It’s not yet mid-morning but already Toronto feels like a filthy sauna. Health officials have warned residents to stay inside and avoid breathing the hot mucky air. Right downtown, where the pollution is worst, this is actually pretty easy: major stores and office buildings in the heart of Canada’s largest city are connected by an air- conditioned 10-km underground concourse offering almost every amenity known to humankind. So what is it that compels a steady stream of people to risk respiratory injury by emerging from one of the biggest of these buildings and making their way across the street?
It’s a Tim Hortons.
The familiar fire-engine-red sign went up just over a month ago, but it’s already turned the coffee and doughnut store below into a neighbourhood mecca. Some customers are clearly tourists happy to sit down in a place that looks like home. But most are as urban as the bank towers themselves: secretaries on a coffee break; well-coiffed executives in expensive summer suits; even an ultra-hip bike courier.
The store is small — only 315 square metres, almost a closet compared to the vast expanses of asphalt and arborite you see in the suburbs and off the highway — and it’s in an odd location, a skinny storefront on a one-way street that’s often clogged with traffic. The interior, decorated in eggplant and blond wood, is a far cry from the company’s trademark colours, yellow and brown.
But we should get used to it, food service executives and industry analysts say, because the unexpected sight of a suburban doughnut shop transformed into a chic downtown cafe is the shape of things to come. That’s not only true for Canada’s best-known coffee and doughnut business but also for the country’s $11.1-billion fast-food industry as a whole. All the old rules about what consumers in a given country or region will or will not buy are being radically rewritten. Almost every company that once concentrated on a single, well-defined market niche – – the morning, or the suburbs, or a geographic area — is crossing the conventional borders in an effort to win new customers and, more important, to lure existing ones back to their premises several times a day.
In keeping with that trend, high-priced coffee shops are now selling bagels and sandwiches and McDonald’s is launching a line of gourmet coffee and baked goods. “A lot of the old lines are now being blurred,” says Becky McKinnon, president and CEO of Timothy’s World Coffee, Canada’s third-largest speciality coffee retailer. “We have spent a lot of money making our stores convenient and comfortable. So how do we sell more of what we make to the people who like us?”
Fortunately for the companies involved, the food service business continues to grow by burgers and fries. Canadians now spend 41 cents of every designated food dollar on meals prepared outside the home. Moreover, the Toronto-based NPD Foodservice Information Group calculates that quick or limited service (known as QSR in the trade) now accounts for 64 per cent of restaurant visits, up from 58 per cent in 1996. “We live in a time-driven society,” says NPD vice-president Ailene MacDougall, “and QSR fills that need.” Quick-service restaurants are now both a necessity and an affordable luxury. “This trend has been fascinating,” says David Newman, who follows the food service business for Merrill Lynch Canada. “The more people are financially stressed, the harder they work. And the harder they work,” he says, “the more they eat out.”
We are, more than ever before, a nation on the move. “Canadians are up and out of bed and on the go much earlier than the traditional person might think,” says Peter Beresford, vice-president of marketing for McDonald’s Restaurants of Canada Ltd. We want to buy our breakfasts while we are in transit, preferably at drive-through restaurants, he adds. And all day, we want food that we can eat while holding it in our hands: sandwiches, muffins, bagels, wraps. While we prize convenience and portability, Canadians are also cost- and quality-conscious when it comes to their quick-service spending.
Plus there’s another criterion: “a growing demand for healthier products,” says Terry Meyer, co-owner of Edmonton-based Three Blondes & a Brownie Inc., McDonald’s national supplier of low-fat muffins. But these healthier products have to look and taste even better than the ones they’re replacing. “People want scones,” she says, “but they want scones with white chocolate.”
Tim Hortons saw it coming. From its earliest days, the company has been a fast-food pioneer. In 1964, Toronto Maple Leafs defenceman Tim Horton and his partner, former Hamilton policeman Ron Joyce, shook up the status quo by opening coffee-and-doughnut restaurants in a country where fast food was a novelty. What’s more, they were groundbreaking sports marketers, exploiting Horton’s association with hockey years before such promotions became standard practice. Miles Mattatall, a Hamilton-area franchisee, remembers how excited he felt when his father, Ed, bought the company’s very first location from Joyce, a childhood friend from Nova Scotia. The original store was painted blue and white, the hockey team’s colours, and when a new location opened, the Maple Leafs would show up to drink coffee and sign autographs. “I could hardly wait,” says Mattatall. “I’d get to see Horton, Frank Mahovlich, Johnny Bower — all the legends.”
Tim Hortons also broke ground by diversifying. In the 1980s, after the chain had grown to more than 100 stores, management started to strategize seriously for the future. By then, Joyce owned the company outright, having paid Horton’s family $1 million after the hockey star was killed in a car crash in 1974. He decided to drop the word “donut” from the name, and, a few years later, to introduce soup — a momentous move, says Paul House, president and COO of The TDL Group Ltd., which operates Tim Hortons on behalf of its U.S. owner, Dublin, Ohio-based Wendy’s International Inc. The success of the soup launch prompted the company to augment it with bagels, sandwiches and chili; in Quebec, Tim Hortons even sells baked beans with toast.
Whatever qualms early doughnut lovers may have had about the product mix seem to have been put to rest: the success of Tim Hortons’ strategy can be seen in its growth. In 1995, it merged with Wendy’s in a $580- million deal that gave Joyce, who now lives in Calgary, 15 per cent of Wendy’s, making him the U.S. company’s largest shareholder. The company now has more than 1,900 stores in Canada and 125 in the United States – – about 100 of which are combined with Wendy’s — and is expanding rapidly. Sales are expected to top $2 billion this year and, if Tim Hortons keeps opening new stores at its current rate, to surpass sales at McDonald’s Restaurants of Canada. “They’ve done an amazing job,” says Lisa Posluns, a Toronto real estate broker who makes her living doing deals for a variety of fast-food restaurants. “Landlords love them, customers line up out the door.”
So what are competitors doing to counter such success? Both Tim Hortons and McDonald’s insist they’re not rivals, and that their business plans are developed with no thought of one another’s next move. Still, McDonald’s has spent almost a year doing extensive research on Canadians’ appetite for coffee and baked goods, and is now in the process of launching its own line.
Called McCafe, the concept was invented in Australia and has so far been introduced in 15 countries. The first such store in Canada, a wood-panelled prototype designed by Burlington, Ont., franchise owner Ralph Sgro, was installed in May. According to Sgro, who has spent 14 years as a McDonald’s franchise operator, it’s receiving rave reviews from regular and out-of-town customers. “They’re saying this is excellent!” says Sgro. “They want to know when we’re coming to their town.”
The answer is pretty soon: this month, McDonald’s is opening 10 McCafes in existing restaurants in London, Ont. Depending on the response, others will be built in Charlottetown, Moncton, N.B., and Maple Ridge, B.C. Quebec’s first McCafe, located in Longueuil, will be unique in Canada; it will be a stand-alone bistro along the Starbucks model. The others will be what McDonald’s calls a seamless or integrated front counter that, like Wendy’s and Tim Hortons’ 100-odd “combo” restaurants, will give customers a choice of food and beverage. “We want to make it easy for people to come in and order a Big Mac with a latte for lunch,” says Sgro. “Then, later in the day, they can come back for a pastry and a cappuccino.”
All is not lost for doughnut purists, however. They can still take comfort in the advent of Krispy Kreme.
In the 18 months since it went public, the Winston-Salem, N.C.-based purveyor of the Hot Original Glazed has been a U.S. stock market darling and a business sensation. Kremeko, Inc., the Toronto-based company that plans to open 32 doughnut stores in Ontario, Quebec and the Atlantic provinces over the next several years, has received more than 400 franchise queries since the start of the year. Remarkable, given that the company is pushing neither convenience nor portability. It plans to build huge stores, each employing 100 people and requiring an acre or more of land. They will have booths and drive-through windows, and big neon signs proclaiming “Hot doughnuts now.” “This is a suburban destination concept,” says Kremeko’s Roly Morris, a former Starbucks executive who believes he can achieve similar success with this new venture.
As far as Tim Hortons’ management is concerned, the key to winning and keeping customers does not lie in duking it out over doughnuts — which, despite 16 years of diversification, still account for between 12 and 25 per cent of sales, depending on the province. Krispy Kreme, says House, is a U.S. phenomenon that may be a hit in Canada. “It’s much like Starbucks was when it started in Canada,” he says. “I assume they will do OK, but we’re doing just fine.” He also notes that if Krispy Kreme makes Canadians want to buy more doughnuts, Tim Hortons is bound to benefit.
Meanwhile, House says the company will focus on its own strategic plan, which involves expanding in Western Canada and Quebec, as well as opening a lot more cafe-type stores in downtown Toronto and other major centres — especially Vancouver, the only big Canadian city that still doesn’t have a downtown Tim Hortons. And after that? Trend-spotters say the momentum is mostly in Tim Hortons’ favour. But things are changing rapidly. Asked to identify the next fast-food trend, Meyer of Edmonton’s Three Blondes & a Brownie cites the fruit-and-vitamin concoctions from California and the Pacific Northwest that are gaining popularity in Canada. “This is a big story,” she says. “It’s almost a meal replacement, with wheat grass and this and that. I think it will provide some competition for coffee.” But not, she adds, for Tim Hortons. “No matter what the next fashion trend turns out to be, they will always be there. We’re Canadians. They’re part of our psyche.”