Winnipeg Free Press - PRINT EDITION

Sweet smell and success

Hortons chain brings in baked-goods odour as part of revamp

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It's 9 a.m. inside a busy suburban Tim Hortons restaurant and it smells like doughnuts.

The tempting aroma is noteworthy, because for many years the scent of sweet baked confections was not palpable at Canada's biggest coffee and baked-goods chain.

Tim Hortons, which claims to sell eight out of 10 cups of coffee in Canada, is already a leader among quick-service restaurants for breakfast and is catching up to the leader in lunch, CEO Marc Caira said. "We'll get to dinner," Caira said.

But as its core coffee business faces a renewed assault from McDonald's and Starbucks, Tim Hortons' remodelled locations have moved some of the elements heretofore enclosed in the back kitchen -- staff clad in baker's whites, glass-front ovens and a pastry cooling rack -- into the front of the store in a bid to romance its customers' senses.

"We are living in a world where people want more transparency, they want to know how products are prepared, they want more information," says Caira, sipping coffee from a Tim's ceramic mug and sinking into a leather armchair at the updated outlet, which boasts warmer touches such as a stone fireplace flanked by Christmas stockings, flat-screen televisions, digital menu boards and movable seats and tables.

"Fresh," in all of its connotations, has been the defining trend of commercial food service for the last two years: fast-food consumers want to see and smell food being cooked and prepared in front of them, rather than wrapped in a cold case or tucked away in a kitchen. At Tim Hortons, the placement of baked goods has also undergone a shift, from a display wall behind the cashiers to a glass case at the order counter, right under customers' noses.

"If consumers are looking for that transparency, the theatre, the emotional connection, the aroma, why not show it?" Caira said. "It is part of who we are. Now we are going to put it more front and centre."

After a two-year search to fund a permanent CEO following the swift exit of Donald Schroeder in 2011, Caira proved to be a steadying presence when he took the reins at Tim Hortons five months ago at a time of high tumult.

Key shareholders were staging a minor revolt, demanding a host of changes, among them wanting the Oakville, Ont.,-based chain to take on more debt to buy back shares, consider forming a REIT and look at exiting its U.S. business, where it has 817 stores. Tim's same-store sales, which routinely doubled those of its competitors a decade ago, had slowed and in the first quarter actually experienced a decline in Canada for the first time since the company's initial public offering in 2006.

Meanwhile, veteran fast-food players are facing competition from newer chains such as Five Guys Burgers and Fries, where consumers can see fresh food being prepared in their line of sight.

"Customization and preparing food in front of people is a big food trend and you are seeing it across the food service sector," says Geoff Wilson, president of a food-service industry consultancy FsStrategy in Toronto. "People want to see real, fresh food; they want to be able to say -- 'I want it toasted for longer, I want extra tomatoes.' "

When Caira came to the helm at Tim Hortons in July, he went right from meeting franchisees across the country to meeting with the company's largest institutional shareholders.

"Since then, the noise level has quieted down," Caira said. "We had very good discussions with them. Some of their ideas were good, and I have no problem taking someone's good ideas."

The company has since expanded its share-buyback plan by $900 million and while the U.S. division will remain intact, executives agreed it made sense to pursue a U.S. development model that requires a lower level of capital investment, namely by forming partnerships with local players in the sector.

Other strategic ideas didn't really make sense, Caira said. "Like selling our real estate when there is no real estate really to be sold. Or getting out of our supply chain when the supply chain is strategic to our business model." Further international expansion will happen, but improving the execution of the existing business is a priority before it tackles new markets beyond its budding Middle East business.

But as the industry looks to Caira to write the next chapter with the unveiling of Tim Hortons' new five-year strategic plan this coming February, the biggest question mark surrounding the business has to do with the CEO's next strategic move for its restaurants, which stand at 3,500 in Canada. With a new-outlet opening rate of 160 to 180 a year, the chain draws ever closer to the 4,000-unit capacity target in Canada set by prior management.

So far, Caira has made it clear improving service fundamentals are at the forefront of his charge as Tim Hortons' network matures: making it quicker to get in and out of stores by creating beverage-only lines, simplifying menu boards and speeding up the drive-thru windows by building double car lanes, and shifting the outdoor order terminal back to the fifth-car position.

"Customers say 'I want my food now, I don't want to wait for too long,' -- that is a very important part of maintaining a business now," Wilson explained.

And for people who want to linger, it's all about warm touches such as comfy seating and fireplaces, which Tim Hortons and McDonald's implemented after the success of Starbucks.

"Years ago in the quick-service industry. our attitude was, 'I am going to give people really hard seats to sit on, so the seats will turn over and people won't sit for more than 15 minutes,' " Wilson said.

"Now a comfortable environment is a necessity. The nature of people's work has changed. Even if a customer wants to stay for two hours, they might come to you all the time when they have to duck in and out, too."

But it's clear things need to evolve even further inside Tim Hortons restaurants, which made a bold play to go after McDonald's lead in the lunch category over a decade ago by introducing an array of soups, chili and sandwiches.

McDonald's has steadily chipped away at Tim Hortons' 80 per cent market share in drip coffee, now closer to 77 per cent, by offering up its own premium roast blend. Starbucks has made increasing gains in Canada, with more than 1,300 outlets and more than $1 billion in annual revenue, and the Seattle chain's recent fourth quarter recorded the strongest same-store Canadian sales growth in 13 quarters.

Perry Caicco, retail analyst at CIBC, suggested on Tim Hortons' most recent conference call Tim's executives feel they "possibly have lost touch with the younger consumer, and with the trend toward healthier eating."

Caira counters the company serves plenty of young customers, but could be doing more to engage them.

"I think we need to look at our menu, and at things that these younger consumers are looking for."

Focusing on nutrition will be an important piece of the strategy, he says. That could be a tall order for a chain whose display cases abundantly showcase sugary treats, albeit one that sees less than 10 per cent of its revenue actually coming from donuts.

Fortunately, Caira is no stranger to the food side of the business, after spending many years working on food and beverages at the packaged-food giant Nestlé, where he at one point worked on the development of soups for Tim Hortons.

For now, the CEO remains mum on any future menu changes, but is encouraged by Tim Hortons' success with a line of grilled paninis. The business has driven up demand by introducing a number of sandwich versions as limited-time offers, including Steak and Cheese and Extreme Italian.

Darren Tristano, restaurant industry analyst at Chicago-based food-service consultancy Technomic Inc., said a challenge for Tim Hortons will be to balance new innovations with the menu items that keep its loyal customers coming back.

"Tim Hortons certainly has the greatest number of resources in Canada to be a very innovative brand, and they are," Tristano said.

"Many of the customers they have are looking for the things they already have on the menu. You do not want to go too far with the changes, because a core base knows what to expect and what they want. You have to add items and be careful about which ones you take off."

One goal of Caira's is clear -- to top McDonald's 20 per cent in traffic share of the lunch category, which Tim Hortons has matched in the last two quarters but has never been able to beat.

"We want to be a clear No. 1" in lunchtime share, Caira said. "Can we get a little bit better? Yes. We want to get faster, and order accuracy is a big issue. These are the things that we are working on, the service elements. To me the real tale here will be how we deliver."

 

-- Postmedia Network Inc. 2013

Republished from the Winnipeg Free Press print edition December 27, 2013 B11

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