Today we held an informative call with John Barker, former Senior VP and CCO of Wendy’s, who lived through the merger of WEN/THI. A replay of the call can be accessed below.
Replay: BKW/THI Merger Thought Leader Call
Summary Bullets
Can you provide some historical context on the prior WEN/THI merger?
- Tim’s is a unique brand; very tied into its communities
- There was a lot of excitement about WEN/THI coming together
- 1992 first time they were put together under the same roof
- In his 10 years of association with the brand, the phrase “iconic” would often be thrown around when referring to Tim’s
- Think it is a spot on description
- No major restaurant brand is tied as closely to its community or country than Tim Hortons
- Well-run mom and pop shop; about 2-3 restaurants per franchisee back in the mid-1990’s through mid-2000’s
- Franchisees were in love with the brand; you don’t see that everywhere
- Very solid business in Canada; the new unit growth was phenomenal from 1
- Avg. same-store sales over those ten years was 7.5%
- Wendy’s was very fortunate to pick up the chain at such a good price
What did the WEN/THI merger accomplish?
- The WEN/THI merger worked for shareholders
- Tremendous value was created by the time of the IPO and spinoff
- It was a good relationship from a value creation standpoint
- From a business standpoint, combination units never really took off on a national level
- One business was very Canadian centric, the other was very U.S. centric
- The two brands at that time felt that there was competition, because the franchisees see it that way
Will this deal help accelerate growth for THI?
- This deal can bring access to different types of franchisees for Tim Hortons
- It could require a different approach to running the brand
- Whether or not it will be as successful as it is in Canada remains to be seen
- The model they currently have in Canada works
Did THI stick to the mom and pop franchising model when dealing with WEN?
- For the most part, yes
- If THI wants to accelerate growth, they will need to change the culture of the business
- This is a multi-year process
- If they had large franchisees like they have in the Burger King business, that could be different
What other hurdles does THI face in building the brand abroad?
- Good brand awareness just South of the Canadian border
- But anywhere else, the brand doesn’t have much recognition
- Customers elsewhere don’t understand Tim’s as a brand, they only understand the functional needs of it
- Buffalo, Columbus, Michigan – as they immersed themselves more the in the local communities and the brand became better understood, it became more successful
- It would be difficult to accelerate growth under another franchise model
- THI uses a grassroots approach to building its business
Is there potential to grow the THI business outside of the U.S./CAN?
- They didn’t need THI to grow internationally when it was with WEN because it was growing so strong in Canada
- The functional delivery of the brand is just fine
- The delivery of products would probably have to be adjusted to some degree, because many of the products in Canada are very unique and they resonate with customers there
- How you do this internationally, no one really knows
- Tim’s was an R&D juggernaut back in the day
What is the risk of 3G cutting back on franchisee support for THI?
- This is something they must be very careful about
- WEN never tried to change THI’s operations
- THI has a very deep commitment to training, R&D and product delivery
- National marketing in Canada was brilliant, development and real estate expertise in Canada was best-in-class
- If you’re going to grow rapidly, you need to replicate these things
THI is already a fairly lean organization – will 3G find cost cutting opportunities there?
- Comes down to how much synergy they’ll try to create across the two brands
- WEN was careful to keep the brands separate
- They shared services at the very highest level only
- Two different approaches to the businesses
- Cost cutting buckets might exist, but they’re likely small
Do you believe the motivation behind the deal isn’t tax-based?
- There is certainly an opportunity to benefit from that
- This has created significant value already based on the stocks’ reactions
How will this be perceived in the franchise community?
- THI has been through this once already
- Didn’t have that much interaction with the WEN brand
- They didn’t really have a strong opinion about being owned by a U.S. company
- But since 2005 to today, franchisees are a little more sophisticated and they are probably paying attention to this pretty carefully
- They will not want their brand to change, particularly the way it’s operated
Has BKW created a firestorm of backlash against the brand?
- Social media is often blown out of proportion
- There could be an impact for a little while, but these are things that consumers typically get over
- Could be a one to two day phenomenon
- A lot of pride in the THI brand, so it’s a little different with that brand
- This should be watched very carefully
- On the political side, this is a very difficult position for politicians to be in as well as people who manage companies because you have a division of responsibilities
- But you are, by your charter, supposed to pursue shareholder value creation
What if BKW sees an extended period of declining sales due to this?
- Daily sales should be monitored closely
- BKW could pull back on the deal, but sincerely doubt that will occur
- You can do a lot to monitor social media
- Most big brands have these capabilities
How difficult is it to bring two companies with distinctly different cultures together?
- It’s a big issue because restaurant companies have distinct cultures
- Culture at THI is deeply ingrained; they certainly won’t want to change
- WEN decided early on to let the THI culture carry on
- The only place it blended was at the senior level
Will the THI Chairman stick around much longer?
- Don’t have any insight into that
- It would be wise for BKW to hold on to some of the high-end talent from THI, no matter how they structure the organization
- Smart companies always figure out a way to do that
- THI has been a juggernaut over a long period of time
- If we start to see leakage of people at the company, it would be concerning
- Franchisees will be watching this pretty closely
Howard Penney
Managing Director
Fred Masotta
Analyst