Paul House, COO and president of Tim Hortons, has believed in the potential of the Canadian-based brand for decades. Today, it is his mission to convince the industry that Tim Hortons is more than just a treat shop and that its 70 percent market share in Canada is more than just luck. To that end, House has his eyes on the United States, specifically the Northeast, where he hopes to position his coffee shop brand as an alternative to just about everything already out there. He was more than 250 stores into his plan, when QSR caught up with him. The perception in the United States is that Tim Hortons is a coffee and doughnut brand. Is that a fair characterization? When I joined here, we had coffee and doughnuts and a small line of muffins. But over time, we've put in lunch. We've added a lot of baked goods. Our muffin line has expanded dramatically. We only had four varieties when I joined here. Today, we have over 20. We introduced bagels in 1996. That significantly changed our business. We brought soup into our business back in the '80s. We matured into sandwiches in the '90s. We have a great afternoon business. We have a good morning business, a healthy lunch business. We have an average guest check of $2.50, but the reality is we do business through all dayparts, which allows us to survive very successfully on a low guest check. Lunch is a growing segment of our business. We're second to McDonald's at lunch here in Canada. For somebody that was late coming into lunch, we're very happy with our position. Are you seeing that same kind of success during lunch at your U.S. stores? We're starting to get that way. We're a healthy alternative because of our soup and sandwich business. Our soup gives us great equity for health. The sandwiches add credibility; everyone is moving into that category. That's good and bad and shall certainly pass, as well. But, sandwiches are the flavor of the day, right now. We do many other things. We're into beef stew, chicken stew. We're a healthy, wholesome lunch. Isn't it ironic that a former doughnut shop brand is now positioning itself as a healthy alternative? We own a wonderful position—soup and sandwiches. Doughnuts, today, are an important part of our business, but not the core of our business. They were 25 years ago. Today, at an average store, doughnuts make up 10 to 15 percent of our total sales. We'll do that much at lunch. The business has radically changed in the 20 years through my career here. And, it's continuing to change. The whole food industry in the next five years will change more dramatically than it has in the past 20. How so? The emphasis on healthy alternatives and portion size is going to—is—radically changing the landscape. Just look at what McDonald's is doing, what everyone is doing. The things that carried the day 20 years ago will not survive going forward. You need to change your menu and adapt to the changing consumer demands. Those who do it best will be the ones that champion. Those who don't will go by the wayside. When did the first store in the States open? Our first stores in Buffalo opened in 1985. We had four stores there and stayed with four stores into the early '90s. We really started developing stores in the U.S. in about '96, after we merged with Wendy's. Through that association, we did a couple of major real estate deals. We bought the Rax chain and all its stores. Wendy's took some, and we took a significant amount of them. We bought a bunch of Hardee's locations in Detroit. Again, Wendy's took some, and we took a bunch of them. That was really the point when we started to look at the U.S. market very seriously. Frankly, at that point in time, we probably took on more than we were capable of handling. We slowed down a bit after that. We have a great team today. Our sales increases are certainly reflective of that. We feel very positive about the U.S. and are going to stay focused on the Northeast. We think there is great opportunity for us there. We'll have 500 stores. We are committed to doing that. And when we get to 500, we'll start to be recognized in the United States as a serious player. That's how we changed the brand in Canada, and I think that's what we have to do in the U.S. I watched Dave Thomas's biography. It talked about how the Wendy's chain really started to move when they got to 500 stores. In the Northeast, if we get 500 stores by 2007, we'll have a strong army on the landscape. Is there a large Canadian presence in those U.S. growth markets? No. There is really no carryover of the brand from Canada to the United States. We thought there would be. We did some research in the Buffalo market when we decided we were going to pick up the pace. No one knew who Tim Hortons was. So we had to take a new approach. There is a bit of awareness if you're in a border town, but very little. You can't survive on that. You have to build brand recognition. Our Buffalo success is strictly attributable to marketing, good operations, good owners, and good stores. Our Canadian reputation is not hurting us, but it isn't helping us. Does that mean Tim Hortons is viewed as a new brand to most Americans? We're a brand-new brand, and we have to prove ourselves. That's what we're setting up to do. How? We're doing what we do in Canada. We market an always-fresh product—fresh sandwiches, fresh doughnuts, fresh coffee. Doughnuts are put on the shelves three to four times a day. We bake continuously throughout the day. You'll find our pricing is really competitive in the marketplace. We're going to put our product out and say, "Okay, who's the best?" You know, prove ourselves. That's what we're going to do in New England. We're going to show them what our brand is about and let the consumer pick. It might take a long time in a market where there is an established buying pattern. But, we're persistent. We've never left a market. When we go there, we stay. We stick around. We make it work. We are too stubborn to leave. Forty years has proven to us that we might take a beating, but we'll get traction if we just keep doing it right. That's our philosophy. Tim Hortons is a heavily franchised brand in Canada. Will you use that same model to grow in the States? Absolutely. We believe in franchising—always have from day one. We are not in the corporate store business. Our founder was a franchisee before he became a franchisor. He built the brand on a strong relationship between the franchisor and the franchisees. We put a lot of investment into our locations. Our franchisee model is based on a sharing of the investment. Occasionally, one of our franchisees will own all the real estate, but in most of the cases, we own or control the real estate. This model has worked well for us. Quite frankly, when we went into the U.S. we couldn't get stores franchised because we weren't known, so we had to operate on a corporate-store model, which was totally foreign territory for us. What is the current ratio of franchised to corporate-run stores? In Canada, we are a good 95 percent franchised. We have about 12 stores in the Oakville head office area that we keep for training and other things. Any other stores that we are operating are stores we have bought back for one reason or another, but don't plan to operate for long. They're usually just inventory, then we move them along. In the U.S., we are about 70 percent franchise/30 percent corporate. We bought the Bess Eaton chain in the spring. Those 42 stores all were and still are corporate. We won't look to franchise there until sometime this time next year. How much does the purchase of existing brands like Bess Eaton play into your growth strategy for the United States? It's one of the opportunities we look at, but it's certainly not our primary way of building the brand. Our traditional way of finding real estate is the way we'll go the majority of the time. Bess Eaton came along…it was really a real estate play. It gave us an opportunity to move into a market that we wanted to go into and give us a presence right off the bat. We've looked at other chains as possible acquisitions, but, generally, they come with too much baggage. But if we can find something like our Hardee's acquisition where we can buy real estate and not inherit anything other than that, we'd certainly look at that. If something right comes along, we want to talk to people. Is Tim Hortons a brand that would work in an urban area, say Manhattan? Well, we're certainly working in downtown Toronto. We have great stores there and are doing some huge volumes. We have stores doing over $2 million that are only open 12 hours a day and are closed every weekend and holiday. We are perched across from Starbucks and many other places. There is great opportunity for our kind of product because it's portable, it's what people are looking for—and the value. For us to go into the urban markets in the United States, we have to be recognized first. We have to get past that 500-store hurdle so that when we do open in those kinds of markets, we have some awareness. If you can come in with a reputation, then that's the way to go. That's the way we will attack it. That's the way we did it in Canada. We did not have a heavy penetration in Toronto until the last six or seven years. We grew in the suburbs and slowly migrated into the urban area. Who is the ideal Tim Hortons franchisee partner? Generally, our people come into us as a couple—usually a husband and wife. We ask for a commitment from both. They come in as single store owners and then grow to the size that their abilities will allow. It depends on the market they're in and how well they can handle it. Some people are very content with two or three stores; other people want five to ten. With our common model, you'll find someone running two to three stores. Mom-and-Pop operators, if you want to call them that, are pretty sophisticated today. There are a lot of people who are tired with the corporate world, want the opportunity to grow their own business, have limited capital, but great work ethics. In our model, if you want between two and three stores, you will be financially very, very successful. Not that a brand won't grow with large corporations. We have some large multi-unit operators in our non-traditional business. But in our traditional sites, we want our people working and living in the community. We want them identified. We want our customers to know who owns that restaurant.
