07/12/2012 02:59 pm ET Updated Sep 12, 2012

Tim Hortons Hopes To Overtake McDonald's In Canada

Tim Hortons

* Tims trails only McDonald's in Canada fast-food lunch share

* Chain to roll out panini sandwiches across Canada this fall

* CEO Paul House still not satisfied with chain's U.S. business (Edits throughout, adds analysts quotes, details)

By Allison Martell

TORONTO, July 12 (Reuters) -- Tim Hortons Inc, best known for its coffee and doughnuts, is pushing for more of Canada's lunch market, and its CEO sees the chain's share of the Canadian lunch trade overtaking McDonald's within about five years.

Tims, as the chain is known across Canada, has expanded its food offerings and says its market share for fast-food lunch in its home market is now second only to that claimed by McDonald's Corp, the U.S.-based heavyweight.

"There is no reason why we cannot be No. 1 at lunch," said interim Chief Executive Paul House in an interview. "Can we do it in a year or two? No. Can we do it in the next five years or so? Absolutely."

Edward Jones analyst Brian Yarbrough said the goal was tough but achievable.

"The brand is so strong in Canada that there is definitely that opportunity," he said, though he cautioned that its success might depend on McDonald's ongoing push to remodel stores and revamp its own menu.

Tim Hortons, named for a hockey star who helped start the company, is akin to a national symbol in Canada. Its ads celebrate taking the kids to hockey practice and its ubiquitous restaurants are mandatory political campaign stops.

The company continues to grow. In the three months ended April 1, earnings rose 10 percent as revenue climbed 12 percent to C$721.3 million. The stock has powered almost 10 percent higher this year.

Tims already claims eight of every ten cups of coffee sold in Canada, and that's why the company has to be aggressive in other segments, House says. He sees new menu items boosting the company's market share, and he is on a media push promoting a new line of grilled panini sandwiches, which the chain will offer across Canada this fall.


The new sandwiches are an import from Tims' stores in the United States. Another product first introduced south of the border, frozen lemonade, came up in the spring.

Not so long ago, the U.S. stores were a drag on earnings rather than a source of ideas for the core Canadian business. In 2010 Tims pulled out of some markets, closing 36 U.S. restaurants. At the beginning of April, it had 721 locations in the United States and 3,315 in Canada.

Lately the U.S. business has boasted strong sales gains in established shops, 8.5 percent in the last reported quarter. That compares with 5.2 percent growth in Canada.

"We feel good about our U.S. business, but I don't feel great about it," said House. "I want more sales per store... We've got certain stores that are doing huge volumes, but we've got other stores that are doing, you know, average or below average volumes."

House said not all the U.S. stores are profitable, but said that is to be expected in an emerging market. Mistakes were made during the push into the U.S. market, though.

"We were probably getting ahead of ourselves, going into too many markets without building out the markets we had already established," he said.

In recent years the chain has refocused on Ohio, Michigan and New York and other markets near Canada where it is already recognized. That, along with new U.S. management and more effective marketing has helped turn things around, House said.

Yarbrough said the U.S. business is what could really boost the stock over the long term.

"The growth runway in Canada is definitely slowing. They're not going to be able to grow square footage forever," he said. "In the United States there's such a huge opportunity, because the market's so much bigger."


House first served as CEO from 2005 to 2008. When his successor Don Schroeder left abruptly in May 2011, he took over on a temporary basis.

In May 2012, the company said House had agreed to stay until December 2013 if necessary. House said the CEO search is ongoing, and that the company has looked outside Canada for its new head.

House said that when he came back, he did not expect to stay so long, and noted unspecified delays in the search. But he was never in a rush to leave.

"I knew I had to have the mindset that I am the CEO, that I'm here for the foreseeable future, and I've got to run the business that way," he said. "I had to convince the team that, hey, I'm not just here babysitting. I'm here, it's like the old days, I'm back in charge." (Editing by Frank McGurty)