Tim Hortons Takes Beating In U.S.

A sound financial beating has forced Tim Hortons to leave the game in New England, but Canada’s beloved coffee brand said Thursday it won’t stop dropping the gloves against bigger, stronger rivals in the fast-paced American fast food game.

The coffee-and-doughnut chain that bears the name of its hockey-legend founder is shuttering 36 stores and 18 self-service kiosks in the northeastern U.S. — the first time in its 46-year history that Tims has decided to pull out of a money-losing market.

“We’ve not had that kind of experience before,” Tim Hortons president and CEO Don Schroeder admitted Thursday.

But instead of rethinking its decision to enter the U.S.— where it faces off against established players like Dunkin’ Donuts, Starbucks and McDonald’s — Tims plans to cut its losses, learn from its mistakes, and push ahead with an aggressive plan to open 300 new stores elsewhere in the U.S. over the next three years.

“How I view the New England situation is it’s a positive in terms of the earnings that we’ve had and we’ll apply those as we continue to grow our business in the U.S.,” Schroeder said.

The store closures will come mainly in Providence, R.I., and Hartford, Conn., where average sales volumes have been about half of those in other U.S. markets. It will also close two restaurants in Portland, Me.

“The Providence and Hartford markets are among the most densely penetrated market areas in the U.S. by quick service restaurants,” Schroeder said. “We were not successful in expanding our customer base to the levels required for future profitability.”

However, Tims, based in Oakville, Ont., is in the U.S. market to stay as its brand profile continues to grow, Schroeder insisted. None of the other core U.S. markets it operates in are as densely concentrated with competitors, and stores there are performing well, he noted.

“We see the same size of sales progression and customer acceptance that we experienced in Canadian markets in early stages of development, and continue to see traction.”

Brian Yarbrough, a retail analyst with Edward Jones, said it was wise for Tims to pull out of a market where Dunkin’ Donuts, headquartered in nearby Massachusetts, has a stronghold.

“Typically in your home market, or your better markets, you tend to put a lot of stores in,” he said.

“It’s basically like going up to Canada and saying: why can’t McDonald’s and Starbucks and these guys go after Tim Hortons and take over the market?”

The store closures will cost the company as much as $50 million in charges in the final two quarters of 2010.

But Schroeder said closing those stores, which represent a fragment of its 600-store U.S. unit, was necessary because they disproportionately affected the company’s U.S. performance and overshadowed success in other American markets.

Those locations have cost the chain $4.4 million so far this year and a retreat from the fledgling market will improve the Canadian company’s U.S. profits, Schroeder said.

Tims closed a dozen locations in New England in 2008 after performance fell short of the expectations the company had when it acquired a local chain of coffee shops in 2004 as a platform for growth.

It has tried to boost sales in the remaining area locations since, but decided to “call it a day” this quarter when it realized profitability was still far off.

“In hindsight, while we have benefited tremendously through the experience we gained through this acquisition, the fact is, it did not turn out the way we expected,” Schroeder said.

“The most prudent course of action is to focus our U.S. (efforts) in our core growth markets where we are experiencing greater success.”

As Tim Hortons moves ahead with plans to grow in the U.S. it is perfecting a strategy that aims to decrease the amount of time from entering a new market to reaching profitability.

About 70 per cent of its expansion will be focused in existing markets in 10 states in the Northeast and Midwest U.S., where the brand continues to flourish. The other 30 per cent of new stores will be opened in nearby markets, Schroeder said.

Most recently it has trimmed that timeline to three to five years in Syracuse, N.Y. It is currently focused on Detroit, Mich. and Columbus, Ohio.

“We continue to evolve and refine that strategy with all of the learnings we get with every experience in the U.S.,” he said.

Yarbrough, however, suggested that growth opportunities for Tims might be limited to border-region markets where has made inroads, such as Buffalo and Syracuse, N.Y., and Detroit, MI.

“Either you’re going to expand across the United States, or you’re going to stay in the 10 states you’re in and those states only offer so much growth.”

The company (TSX:THI), which has more than 3,700 stores in North America, announced late Wednesday that it earned $73.8 million in the third quarter, or 42 cents per share — up more than 20 per cent from last year.

Three-month revenue was up nearly 10 per cent to $670.5 million, from $610.7 million and ahead of analyst expectations.

However, the company recorded a $20.9 million accounting charge to reflect the impaired value of those assets in its third quarter. That will be followed by an additional charge of up to $30 million to be booked in the fourth quarter.

Tim Hortons U.S. segment had an operating loss of $17.5 million in the third quarter, but excluding the charge related to the store closures, it would have recorded a $3.4 million profit.

Tims also announced that it will use $400 million from the sale of its half of Maidstone Bakeries to buy back some of its shares on open market, a move that may win investor favour. It will use another $30 million as a fund to help offset some of the anticipated rises in coffee, sugar and flour costs over the next year.

During the third quarter, Tims opened 44 locations in Canada and 35 in the United States — essentially offsetting the 36 that will be closed in New England.

Tim Hortons is Canada’s biggest restaurant chain and the fourth-biggest in North America.

In total, it has 3,703 restaurants, including 3,082 in Canada.

Shares in the company were down 39 cents or one per cent at $39.01 in afternoon trading Thursday on the Toronto Stock Exchange.