Tim Hortons rethinks what U.S. customers want

Tim Hortons Inc. (TSX:THI) will take a decidedly American approach to menus at its U.S. stores as the chain prepares to roll out more quick service restaurants south of the border.

While it’s still a work in process, president and chief executive Marc Caira said Wednesday that Tim Hortons needs to reconsider what it believes U.S. customers like to eat, because it doesn’t always fit with what makes Canadians’ mouths water.

“The challenge there is to build loyalty beyond the breakfast day part, and how we plan on doing that is by developing products specifically for the American consumers,” he said in a conference call with analysts after the company released its latest financial results.

“In the past, we may have tried to perhaps use Canadian products a bit too often.”

Caira, who joined Tim Hortons last summer from the global operations of Swiss food and beverage company Nestle, didn’t reveal what he thought suited U.S. appetites., but said a major focus would be on snacks for lunch and dinner hours. However, he said there would be an emphasis on new breakfast menus too.

Several of Tim Horton’s recent Canadian menu additions first launched in the U.S., including the egg white breakfast sandwich and lunch paninis.

Mike Meilleur, executive vice-president of the company’s U.S. operations, said some of the latest new products stateside include frozen hot chocolate and a spinach and egg hand-held pie.

On Wednesday, Tim Hortons reported a 5.5 per cent bump in net profit in the first quarter to $90.9 million, results that fell short of analyst expectations. The profit amounted to 66 cents per diluted share, compared with $86.2 million or 56 cents in the same period last year.

Analysts on average had expected 68 cents per share, according to estimates compiled by Thomson Reuters.

Revenues were up 4.8 per cent to $766.4 million compared with $731.5 million.

Operating expenses increased by 7.3 per cent due to items such as increased rent, renovations and new restaurant openings, although the company also blamed the higher costs on $3.1-million of expenses from the launch of its own co-branded credit and loyalty card, the Double Double Card.

Same-store sales, those at stores opened for more than one year, were up 1.6 per cent in Canada and 1.9 per cent in the United States, despite some challenges including bad weather.

Tim Hortons is looking for fresh inspiration in the United States where it still trying to gain traction, while shareholders have called for the chain to refocus its expansion plans. The pressure led to the company promising to drive more brand awareness and develop more franchises.

In February, Tim Hortons announced plans to open 300 new U.S. locations by 2018 in various cities including St. Louis, Youngstown, Ohio, Fort Wayne, Ind. and North Dakota, where it already has a presence.

On Wednesday, the company added Pennsylvania and West Virginia to the list, saying they would together open as many as 20 Tim Hortons.

Feeding the U.S. customer will be an entirely different challenge than appealing to Canadians, partly because the industry competes with food items that sometimes grab headlines because they’re so outrageous. For instance, Taco Bell recently launched a waffle taco that it has aggressively marketed on television as a more exciting alternative to McDonald’s Egg McMuffin.

Other U.S. coffee chains have also pursued stronger position in the breakfast market, including Starbucks which revamped its menu in March to include more sandwiches like a breakfast croissant with ham, cheese and egg.

In Canada, the competition is comparatively tame, although Tim Hortons is still refreshing its menu with new items. In the past few months, it has introduced warm kettle chips, a chicken sandwich and a new line of frozen green tea beverages that Caira said he hopes will keep customers coming back throughout the day and buying more.

“We need to convince a small percentage of those ordering a single item to order two and, for those currently ordering two items, we’d like some of them to order three,” he said.

Tim Hortons has begun placing coffee bean supply orders for 2015, though chief financial officer Cynthia Devine said it’s at a higher price than this year. International coffee futures prices have been on a steep increase, rising more than 60 per cent this year, as Brazil and other key coffee producing countries face extremely dry weather.

Typically, higher coffee prices are funnelled down to the customer, though Devine did not outline any sort of plan and said the company is “monitoring market prices closely.”

“We will continue to make decisions that we feel are right for the chain over the long term,” she said.

Shares in Tim Hortons closed down more than one per cent, or 79 cents, to $58.89 on the Toronto Stock Exchange.