Tim Hortons, Canada’s largest restaurant chain, has signed a new deal to open 100 stores in Saudi Arabia over the next five years, on top of the 120 it is planning in the Gulf by 2016, as drooping demand in its home markets put increased emphasis on its growth overseas.
As part of its Q1 2013 results, the chain announced a franchise deal with Apparel FZCO to open as many as 100 restaurants in Saudi Arabia in the next five years.
That is on top of the deal the company signed with Apparel in 2011 to open up to 120 locations in several Arab states, including Qatar, Kuwait, the UAE, Oman and Bahrain.
"These are the type of deals they should be doing - these royalty deals, where they don't take on any of the risk and get all the reward," Barry Schwartz, a portfolio manager at Baskin Financial, which owns about 130,000 Tim Hortons shares, told Reuters. "This is the type of structure they should follow in the US."
The firm currently has a total of 27 restaurants in the Middle East, with a total of 20 locations planned in 2013.
“Development in Saudi Arabia will be managed by Apparel and will focus on major urban markets, with opportunity for development beyond the initial 100 targeted locations. We continue to assess additional international markets for development in various regions of the world as part of our international strategy,” the firm said in its quarterly report.
Shares of Tim Hortons, which boasts that it sells eight of every 10 cups of coffee sold in Canada, fell more than 2.5 percent after the company posted its first decline in established store sales since its 2006 initial public offering.
The company, under pressure from hedge fund Highfields Capital to boost shareholder returns, said it is considering the Boston-based fund's key demands. But any change will await its new CEO, Nestle veteran Marc Caira, a 59-year-old Canadian.
Highfields wants the chain to take on new debt to buy back shares and believes that Tim Hortons' US returns do not justify further investment there. It also wants the company to enter into less capital-intensive franchise deals in the US or scrap its US expansion plans, according to documents seen by Reuters.
Interim CEO Paul House said Tims won't pull back from the US market, but is studying a plan to work with well-funded franchisees who could operate multiple locations there.
The company said tough conditions in the first quarter led to heightened competition and drove sales down at established stores by 0.5 percent in the US and 0.3 percent in Canada.
Named after the hockey player who founded the brand in 1964, Tim Hortons is something of an institution in Canada with more than 4,071 outlets worldwide. In its home market the brand has a 40 percent market share of all quick service restaurants and serves up to two billion cups of coffee every year.
The UAE is home to an estimated 27,000 Canadian expatriates and the Gulf state is Canada’s largest trade partner in the Middle East and North Africa region.
The first UAE branch of Tim Hortons in Downtown Dubai was mobbed by Canadians before it even opened last month.
“I went there when it first opened and there were these queues coming out the door and they were all Canadians so it’s actually bringing all of these Canadians together. It even tastes the same, it tastes like home,” said Canadian expat Heather Chuter.
“I think it’s reminiscent of routine for us, it’s a part of a daily routine so you go in the morning, or for lunch, it’s something that joints people together,” said Canadian Nicole Rogers. “It really is something people go quite crazy for; there was even one in Kandahar at the military base,” she added.
* With Reuters