Tim Horton's Struggles for Growth in U.S.

Canada's Beloved Doughnut Chain Faces Uphill Battle Against Dunkin,' McD's

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CHICAGO (AdAge.com) -- Just how important is it to be first? Ask Tim Horton's, the self-described McDonald's of Canada, which is struggling for a foothold in the U.S. market.

Horton's has built a massive following in Canada -- and developed a small cult in the U.S. -- based on high-quality coffee, indulgent doughnuts and what's described as consistently good service. When it comes to the States, Darren Tristano, exec VP of Technomic, a Chicago-based restaurant-industry consultancy, said Tim Horton's might be paying the price for being second.

Horton's: U.S. awareness is low, but the chain has $200 million in U.S. sales.
Horton's: U.S. awareness is low, but the chain has $200 million in U.S. sales.
"When you look at the Canadian marketplace, they were first to market, and that's a big deal," he said. "The opposite is true here. Dunkin' Donuts is approaching 6,000 locations, and they're coming into Dunkin's backyard and trying to compete on quality." Horton's has about 500 U.S. locations, concentrated in Western New York, Ohio and Michigan. The chain has about 3,500 locations in Canada.

Dunkin' is based in Canton, Mass., with a loyal following in the Northeast. Horton's closed "underperforming" stores in New England late last year. Mr. Tristano added that Dunkin' has conversely faced an uphill battle breaking into the Canadian market.

Still, it doesn't seem to take much Horton's exposure to make a fan. Anthony Claudia, a Telluride, Colo.-based film executive, tried the coffee while working on a project in Ontario. "It's kind of like the Canadian version of Dunkin' Donuts, but a lot better," he said.

Long journey ahead
In the U.S., Mr. Tristano said Horton's is "definitely catching up, but it's going to take some time to establish the brand."

Then again, the chain is not exactly a new arrival. Horton's opened its first U.S. location in Buffalo, N.Y., in the mid-1980s. But its concerted push began about 10 years later, Horton's Chief Operating Officer David Clanachan said in an interview. The company merged with Wendy's in 1995 and became a stand-alone public company in 2006. "We consider ourselves to be a strong regional brand with aspirations to grow our business throughout the full landscape," Mr. Clanachan said. He added that Canadians and Americans aren't so different; they're all looking to save money. "We believe price-value never goes out of style," he said. But that might be part of the problem.

RBC Capital Markets analyst Irene Nattel wrote that Horton's has the value-as-brand attribute sealed up in Canada, but not here. "American consumers less familiar with the brand need to be educated on that positioning, particularly in the current economic environment." She said the chain is tweaking offerings in 2009 to create more value combos.

Even though awareness is low, the chain has $200 million in U.S. sales and spends about 5% of that on advertising -- a percentage higher than what is spent by McDonald's. According to TNS Media Intelligence, the chain spent about $9.5 million in measured media during 2008. Its agency is JWT, Toronto and New York.

Breaking even
At the company's fourth-quarter and full-year earnings call last month, CEO Donald B. Schroeder laid out the case for impressive performance in Canada, with 4% same-store-sales growth and U.S. same-store sales essentially flat, down 0.1%. "Our brand is much less developed in most of our U.S. markets, and the economy was under greater pressure," he said. The company projects its U.S. business will break even by the end of the year.

In addition to a brand-awareness deficit, Harry Balzer of NPD Group said differentiation is a hurdle. The chain competes with McDonald's, Dunkin' and Starbucks, which make up about 45% of restaurant-coffee consumption.

"New is a powerful thing, but you have to be more than just new," he said.

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