Growth Jitters For Tim Hortons

Coffee giant goes public, but is there room to grow?

TORONTO (Monday, March 20, 2006) - Tim Hortons' popularity has observers expecting a caffeine-fuelled trading frenzy when its shares hit North American stock markets for the first time this week. But analysts caution that the Canadian coffee chain's growth may be stunted.

There is about one "Timmies" for every 11,500 Canadians. That's more than double McDonald's ratio of one restaurant for every 21,700 Americans.

2,597 OUTLETS

There are about as many Tim Hortons per Canadian as there are McDonald's, Burger King and Wendy's combined per American, points out Peter Oakes, a New York-based analyst with Piper Jaffray & Co. He's not sure the Canadian market can sustain as much growth as Tim Hortons is counting on.

Since it was bought by Wendy's International Inc. in 1995, Tim Hortons Canada has grown from 1,180 outlets to 2,597. It has also posted impressive growth in same-store sales by expanding its menu and ratcheting up the convenience factor.


"However, we are a little queasy about trend-lining its growth going forward," Oakes said in a recent note to clients.

The coffee and food operator, whose IPO this week values the company at about $4 billion, has suggested it can expand another 40%, reaching one outlet for every 8,000 Canadians.

"There are numerous growth opportunities in the Western provinces, Quebec and select high-traffic metropolitan areas," the company said in a filing with regulators last week. It added that its 'we fit anywhere' outlet strategy allows it to add restaurants in popular areas without saturating the market.

Its long-term goal is to have between 3,500 and 4,000 restaurants in Canada.

Oakes, who describes himself as "a steady fan of Tim Hortons -- the Canadian biz, that is," calls that goal "highly unlikely."

"That leaves Tim Hortons USA to pick up the slack," also "an unlikely scenario," he said.

Say Tim Hortons to many Americans, and the reply will be, "Who?" There are 288 south of the border, up from 17 in 1995. The company hopes to have 500 by the end of 2008.

Buffalo is the most successful U.S. market so far, according to the company, with 48 outlets at the end of 2005.

"We enjoy consumer loyalty and brand acceptance in this market," Tim Hortons said.

Detroit, with a compound annual growth rate of 6.7% over the last seven years, and Columbus, with growth of 6.4%, are two other successful markets.

But Tim Hortons was disappointed by its acquisition of 42 restaurants in New England in the second quarter of 2004, which forced it to take a pre-tax charge of $53.1 million in the fourth quarter.

Besides opening new outlets, another avenue for growth is selling more at existing stores. Average Canadian same-store sales rose 5.2% in 2005.

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