Once gung-ho about Hortons, Show Me Hospitality is now ‘stuck in mud’
Illustration by Jonathan Hankin
Over the long holiday weekend this past Thanksgiving, Show Me Hospitality’s President Eric Sigurdson had the sad task of closing two of his six Tim Hortons restaurants in St. Louis, Missouri. By Christmas Eve he had shuttered all stores.
The action was the last in a long line of setbacks for the once-gung-ho man, a former Krispy Kreme franchisee, who said he had a “deep passion” for the iconic Canadian brand and to prove it had signed a deal in May 2014 to open 40 restaurants over five years.
That development agreement was plenty aggressive in its own right, requiring eight or nine openings per year. But when 3G Capital formed Restaurant Brands International and bought Tim Hortons in December 2014, the new ownership group ratcheted up its requirement, Sigurdson claims in a lawsuit. All at once, Show Me Hospitality had to commit to more than 200 restaurants in the area over 10 years.
That deal would have required an additional $20 million in investment and if it had been completed, would yield “a desired ratio of one restaurant per every 15,000 people in the territory. To put this into perspective, McDonald’s has approximately 130 restaurants in the St. Louis region, which it built over several decades,” wrote Sigurdson’s attorney, Scott Korzenowski of Dady & Gardner. And McDonald’s, as most in franchising know, “is the king of real estate.”
He was more blunt in an interview. “That’s insane,” he said about the proposed development schedule.
Instead of dashing ahead on an aggressive opening schedule, Sigurdson was “stuck in the mud,” as his attorney puts it. The lawsuit, filed in U.S. District Court for the Southern District of Florida, seeks more than $50 million in damages in a claim by Sigurdson that his business would have been worth a cool $125 million when completed.
Stock price rising
Tim Hortons USA Inc., the defendant in the lawsuit with headquarters in Miami, sent a statement that said in part: “We know our success depends on the success of our restaurant owners and that is a key driver behind every decision we make. It is important to note that of the approximately 700 restaurants in the U.S., the matter you reference represents a very small number and occurred in the ordinary course of business. As you may know, we have strongly denied the claims brought against us.”
The statement continued: “There are several public examples of the problems this particular franchisee has had with us and others, so it should be no surprise that we have also taken appropriate action to protect our business and our brand. We only want the best partners who are committed to upholding our high brand standards and complying with all applicable laws.”
Market watchers and management could point out that Restaurant Brands International is keeping shareholders very happy, its stock price topping $78 per share in December 2017, up from $62 in January 2017 and $40 in January of 2015. Its operating mode is to buy a brand—Burger King, Tim Hortons and Popeyes are also under its umbrella—and then aggressively cut costs, especially corporate executives, thus goosing the share price.
Restaurant Brands International is also facing two class-action lawsuits related to Tim Hortons, including a $500-million class-action case filed by Tim Hortons franchisees in Canada, who banded together to form the Great White North Franchisee Association. The association sent a statement in support of Show Me Hospitality, saying Restaurant Brands International “is appearing to continue to disregard its obligations to Tim Hortons franchisees both in Canada and in the United States.”
Sigurdson said in the lawsuit his trouble started just a few months after the acquisition by 3G Capital/Restaurant Brands International. In May 2015, the company closed its U.S. headquarters in Dublin, Ohio, and said it would run the U.S. operations from Canada. The Dublin office was down to 50 employees following layoffs, which was in turn down from 125 the previous year.
“From December of 2014 into the spring of 2015, Show Me Hospitality could get no response from Tim Hortons, so all their projects were stalled, and they were getting deaf ears,” said Korzenowski with Dady & Gardner. “If you’re going to build 40 restaurants in five years, you can’t take six months off. The whole thing is in a grinding halt and Eric is beside himself.”
After that, the new management transferred to Miami, where Burger King, another RBI brand, is based. Following the acquisition of Tim Hortons, the new owners terminated nearly all of Tim Hortons USA executives, the lawsuit said, including those involved in procuring the original area development agreement with Show Me Hospitality, and replaced them with members of Burger King’s executive team.
Sigurdson said he couldn’t get any of his locations approved because the executives in Dublin were gone, and he said in the lawsuit he soon had an encounter with Elias Diaz Sese, newly appointed director and brand president. He flew to Canada with investment partners he had secured, RSW Group, who were willing to “immediately invest $2.43 million” into the Show Me operation. But Sese had an ultimatum, according to the lawsuit: either Show Me Hospitality would commit to the area representative agreement for 205 restaurants, or the franchisor would no longer support the area development agreement, the lawsuit said.
“From mid-2015 all the way up to 2016 that’s all Tim Hortons was saying: Do this, do this, do this. They were doing nothing they were supposed to do,” said Korzenowski.
“Eric Sigurdson had an agreement and Tim Hortons basically bailed on it, they repudiated it,” said Korzenowski. Instead of perhaps 25 restaurants by now, Sigurdson has none.
“Eric’s financial projections were that his business would be worth $125 million,” at the end of the original agreement, “and now it’s worth nothing.”
Beth Ewen is editor-in-chief of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to email@example.com.