Tim Hortons Case

Business Model

Tim Hortons primary business model is to identify potential restaurant locations, develop suitable sites, and make the new restaurants available to approved franchisees, with the objective to have franchisees own substantially all Tim Hortons restaurants except for a few Company-owned stores used primarily for franchisee training. Although the Company directly or indirectly owns only a small number of stores, it does own, or has a controlling interest in, the real estate for approximately 8% of franchised restaurants. The Company's vertically integrated business model allows Tim Hortons to improve product quality and consistency, protect proprietary interests, facilitate the expansion of its product offerings, control availability and timely delivery of products, provide economies of scale and labor efficiencies, and generate additional sources of income. For FY12 rental royalties and franchise fees grew 6.5% and 5.8% to $781million and $113.9million respectively.

Tim Hortons business model generates several sources of revenue for the Company including distribution sales, franchise fees, rent and royalty revenues, equity revenue, manufacturing revenue and sales from the limited number of Company-owned restaurants.

Tim Hortons restaurants operate in a variety of formats, and the Company oversees and directs all aspects of restaurant development for system restaurants, from an initial review of a location's demographics, site access, visibility, traffic counts, mix of residential /retail /commercial surroundings, competitive activity, and proposed rental/ownership structure, to considerations of the performance of nearby Tim Hortons locations, projections of the selected location's ability to meet financial return targets, franchisee identification, and physical land development and restaurant construction costs. While the Tim Hortons restaurant design is typically a highly recognizable, standalone restaurant, the Company does vary the design to fit into local architecture and municipal requirements, including non-standard locations such as self-serve kiosks. The Company's self-serve kiosks typically have single-serve hot and cold beverage offerings and a limited selection of donuts, muffins, danishes, and other pastries and complement core growth strategy by increasing customer convenience and frequency of visits, allowing for additional market penetration of the Tim Hortons brand, and providing an additional model for unit growth and development.

Restaurant owners operate under several types of license agreements. A typical term is 10 years with a loyalty of 3 to 4.5% of gross sales and additional 8.5 to 10% of sales for rent (rent is based on gross sales). Higher loyalty applies to restaurants owned or leased from third parties. There is additional contribution required for advertising and promotions. The license also requires a full renovation of restaurants by restaurant owners every 10 years. THI typically pays (but not required to pay) 50% of such costs for properties owned or leased by THI.

Because the franchisees play an integral role in the success of Tim Hortons, the Company has implemented a comprehensive franchisee screening and recruitment process that employs multilevel interviews with senior operations management and requires candidates to work two to three different shifts in an existing franchisee's restaurant. Each new franchisee participates in a mandatory eight-week intensive training program to learn all aspects of operating a Tim Hortons restaurant in accordance with Company standards. Management-level employees of franchisees have the opportunity to become certified at the Company's training center after completion of an eight-week training program. The Company also provides ongoing training and education to franchisees and their staff after completion of the initial training programs. In addition, Tim Hortons has standardized its restaurant management software with an application service provider to give the Company's system restaurants the ability to manage a variety of the day-to-day operations and management functions.

In non-franchised operator agreements where THI owns the equipment, signage and trade fixtures, the operator is required to pay 20% of gross weekly sales. All other expenses, including salaries, taxes, maintenance etc. are paid by the operator.

Tim Hortons quality control programs focus on maintaining product quality, freshness, and availability, as well as speed of service, cleanliness, security, and employment standards. These programs