Stock prices of Tim Hortons Inc. and Burger King shot up this week after news the two companies will merge. A new Canadian address will allow Burger King to pay lower taxes on its international earnings. Burger King's strength in the U.S. and overseas may help Tim Hortons to expand in those markets.
The deal is likely to be controversial in Washington. Elected officials, both Republican and Democrat, have complained that too many U.S. companies are avoiding U.S. corporate income tax by creating nominal head offices in countries with lower tax rates. Since control of the merged restaurant chains will rest with the New York investment firm 3G Capital, (already the controlling shareholder of Burger King) the Canadian head office may be denounced as a flag of convenience and a tax-avoidance device.
Tim Hortons has enjoyed spectacular success providing coffee, doughnuts and other baked goods to Canadians. It long ago overtook McDonalds as the leading fast-food chain in Canada. It stands miles ahead of Starbucks as a provider of brewed coffee for Canadians. Growth in Canada has slowed, however, and the company has been relying on new products and new locations outside Canada to keep the growth going.
In its most recent quarterly report, Tim Hortons announced its same-store sales in Canada grew by 2.6 per cent from the corresponding quarter a year earlier. The number of transactions declined, but customers spent more at each visit because of its new breakfast and lunch products. The chain kept Canadian sales growing by opening new stores. In the U.S., by contrast, same-store sales grew by 5.9 per cent. System-wide sales growth (counting newly opened stores) was 5.9 per cent in Canada and 12.3 per cent in the U.S. These results suggested Tim Hortons was achieving gradual success in its expansion into the U.S.
Tim Hortons said it liked the merger deal with Burger King because of "the potential to leverage Burger King's worldwide footprint and experience in global development to accelerate Tim Hortons growth in international markets."
That was approximately the same reason given for the previous Tim Hortons merger with the Wendy's hamburger chain 18 years ago. That merger came unstuck 10 years later when a potential acquisitor of Wendy's concluded that it could achieve better results by selling Tim Hortons into the market as a standalone company. The new owners of Tim Hortons may come to the same conclusion, especially if the U.S. tax advantages for Burger King turn out to be less than they were counting on. Tim Hortons clearly knows how to expand in the U.S., even without Burger King holding its hand.
Tim Hortons gave Canada the term "double-double" as a name for its sugary, milky coffee. Its advertising tag line "R-r-roll up the r-r-rim to win" became a distinctive Canadian gag, able to raise a smile of recognition from Canadians overseas, but merely puzzling to non-Canadians. This was brilliant marketing, and Canadians can be proud of the success the firm has achieved within Canada and to a lesser extent in the U.S. and overseas.
The new owners are wisely keeping the Burger King and Tim Hortons brands clearly distinct. People don't line up for coffee at Tims because of its international feel. They line up because it has become part of their daily routines and their consciousness. Any attempt to remake Tims into something less Canadian is likely to damage the brand and hurt Canadian sales.
Burger King draws significant shares of its revenue from Latin America, the Caribbean, Europe, the Middle East, Africa and Pacific Asia. The experience of expansion in these regions may give Burger King some basis for showing Tims how to sell coffee and baked goods in those same regions, but the results may take many years to appear. The quicker result, if it works, will be Burger King's tax break.