Tim Hortons‘ parent company replaced its chief executive and acknowledged that its franchisees’ profits have slipped well below pre-pandemic levels, moves that coincided with a simmering franchisee revolt over the cost of coffee and other ingredients.

Restaurant Brands International Inc. made the announcements on Feb. 14 while reporting new financial data that showed the company’s net income increased 18 per cent in 2022, to US$1.5 billion.

Joshua Kobza, the current chief operating officer, will take over as CEO on March 1, inheriting day-to-day leadership of a company that also owns the Burger King, Popeyes Louisiana Kitchen and Firehouse Subs brands.

Comparable sales at its Tim Hortons restaurants increased 10 per cent from 2021, compared with an annual increase of 10.6 per cent the previous year, but higher revenue didn’t necessarily translate into bigger profits for franchisees.

Patrick Doyle, executive chair of RBI’s board, said on a call with analysts that the average Tim Hortons restaurant made $220,000 in annual earnings before interest, taxes, depreciation, and amortization. That’s about $100,000 less than in 2018, which is the last time RBI reported the metric, according to a transcript of company’s 2019 investor day presentation.

A spokesperson for RBI said there was no connection between the news disclosures and a decision by a group of franchisees to go public with complaints over cost increases for inputs such as coffee and sandwich ingredients that they are forced to purchase from head office. The Alliance of Canadian Franchisees told select news outlets last week that its members’ profits had fallen to a “crisis point,” creating some drama ahead of the RBI’s quarterly earnings update.

Doyle said the company will now publicly report on franchisee profitability annually, to “elevate our accountability to our franchisees even further.” He blamed the drop in profitability on commodity cost spikes, “generationally high inflation” and the lingering impacts of the pandemic on store traffic.

“Those aren’t excuses. What matters in my opinion is our baseline today and how we grow from here,” Doyle said on the call. “There’s an opportunity in Canada to improve profitability across all formats and regions.”

‘New era’

In two weeks, Kobza will take over from current chief executive José Cil, as a way of ushering in “a new era of growth,” Doyle said. “This is about setting ourselves up for an accelerated pace of growth for the next five to 10 years.”

Analysts at Citigroup Global Markets Inc., however, said in a note that they doubted Kobza represented a change in strategy, but is “potentially more of a peace offering to vocal franchisees.”

The Alliance of Canadian Franchisees (ACF) has been trading barbs with RBI in the media since last week, after leadership at the franchisee association decided that meetings with executives at the company didn’t “get anybody anywhere,” according to executive director Dave Lush. So Lush gave interviews to the Financial Post and the Globe and Mail, complaining about the costs that RBI was forcing onto franchisees.

“The (franchisees) are, in their minds, almost at a crisis point for profitability,” Lush said profits had fallen to a “crisis point,”.

In response to the criticism, Tim Hortons spokesperson Michael Oliveira dismissed ACF as an “antagonistic” group and said the company doesn’t consider it to be a legitimate voice for franchisees.

“Airing grievances in the media is not what our guests expect of successful, profitable Tim Hortons restaurant owners,” he said in an email.

Lush wouldn’t say exactly how many members his organization represents, though he did say they collectively own 1,100 Tim Hortons restaurants, out of a total 5,600 locations worldwide.

ACF, formerly known as the Great White North Franchisee Association, has engaged in messy public spats with RBI in the past, but appeared to have gone dormant in recent years after settling a part of class action lawsuits with the company. Since then, RBI has boasted about a “back to basics” turnaround at Tim Hortons in recent quarters, with sales surpassing pre-pandemic levels.

“We’ve now reported seven quarters of strong sales growth at Tims,” Doyle told analysts.

Higher sales

In the earnings update, RBI reported sales of US$1.83 million at Tim Hortons in the fourth quarter, up about five per cent over the same period in 2021. Profit in the three months ended Dec. 31 was US$336 million, a 28 per cent increase from a year earlier.

Lush said the sales increases for franchisees have been outpaced by the cost of ingredients.

“This isn’t a case of ‘I’m not making enough money and that makes me unhappy. This is a case of ‘I’m not making a profit at all,’” he said last week.

Matt Dunigan, RBI’s chief financial officer, told analysts that volatile commodity prices, including coffee beans, drove up costs in the Tim Hortons business in the forth quarter of 2022. “As an example, we typically buy coffee nine to 12 months out and as a result, in Q4, we were working through inventory that was purchased at more elevated levels,” he said.

Christopher Carril, an analyst at RBC Capital Markets LLC, said in a note that performance came up short partly because of “higher-than-anticipated” supply chain expenses at Tim Hortons.

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