Tim Hortons operating profit margins slipped 1.48 percentage points to 12.48 per cent at 442 restaurants in Central Canada this year compared with 2016.Fred Lum/The Globe and Mail
The clash between the parent company of Tim Hortons and some of its restaurant owners is intensifying, with both sides vowing to take legal action amid a dispute about franchisee profitability.
Daniel Schwartz, chief executive officer of Restaurant Brands International Inc., told an internal Tim Hortons all-franchisee conference call this week it has taken legal action against a group of restaurant owners over confidential information it says was leaked, and "negative" comments about Tim Hortons.
Restaurant Brands has issued default notices to nine directors of Great White North Franchisee Association, which was formed in March by disgruntled restaurant owners to fight RBI's hyperfocus on improving efficiencies and the harm they say it inflicts on the business. The notices, based on alleged breaches of the franchisee contract and confidentiality requirements, could eventually result in the company pushing out those franchisees, franchise experts say.
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The association counters the default notices continue a pattern of conduct "to intimidate GWNFA and the efforts of the franchisees to associate in order to advance their interests," which is within their rights under existing law, association president David Hughes says in a letter on Thursday to Tim Hortons.
The company is "actively and in bad faith interfering with franchisees' right to associate and directly or indirectly penalizing or threatening franchisees who choose to associate," says Mr. Hughes, a franchisee in Lethbridge, Alta. "That pattern of conduct will no longer be tolerated."
The association is taking "appropriate legal action" including a claim seeking damages, he says.
The stepped-up fight follows a Globe and Mail article last week about a push by the franchisees' association to get RBI to approve higher prices to help cover the cost of pending minimum-wage increases in Ontario and Alberta. Some franchisees already were feeling squeezed by their parent company which they say is passing on costs to them to help boost the corporate bottom line.
Tim Hortons said in an e-mailed statement it is "committed to protecting and growing" the brand.
"We remain dedicated to working with our franchise owners directly, and through their owner-elected advisory board. As always, we look forward to continuing to support our restaurant owners and their teams."
The Globe article referred to a Sept. 7 e-mail from an RBI official to franchisees that outlined some Tim Hortons challenges, including operating profit margins that had slipped 1.48 percentage points to 12.48 per cent at 442 restaurants in Central Canada this year compared with 2016.
The e-mail also reviewed night inspections of restaurants, showing photos of display shelves left "barren or sloppy;" "overflowing garbage" pails; and food heaters without expiry-time labels, which is a food-safety issue, the e-mail said.
On Wednesday, CEO Mr. Schwartz told the internal franchisee conference call, a recording of which was obtained by The Globe: "We recently had another disturbing example of restaurant owners leaking confidential information to the press and harming the brand and harming your businesses.
"Owners who breach their licence agreement, who leak confidential information and speak negatively about our brand to the media, are not welcome to be part of this system. I have zero tolerance for this behaviour.
"We have already taken legal action and will continue to take all necessary steps to protect the brand."
Still, Ben Hanuka, a franchise lawyer at the firm Law Works, said the default notices are an unusual and aggressive step for a franchisor to take and could be conceived by a court as a veiled attempt to shut down the association and get rid of its leaders.
"A judge may potentially view this as an act targeting the franchisees' right to associate and impeding that ability," Mr. Hanuka said in an interview. "This is certainly a very drastic move – a very bold move."
Franchise legislation that was enacted in 2000 gives franchisees the right to associate, he said, emphasizing he's not involved in the Tim Hortons matter.
John Gordon, principal at restaurant adviser Pacific Management Consulting Group in San Diego, said he expects the situation to get worse now as franchisees dig in their heels. "This is a worst-case scenario."
RBI has refused to deal with the franchisee association, instead communicating with an elected franchisee advisory board that it is beefing up but which the association says simply is a rubber stamp for the company.
On Wednesday's franchisee conference call, company executives insisted Tim Hortons is on the right track. Mr. Schwartz said it is making progress in improving franchisees' profit margins, noting their costs were lower in July and are expected to be lower still in the company's third and fourth quarters, which will lead to the highest gross profit margins "in many years."
Sami Siddiqui, president of Tim Hortons in Canada, said on the call that sales had picked up over the summer and into the fall, thanks to the results of a Roll Up the Rim to Win marketing campaign to mark Canada's 150th anniversary as well as a strong breakfast and baked-goods business and a latte launch.
He said Tim Hortons will "strategically" increase prices in its restaurants "as we always have multiple times across our menu beginning later this year and extending into next year."
"We are confident we will be able to offset the impact of minimum-wage increases while maintaining transactions in our restaurants," Mr. Siddiqui said, adding the company has been active in fighting the proposals.
He said Tim Hortons's recent launch of a preorder-and-pay mobile app has resulted in 100,000 users and a double-digit increase in the amount customers spend for a purchase. He said the average digital transaction is three to four times more profitable than an analogue purchase and the chain is "just scratching the surface".