Tim Hortons’ reputational hit could hurt sales, says BMO, downgrading stock
TORONTO — Declining consumer perceptions about Tim Hortons’ brand have prompted Bank of Montreal to downgrade the stock of parent company Restaurant Brands International Inc., suggesting the public disfavour could hurt sales at Canada’s biggest quick-service restaurant chain.
Following a recent Leger survey that saw Tim Hortons plunge to the 50th most admired company in Canada from fourth a year ago, BMO Capital Markets conducted its own online survey to probe consumer perceptions about Tim Hortons.
“Overall, while brand perception of Tim Hortons remains overwhelmingly positive with respondents (75 per cent view it positively and only 11 per cent view it negatively), there was a significant shift in participants’ perception of Tim Hortons over the last 12 months,” analyst Peter Sklar of BMO wrote in a report Monday.
In an online BMO survey of 700 Canadians, 16 per cent of respondents said that their perception of Tim Hortons had become more positive in the last year and 28 per cent said that their perception had become more negative. Over the same period of time, their perception of Starbucks remained neutral and their impression of McDonald’s McCafé had improved, Sklar noted.
“Of those respondents who stated that their perception (of Tim Hortons) had become more negative, over 50 per cent stated that it was due to seeing negative press on Tim Hortons in the news and 71 per cent said that the negative attention would cause them to consider going to Tim Hortons less frequently; 27 per cent stated they would prefer to go to another coffee retailer more.”
Owner Restaurant Brands International Inc., set to report first-quarter results on Tuesday, has seen its share value decline 23 per cent in the last six months.
The BMO survey also found other Tim Hortons innovations, including espresso drinks and the mobile app, “do not appear to be gaining traction,” with consumers at a time that rival McDonald’s held a $1 coffee promotion generated significant consumer awareness.
Sklar revised his first quarter same-store sales estimate for Tim Hortons Canada to 0 per cent from a prior estimate of 0.8 per cent.
“While the same-store sales at Tim Hortons Canada has a minimal impact on the short-term earnings of Restaurant Brands International, we find that the stock tends to trade on same-store sales results.”
BMO downgraded the stock to market perform from outperform and slashed the target price to US$58 from US$70.
The news follows a protracted period of turmoil at the Tim Hortons segment of Restaurant Brands International, which has faced an ongoing revolt and lawsuits from a group of franchisees protesting a slew of head office practices that began after the beloved Canadian brand was scooped up and merged with Burger King by Brazilian hedge fund 3G Capital in 2014.
The federal government has promised to probe allegations made by the Great White North Franchisee Association earlier this month that new management has failed to live up to a number of promises made to the government in the takeover deal. That included commitments to maintain franchisee relationships, rent, and royalty structure for five years, and to maintain existing employment levels at Tim’s restaurants. Some Ontario franchisees drew the ire of labour groups and a wave of negative public attention in January after they reduced employee benefits in response to the province’s minimum wage hike. They countered that head office was not allowing them to increase menu board prices in response to the wage hikes, as other chains such as McDonald’s had done.
Tensions boiled over last week when the 19-member board of Tim Hortons franchisees that meets regularly with head office called out the 600-plus member splinter franchisee association in a letter for contributing to the brand’s damaged reputation by attracting negative media attention and contacting the federal government.
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