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Tim Hortons Report

Autor:   •  January 8, 2019  •  5,491 Words (22 Pages)  •  42 Views

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Key factors to succeed in the industry include implementing new technology, innovating food products, and creating economies of scale in sales and supply chain operations. New technology can enhance the consumer experience, collect consumer data, and increase brand loyalty in a cut-throat industry. Adopting mobile technology is crucial, with examples of mobile payment like Starbucks’ “Order and Pay” app. Through this app, Starbucks has built a goldmine of consumer information which will guide future product development and marketing campaigns; this also ties into food innovation, which ultimately drives sales. As consumer preferences shift, recently towards healthier options (Alvarez, 2017), companies must innovate their products to align with these changes or they risk losing market share. Food innovation also aims to increase the price per order by introducing higher priced items or product bundling (Tim Hortons, 2014). Both new technology adoption and food innovation converge into the larger goal of achieving economies of scale. Selling large quantities allows companies to be profitable, despite slim margins.

The QS industry in Canada has been growing at a slow and stable annual 2.8%. 2017 industry revenues are expected to be $24.3 billion, with profits of $1.3 billion (Alvarez, 2017). Margins are slim at 8.3% (Alvarez, 2017) due to high costs from product ingredient purchases (39% of average company revenues), wages (27.8%), and property fees (12.3%). This high cost structure pushes many companies to seek alternatives in vertical integration to better serve demand, automation to reduce wage costs, and consolidation to share physical restaurant locations.

In terms of raw materials, QS companies have high leverage over their suppliers. TH has multiple suppliers for coffee, sugar, and paper, and maintain alternate suppliers, if needed (Restaurant Brands International, 2016). This reduce costs, but only for some raw materials. Coffee is still very vulnerable to global pricing fluctuations. In 2015, drought and poor weather significantly reduced supply, while global demand increased. This supply deficit has resulted in prices soaring in double digit growth since 2011 (Reuters 2016). Vertical integration can help stabilize some of this price fluctuation, which TH attempted to do by operating two of their own coffee plants (Restaurant Brands International, 2016); ultimately companies are susceptible to the low and volatile supply of coffee. In addition to fluctuating global prices, more specialized products, as a result of product innovation, also means higher supplier bargaining power. TH has admitted that they only have a handful of suppliers for each product category and any changes “would likely adversely affect our business” (Restaurant Brands International, 2016).

The average price of a QS meal is $8.50 (Sturgeon, 2015), which translates to low buying power of individual consumers. The low purchase quantities and the sheer number of consumers dilute the power of individual buyers. However, there are many substitute products for QS restaurants that are a growing threat, and the brand switching costs are almost non-existent.

Industry Analysis

Overall the industry is mature and growing at 2.8% annually with slightly increasing annual profits of $1.3 billion. Large companies have horizontally integrated and competition is fierce for existing consumers and prime real estate; it has high competition and low barriers to entry. Approximately 60% of new restaurants close or are sold within three years of opening (Alvarez 2017). The industry is still attractive and has niches to serve, but it is increasingly difficult to enter and survive. Thus, companies are looking towards global expansion to sustain their growth.

There are a number of macro-economic, social, legal and other factors that impact the industry. The industry is heavily dependent on consumer confidence, which indicates discretionary spending on fast food (Alvarez, 2017). The QS industry is subject to many government regulations, specifically regarding food safety, occupational safety, labour, and franchising (Restaurant Brands International, 2016).

3. MARKET / DEMAND ANALYSIS

Since the QS industry is in the mature segment of the industry life cycle, revenues grew modestly at 2.8% annually. The industry essentially targets all consumers, but the middle-class consumers sustain the industry. The middle income quintiles compose 60% of industry demand (Alvarez, 2017). There are also two target markets: baby boomers and young adults. The baby boomer generation has high discretionary income compared to other age demographics, which is an indicator of dining out. Young adults aged 18-30 now also have high discretionary income due to delaying marriage and having children, and they tend to value convenience.

Currently the most relevant trend to the QS industry is consumer demand for quality: consumers want healthy foods made from high quality, and ethically-sourced ingredients (Tristano, 2016). Companies must adjust their product lines to reflect this, creating an opportunity to compete on food innovation and market positioning based on supply chain transparency. Mobile technology is also becoming increasingly integrated into consumers’ lives. Starbucks receives 25% of their orders on their mobile app, and the industry can expect 10% of its sales made via mobile order by 2020 (Taylor, 2016). The QS industry’s main selling point is convenience; adopting new technology will allow companies to keep that promise, capture consumer data, and increase brand loyalty. The price elasticity of demand is high for fast food; the industry is vulnerable to trends that affect consumer confidence, especially with many substitute products.

4. FIRM ANALYSIS

Brief History

In 1967, Tim Horton partnered with Ron Joyce, first franchisee, to expand the business. After Horton’s death, Joyce took over and expanded into Quebec in 1977. By 1984, TH penetrated the U.S. market and established their first store in Tonawanda, NY. In December 2014, BK officially acquired and merged with TH. As of Dec 31, 2016, TH generates approximately $2.1 billion USD in sales and has 4613 restaurants globally (Restaurant Brands International, 2016).

Over the years, TH increased sales from their innovative menu items. Notable products include: apple fritters & dutchies (1964), timbits (1976), iced capps (1999), coffee pods (2011) and dark roasted coffee (2014). In addition to their menu innovations, TH also developed technology to increase sales. In 2014, the company partnered with CIBC to develop the Double

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