get a better idea of where Tim Hortons plans to take its partnership with American dairy chain Cold Stone Creamery. The two companies launched a handful of co-branded restaurants in 2009, but the expansion has been slow at best.

While there are many questions that remain unanswered, analysts aren't souring on the brand, which celebrates its 50th anniversary this year.

"Tim Hortons is a mature company with a strong consumer franchise," Nattel said, adding that it "has above-average earnings growth potential."


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