W25260 TIM HORTONS: BRINGING CANADA’S ICONIC COFFEE TO CHINA Dr. Lucas Liang Wang wrote this case solely to provide material for class discussion. The author does not intend to illustrate either...

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W25260 TIM HORTONS: BRINGING CANADA’S ICONIC COFFEE TO CHINA Dr. Lucas Liang Wang wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveypublishing.ca. Our goal is to publish materials of the highest quality; submit any errata to [email protected]. i1v2e5y5pubs Copyright © 2021, Ivey Business School Foundation Version: 2022-02-09 On February 26, 2019, the first Tim Hortons coffee shop in China was opened on the ground floor of an office building near the People’s Square, one of the busiest business districts in Shanghai. This new coffee shop marked the entry of Tim Hortons⎯the number-one coffee franchise and a national icon of Canada⎯into a new foreign country (see Exhibit 1). To chart the entry and the following operation of the coffee brand, the parent company of Tim Hortons, Restaurant Brands International (RBI), teamed up with Cartesian Capital Group (Cartesian Capital), a private fund, in a joint venture, Tim Hortons (China) Holdings Co., Ltd. (Tims China). Yongchen Lu, the chief executive officer (CEO) of Tims China and a graduate of the master of business administration program (MBA) from Tuck Business School at Dartmouth College in the United States, also attended the event. The opening of the first shop was certainly celebratory, but Lu knew better than anyone that greater challenges would lie ahead. Although the coffee market in China had been projected to soar in the next few decades, Tim Hortons was an apparent latecomer relative to other foreign brands like Starbucks and countless indigenous providers. As a later entrant, how could Tim Hortons best position itself and expand in this rapidly growing market? TIM HORTONS: CANADA’S ICONIC COFFEE CHAIN The first Tim Hortons shop opened in Hamilton, Ontario, Canada, in 1964, serving freshly ground coffee and two types of doughnuts⎯the Dutchie and the Apple Fritter. The founder, Tim Horton, was a legendary hockey player in the National Hockey League and branded the store with his name to appeal to consumers. Ron Joyce assumed sole ownership of the fledgling coffee brand after buying out the Horton family in 1974; the chain had around forty shops then.1 Through aggressive franchising, Joyce subsequently turned Tim Hortons into a nation-wide coffee chain in Canada. Tim Hortons coffee shops were present in bus stations, airports, shopping malls, gas stations, and community centres in cities and rural areas stretching far into the north of the country. It eventually surpassed McDonald’s Corporation (McDonald’s) and became Canada’s largest quick-service chain per systemwide revenues in 2002. A ut ho riz ed fo r us e on ly b y K w an K iu C hi an g in In te rn at io na l B us in es s at U ni ve rs ity o f O tta w a fr om 9 /7 /2 02 2 to 1 1/ 30 /2 02 2. U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. mailto:[email protected] http://www.iveycases.com/ Page 2 W25260 Coffee was Tim Hortons’s signature offering, and its famous original blend was made with 100 per cent Arabica coffee beans and, per the “always fresh” policy, served within twenty minutes once brewed. With the average price for the brewed coffee being less than two Canadian dollars per cup, the chain had striven to serve everyone. Yet, the chain’s menu had ballooned along with its geographic spread. Timbits (bite- sized doughnut balls) were introduced in 1976, followed by a variety of additions in the 1980s and 1990s, including freshly baked pastries such as muffins, cakes, and croissants, and specialty beverages such as flavoured cappuccino, café mocha, and iced cappuccino. In 2006, the chain started rolling out sandwiches, paninis, wraps, and bagels throughout the day, further enriching the menu. Lemonade, hot chocolate, lattes, and specialty teas appeared on the menu in the early 2010s. With the ubiquity of its outlets, Tim Hortons permeated Canadian life, rendering its brand a cultural icon. For Canadians, Tim Hortons coffee shops were the default place to go to, whether they were on their way to a morning shift, enjoying a coffee break, assembling for a casual gathering, or simply grabbing a drink on the go. The attachment of Canadians to this brand was unprecedented, as evidenced by the chain consistently earning top rankings in lists of Canada’s best or most influential brands. Most recently, Forbes had named Tim Hortons one of the Top 10 Global Fast-Food chains in the world. Thanks to Tim Hortons, Canada had earned the nickname Timbit Nation and had the highest consumption of doughnuts and the most doughnut shops per capita in the world. The strong growth momentum and ever-rising brand value had led to increased interest in Tim Hortons by strategic and financial investors. In 1995, Wendy’s International, Inc. (Wendy’s), an American burger company, acquired Tim Hortons. Intriguingly, the coffee chain significantly outperformed its burger counterpart in the subsequent periods. In 2009, it regained independence and became a publicly traded Canadian company. The ownership of Tim Hortons changed hands again in 2014, when 3G Capital, the Brazilian private equity fund that owned Burger King, acquired the coffee chain. Post-acquisition, 3G Capital merged its two fast-food service chains into a new holding company, RBI, which resulted in the world’s third-largest quick-service restaurant company.2 Since the takeover by RBI, Tim Hortons had witnessed steady growth in sales and store counts (see Exhibits 2 and 3). By December 31, 2018, Tim Hortons had generated system-wide sales of US$6.87 billion, representing a 2.4 per cent increase from the previous year. The count of system-wide restaurants had reached 4,846⎯a record high⎯and among these, 3,955 stores were domestic and 891 were overseas. COFFEE INDUSTRY Coffee was one of the world’s most consumed beverages. People had chewed the whole coffee berry long before making drinks with the beans, as was commonly done now. 3 Coffee was indigenous to the southwestern uplands of Ethiopia in Africa.4 By the eighteenth century, people had planted coffee crops widely in tropical and subtropical areas around the globe.5 Coffee generally fell into three categories, according to the way it was consumed: instant coffee (also called soluble coffee) came in a powdered form, including a powdered mixture offering with sugar or cream, and could be quickly made into a beverage with a simple pour of hot water or milk; ready-to-drink coffee was pre-made liquid coffee that was sealed in bottles or tins; and brewed coffee was made from freshly ground coffee beans and consumed onsite. While the first two types were commonly sold in retail outlets (e.g., supermarkets, convenience shops, and vending machines), ground coffee was consumed mostly in coffeehouses, restaurants, or at home.6 A ut ho riz ed fo r us e on ly b y K w an K iu C hi an g in In te rn at io na l B us in es s at U ni ve rs ity o f O tta w a fr om 9 /7 /2 02 2 to 1 1/ 30 /2 02 2. U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. Page 3 W25260 People’s enduring fondness for coffee began with the energizing effect of caffeine, yet physical caffeination was just one of several reasons behind the popularity of the beverage. Coffee blended well with many flavours and could be adapted easily into different cuisines. A coffee culture often grew as people developed ideas, notions, and feelings toward how coffee was roasted, brewed, and served as well as where they drank it.7 Furthermore, with their omnipresence, coffee shops had become popular public places for such lone activities as reading, writing, or surfing the Internet and for social interactions that fostered intellectual discussions, political arguments, and conversations on trending topics. Adam Smith allegedly wrote his famous book, The Wealth of Nations, in a coffee shop.8 Both the production and consumption of coffee were unevenly distributed across the world. In recent decades, Brazil and Vietnam were the world’s largest producers of coffee beans⎯together representing almost half of the global output. The European Union, the United States, and Brazil were the world’s top three coffee-consuming countries/regions, accounting for nearly 62 per cent of global consumption. Trailing behind these three were Japan, Russia, China, Indonesia, and Vietnam.9 The regional distribution of production and consumption spurred extensive imports and exports of coffee beans and related products around the globe. In fact, coffee beans were one of the earliest global commodities, dating to the seventeenth century, and were currently the second-largest traded commodity, after crude oil. At present, worldwide consumption of coffee had grown steadily to reach more than two billion cups per day.10 TIM HORTONS⎯INTERNATIONALIZATION JOURNEY Tim Hortons first extended beyond the domestic market with a store in Tonawanda, New York, in 1984. Although a handful of Tim Hortons coffee shops opened in the United States in the years that followed, this initial attempt of venturing into Canada’s neighbour to the south was not quite successful. The merger with Wendy’s offered an opportunity to expand further in the United States. During the eleven years under Wendy’s ownership, more than 270 Tim Hortons shops were opened in several northeastern states, including Michigan, Maryland,