‘Answers sought, answers denied’ as Tim Hortons/RBI union sours
Illustration by Jonathan Hankin
The honeymoon is over for Restaurant Brands International, the company formed by Brazilian private equity firm 3G Capital that bought the iconic Tim Hortons donuts-and-coffee chain in December 2014 for $12.5 billion.
Named after a Canadian hockey player and revered in the Great White North, Tim Hortons has about 3,500 units in Canada alone. A band of franchisees in Canada, fittingly called the Great White North Franchisee Association, filed suit against RBI this summer, accusing management of taking money from the ad fund but not using it for its intended purposes, which the complaint says is to advertise the public image of Tim Hortons restaurants.
The group seeks $500 million in damages with another $150 million on top for alleged breach of fiduciary duties, and is seeking class-action status on behalf of all franchisees in Canada.
“Money the franchisees have contributed towards the promotion of their businesses has been converted wrongfully by RBI for the benefit of its shareholders and senior executives,” said John Sotos, the Toronto attorney at Sotos LLP who is representing Great White North.
The complaint names Daniel Schwartz, CEO of RBI, and three other executives. The ad fund contribution is mandated at 3.5 percent of gross sales, and the fund collected nearly $700 million in contributions from franchisees since late 2014, the complaint says.
Reputation is ‘overblown’
Executives at Restaurant Brands International did not respond to requests for comment. They’ve issued statements in the past denying the allegations, and saying they wish to work with the franchisees to resolve issues.
Schwartz told The Street this summer that 3G Capital and RBI’s cost-cutting reputation is “overblown,” as 3G cuts back when necessary, but what drives its growth is a talent for recruiting people and franchisees. RBI acquires companies “forever,” he said.
3G Capital, where Schwartz worked before helming RBI, is famous for improving profit margins by slashing overhead and costs, and its record with Burger King, an earlier acquisition, and Tim Hortons bears out that story.
Burger King’s operating margin before the 2010 buyout was 13 percent, according to Bloomberg. After re-listing in 2012 the margin soared to 41 percent. Tim Hortons operating margin before the acquisition was 19 percent; by the end of 2016 that rose to 33 percent, said Bloomberg.
But it would take only a few months, in March of 2017, for Canadian franchisees to start publicly howling, forming their franchisee association in just a matter of weeks, according to Sotos. In their complaint, franchisees characterize the 3G way as “its well-honed profit-acquisition methods in order to increase its corporate revenues.”
‘A cooperative effort’
South of the border, franchisees are still in the “let’s work it out” stage. I asked Robert Einhorn, the Miami-based attorney representing U.S. franchisees who formed their own association right after their northern brethren did so, if he was taking on a big battle. “It’s not a battle. Hopefully, it’s going to be a cooperative effort,” said Einhorn, managing partner at Zarco Law.
The U.S. franchisees came together rapidly. “It’s been like wildfire,” Einhorn said. “It usually happens under a crisis scenario, and I think a lot of the U.S. franchisees feel like they’re at the crisis point,” he said about the fast formation of the group. There are 788 units in the U.S., and Einhorn says “anecdotally,” U.S. stores “are not profitable, they’re losing money or they’re break-even.”
Einhorn said most franchisees fear retaliation and would not speak with me for this article, something Sotos also asserted, but David Mayer was brave enough to talk. Mayer has been with the concept for 20 years, starting as a corporate employee in 1997 and eventually becoming district manager. In 2003, he and his wife opened a Tim Hortons in Rochester, New York, and now have three locations.
He emphasizes the U.S. group is not disgruntled and wants to work with the franchisor. “It’s protecting ourselves as franchisees,” he said. “When you have a large corporation and such a small franchisee group, you need protection.”
Chief complaints are: with minimum wages increasing, profitability is declining. Mayer wants the company to increase the prices franchisees can charge, reduce the cost of food, and continue to support smaller franchisees who want to be a key part of their communities.
For a Tim Hortons restaurant to be profitable, he said, food, paper and labor costs have to be at 58 percent. “That’s the optimal number. Otherwise it’s very hard to cash flow the business,” he said. “Right now it’s anywhere between 60 and 67 percent.”
He repeats, for emphasis: “We aren’t out to fight with these guys. We’re not out to do any malicious activity. We are trying to work … with them, not against them.”
Popeyes still ahead
Sotos, the attorney for the Great White North Franchisee Association, says lawsuits over the use of ad funds are rare, “and where I’ve seen them, in most cases private equity was part of the ownership structure. They’re looking how to extract the most profit out of the acquisition in the shortest period of time, boost the stock value and sell it to somebody else.”
He says the costly and ugly lawsuit didn’t have to happen. “Franchisors and franchisees are business partners, and when they have issues they talk to each other. Here there were issues that were legitimate questions, and answers were sought and answers were denied,” Sotos says. “Ultimately all of the information the franchisees were seeking will become available through the litigation. It will be exposed.”
What’s still ahead should give anyone in franchising pause: RBI purchased Popeyes Louisiana Kitchen in March for $1.8 billion, with many huzzahs about the benefits that are sure to ensue. Will that marriage come with a longer honeymoon?
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.