Starbucks & Tim Hortons, Research Paper Example

Executive Summary

Coffee dominates the world’s hot drinks market on both local and global scale, ahead of tea. Both Tim Hortons and Starbucks are market leaders in the coffee industry. Tim Hortons is dominant in its home country where it is a symbol of national pride. Tim Hortons caters to a family oriented, lower to middle income demographic offering home-style lunches along with its staple coffee and doughnuts. Starbucks on the other hand is known providing a relaxing experience to its customers in its coffeehouses. Catering to a more sophisticated crowd, Starbucks creates an American version of a European Café experience. Starbucks follows a mix strategy of selling its products through company stores and franchisees where as Tim Hortons’ business structure is dominated by the franchisee structure. In addition to its main business, Starbucks also licenses its name to partners such as Pepsi and Unilever who sell Starbucks bottled drinks and ice cream through retail stores and supermarkets. Starbucks and Tim Hortons have been faced with intense competition from traditional fast food chains such as McDonalds and Burger King that have put downward pressure on their profit margins. Starbucks and Tim Hortons have responded by emphasizing the ethical aspects of their business operation to ward off competition and protect their traditional business.

Marketing

Product: Both Starbucks and Tim Hortons are specialty coffee retailers who also offer complementary products to support their main product such as sandwiches, other hot and cold beverages, snacks, and baked products etc. In addition, Starbucks also sells packaged coffee products in retail stores and supermarkets for home use. The company also has licensing deals with major food and beverage manufacturers such as Unilever for ice cream and Pepsi/Lipton for bottled frappuccino beverages and espresso drinks (DataMonitor , Pg. 8). As far as Tim Hortons is concerned, they do not have any licensing deals on the pattern of Starbucks licensing agreements with Unilever and Pepsi.  The bulk of their products are sold through company owned shops or franchisees, thus, retaining much of the distribution control within the headquarters. Both companies generate a significant portion of their sales during the day since their most loyal customers are students and white collar workers.

Price: Both Starbucks and Tim Hortons are specialty coffee chains with established brands that allow them to charge premiums on their coffee products. The increased competition from non specialty coffee retailers such as McDonald’s and Burger King Etc. has changed the economics of premium coffee, putting downward pressure on branded premium coffee. Faced with the increased price elasticity of demand to their products, Starbucks and Tim Hortons have not only added lower priced offerings to their menu but have also been more careful about raising prices of their popular offerings.

Promotion: Both Starbucks and Tim Hortons have been in business for quite a long time, becoming household brands in the meanwhile. They created a niche market segment and helped transformed it into a multi-billion industry that it is today. The premium quality of their coffee products meant that they could charge premium prices without heavy advertising but the competitive landscape has changed a lot since their old days. The pricing pressure from fast food chains such as McDonald’s and Burger King have decreased their leverage on prices so both Starbucks and Tim Hortons have been trying to differentiate themselves by reminding the customers that they can’t compromise the quality of the products to achieve lower prices and they also engage in ethical business practices by fairly compensating coffee bean growers in various parts of the world.

Both companies still mainly rely on in-store promotional materials, press releases as well as word-of-mouth promotion. Starbucks licensing deals with major food companies such as Unilever and Pepsi means it gets free exposure at supermarkets and non-company retail stores, without having to spend any money while increasing brand awareness at the same time. Both Tim Hortons and Starbucks also offer Wi-Fi at their locations to portray themselves as student friendly and work friendly places.

Place: Both companies do the bulk of their business through company owned or franchisee coffee shops. Starbucks does go a step ahead since it has licensing deals with Unilever and Pepsi. This is why Starbucks branded products can be found in supermarkets and non-company retail stores. Even though this gives Starbucks additional distribution channels but it also means the company loses some control over its marketing strategy unlike Tim Hortons that only sells products through company owned and franchisee shops and thus, has more control over the customers’ total brand experience.

Corporation and Organization Structure:

Both Starbucks and Tim Hortons are publicly traded company which means their stock shares are available to the public as investment alternatives. Starbucks has been led by its charismatic founder, Howard Shultz, a de-facto face of the company since its inception. Tim Hortons is led by Mr. Donald B. Schroeder who has been with the company since 1991. Starbucks owns over 8,800 stores while over 7,800 stores are licensed. In comparison, Tim Hortons’ Canada operations are almost 95% licensed. This differing structure helps Tim Hortons control expenses and minimize capital expenditures even though the company does also earn less in revenues than it could with company owned stores.

Advantages and Disadvantages of the Franchising Method in Business: Tim Hortons

Ownership Mentality

Franchisees who have a long term relationship with Tim Horton’s will give the business a lot of attention, as if they owned the company.  This is very useful for Tim Hortons because franchisees will devote time, attention, funds and not walk away from challenges so easily.

Building the Value of the Brand

Franchising for Tim Hortons will build the brand of the company and provide benefits such as higher sales prices of each unit, be able to build more effective marketing campaigns.  In mostly every situation, a beneficial synergy can be created by the franchisees and the Time Hortons organization to establish a brand that is able to provide competitive advantages in doing business to reduce costs and create more effective marketing and sales campaigns.

Image

The Tim Horton’s franchise method provides for consumers a more superior image of the level of quality to be provided as compared to a non-franchise coffee shop where one wouldn’t know what to expect.  This gives a unique competitive advantage to those franchisees who want to be in the coffee business.

Franchisee Participation and Support

Franchisees are useful partners in the franchise model because they can provide good information about the market conditions and they provide ideas for products.  The franchisee has a level of commitment and energy to make the business succeed, that would be hard to cultivate in house.  Franchisor and franchisee form a very useful team for making sure the franchise is healthy in any adverse market where changes to the franchise can be made with communication between the two.

System Wide Marketing Paid for by Franchisees

Franchise systems such as Tim Horton’s include arrangements for franchisees to contribute to an advertising fund to carry out promotional, marketing and public relations campaigns to achieve competitive advantages by being fresh and relevant in the consumer’s mind.  Tim Hortons brand has captured the hearts and minds of Canadians by growing its business qualities into the culture of the country.

Improved Control over Operations at the Retail Level

Franchising allows Tim Hortons, through legal and operational procedures to control the franchisee’s marketing and operational programs so that the company operates successfully, meeting the high quality requirements of what the customers has come to expect of the company no matter where they go.

Avoidance of Legal Exposure

Tim Horton’s, with a franchise method of operating, is able to significantly reduce its liability in case they get sued, which is a good method of risk control.  Also, franchise laws protect Tim Horton’s right to make sure rules of operating the franchise are not broken and if they are, there are legal repercussions.

Disadvantages

Higher Legal Expense

First time costs to set up and prepare agreements is high at first for Tim Hortons as a franchise but these are just one time costs that don’t occur again.

Technical Legal Constraints: Regulation of the Relationship

Tim Hortons must comply with certain legal requirements regarding termination and non-renewal of franchises by keeping detailed records of their expectations and the franchisee’s performance so it stands up according to franchise law.  To utilize the powers of the franchisor, they must uphold a high level of compliance to laws that only professional administration can perform.

Franchise Marketing Constraints

When promoting and marketing the Tim Hortons franchise to potential franchisees, the company has to be careful in complying with laws that govern what kind of information they can provide such as financial and earnings to them.  This is done so that potential investors are not misled into making inappropriate decisions.

Quality Control Issues

Tim Hortons may encounter different quality control issues as compared to Starbucks because the operations aren’t as closely conducted by the organization itself and requires the franchisees to operate it for them according to the rules. A high degree of trust is placed in the franchisee’s capabilities.

Business Relationship Issues

Tim Hortons has to be comfortable with working with its franchisees who feel like they are “partners” in the company.  It needs to develop good communications with them through the franchise advisory council perhaps in charting strategic directions and implementing marketing plans.

Need to Deliver Perception of Continued Value

Tim Hortons must continually ensure that the franchisees are getting what they are paying for in the form of royalties and marketing funds contributions.  The company must build the brand value so that franchisees can enjoy superior operations and marketing to stay ahead of their competition.

Potential Loss of Freedom

Tim Hortons, if they have been giving away “exclusive territory” rights to its franchisees could create legal problems down the road if they plan to expand through alternative channels of distribution, into special venues such as Walmart, access different markets and in merger situations.  These issues must be handles through agreements and education so Tim Hortons doesn’t limit its options for growth.

Finding Qualified Franchisees

For a long term, healthy relationship with its franchisees, Tim Hortons needs to do its due diligence in finding smart, entrepreneurial spirited individuals who are good members of a team.   This can be through a testing and screening system to find the most compatible individuals.

Unmanaged Growth

Tim Hortons needs to avoid expanding too rapidly because they still have to provide support to their existing franchisees and expanding too fast could limit those capabilities of Tim Hortons.

Advantages and Disadvantages of the Chain Method in Business: Starbucks

Advantages

Profits

Profits that would be shared with franchisees would be retained by the shareholders.

Control

Decisions regarding the business are easier to implement and execute in a corporate chain setting whereas disputes and negotiations can erupt with franchisees who want to do things differently.

Disadvantages

Slower Expansion

In market that is rapidly expanding, competition can be fierce.  A lot of the time the corporate chain method of retaining 100% of the stores in the shareholder’s hands isn’t feasible because not enough locations are able to be opened and managed corporately.   In those situations, franchising can come useful to prevent your competition from gaining a stronger market presence.  Starbucks has not had this problem.

Not for Complicated Operations (Simplicity)

Operations that have complicated operations just to maintain consistency throughout the multiple locations should only be expanded through corporate chains.  Since the operations of Starbucks are very standardize and could be franchised with relative ease, the company decided not to in order to keep the profits in shareholder hands instead to franchisees.

Employee Motivation

At corporate chains, motivation for superior service and providing a standardized product is in the hands of the employees and managers.  Unfortunately, employees can lose focus on the best interests of the corporation and cause unrest within the operations when they feel like they are being used by the “corporate monster”.  At Starbucks, an attempt to thwart unionization in the USA has left a bad taste in the mouths of its employees, contributing to poor public relations.

Loss of Control

Business owners fear a loss of control over the business and its brand that took years to build by the hands of franchisees.  Starbucks, to uphold the high standards its brand embodies, did not resort to franchising to fuel its expansion.

Corporate Social Responsibility: Competitive pressures have forced both Starbucks and Tim Hortons to find other non-price methods to protect their profits and both companies realize that one of the most powerful tools in their arsenal to promote themselves is ethical business practices. Such activities also lend justification to Starbucks and Tim Hortons charging premium prices because they offer better quality coffee made from selected coffee beans from all over the world. Starbucks most visible step in this regard is “Starbucks Shared Planet” which includes ambitious goals such as reducing energy consumption, increasing loans to coffee farmers, improving recycling technologies, and buying coffee beans from certified suppliers among many other goals. Though not on the same scale as Starbucks, Tim Hortons is also committed to fair trade practices in obtaining coffee beans supplies, reducing energy consumption, and improve recycling standards etc. Starbucks has a long history of corporate responsibility. The company first introduced recyclable paper cups in 1984 (Kamenetz , pp 116-122)

Tim Hortons

Tim Hortons shows corporate responsibility to its customers, employees, children, communities, partnerships and environment.

Customers

• Trans fat regulations for customers to enjoy and reduced sodium by 19% for all soups that are offered.
• Provide food safety training twice a year for each restaurant followed by a certificate of food safety for the customers to view.

Employees

• Create a sense of pride for the employees when they are working for the organization.
• Managers and employees annually review their individual development plans.
• Annual training is done to reassure commitment and confirm that the employees are aware of the business practices and ethical standards.

Children

• Tim Hortons Children’s Foundation is a nonprofit organization that allows children who live in economically disadvantaged homes to experience a fun camp that is built to give children confidence with a series of challenging activities.

Community Success

• When a customer buys a Smile Cookie, funds are raised to help local charities all over Canada and the US.
• Timbits Minor Sports Program allows children from the age of 4-8 years to be sponsored and take part in a sports team in their community.
• The organization works with Aboriginal leaders in 4 areas which include education, empowering youth, economic development, and employment.

Tim Hortons Coffee Partnership

• Help small farmers in Guatemala, Columbia, and Brazil by supporting business and social as well as environmental management.

Environmental Stewardship

• Reducing waste, energy, and carbon emissions by recycling and integrating a greener environment.

Starbucks

Starbucks shows social responsibility by giving back to the community, environment, ethical practices, wellness and diversity.

Community

• Encourage their employees and customers to give back to the community by bringing everyone together to achieve a positive goal.
• Donates money to the Global Fund in support of the fight against HIV in Africa with the Starbucks Red, which is a special product served by Starbucks to customers. Over 14,000,000 days of medicine has already been achieved by this program.
• Created “The Starbucks Foundation” to help the community in various ways which assures that the communities who are supplying the company with coffee, tea, and cocoa have an improvement in their living conditions. This was done by improving education, agricultural training, and the sanitation of water and nutrition.
• Assist in educational programs with the creation of The Starbucks China Education Project, which is estimated to invest $5 million towards the initiative.
• Created the C.O.A.S.T. Fund to assist in recovering the Gulf Coast which was hit by the severe impacts of hurricane Katrina and Rita.
• Created the Ethos Water Fund to provide sanitary water to children in need, every time a bottle of water is purchased. 5 cents out of each bottle is donated to the Ethos Water Fund. 420,000 around the world benefit from this program.

Environment

• Manufactures greener cups to help lower costs and decrease the impact on the environment. Reusable cups had also been produced for customers to help prevent the use of excess cups.
• Reduce the corporation’s energy consumption with the help of renewable energies. Heating, ventilation and cooling systems and various number of different equipment are in the works of being more energy efficient. Electricity decreased by 1.7% in 2009.
• Created buildings since 2001that have been built in specific ways to decrease the impact on the environment.
• Reduce carbon emissions by working with farmers in different countries to help prevent as much as possible, the impact on climate change. Forests conservation programs assist in making this possible.

Ethical Sourcing

• Introduce C.A.F.E. practices to farmers as a guideline for helping grow coffee that would benefit the people. The quality of the coffee must be of a high quality.
• Enforce the rights of workers for decent living standards; Starbucks requires child or forced labour as well as discrimination be verified frequently and prevented.
• Manage waste, water, and energy to protect the quality and converse energy.
• Allow farmers to invest in their farms and communities though “Fair Trade Certified”. This will protect the environment in which they live in and acquire skills to utilize in the business world.
• When growing coffee, the soil will remain healthy because of the fact that fertilizers and toxins were eliminated in the process.
• Loan programs allow Starbucks to loan funds to farmers when they are in need of a boost at times when their cash is low.

Wellness

• Provide healthcare for full-time and eligible part-time employees.
• Allow customers to view nutritional information with menu labeling of the product before making the purchase.
• Participate in a study which was held by the Stanford University researchers where additional information was learned about living a healthy lifestyle.
• Reduce sodium from their products willingly.
• Encourages employees to take care of their body by providing healthy tools and resources for their benefits.

Diversity

• Encourage diversity from employees and everyone in whom business is done with.

The coffee retailer’s marketing is interesting in their markets, customers and demand, whereas public relations are interesting in creating relationships with them.  Them both working together offer an extremely effective combination by creating a healthy environment for Tim Hortons to carry out their marketing.

Tim Hortons’ predominance in the coffee and doughnut market has led it to become a Canadian cultural icon and a part of Canadian life.

Tim Hortons Children’s Foundation:  Allows thousands of economically disadvantaged children from all over North America to go to camps where they can become engaged in an environment to develop leadership skills.

Camp Day, which is held annually on the Wednesday of the first full week in June where all proceeds from coffee sales at most Tim Hortons locations, as well as proceeds from related activities held that day, are donated.

Community outreach programs including Free Skating, Free Swimming, Earn-a-Bike Program, Remembrance Day, Food        Drives, the Smile Cookie program, as well as a community clean-up project.

“Roll up the Rim to Win” marketing campaign where over thirty one million prizes are distributed each year.

Starbuck’s marketing is closely tied to its public relations function which is directed towards presenting itself as a socially responsible corporation.  They expect customers to support their business and as a result of that, support social causes.  On their website there is a slogan stated as, “We’ve always believed that businesses can – and should – have a positive impact on the communities they serve.”

Starbucks has differentiated itself into a successful brand/company in a low cost of entry market for a product which is highly substitutable by:

Contributing to the communities it does business in:

“We believe that being involved in our communities is not only the right thing to do, it’s also good business”

“We’d like Starbucks partners (employees) and customers to contribute more than one million hours of community service each year by 2015”.

Be an ethical and consistent supplier to the customers:

The coffee and other products that Starbucks produces for the customers remain consistent year in and out.

Help Limit the Impact it has On the Environment:

They market and promote their recycling, energy savings, water savings, green buildings and climate change by taking initiative that they expect to benefit the company and look excellent in the customer’s eyes.

Financials:

As far as financials are concerned Tim Hortons had better current ratios than Starbucks in all three years even though both companies have shown steady rise in current ratios over time. As we mentioned above Tim Hortons place greater emphasis on licensing as its mode of business which helps it reduce expenses. The higher current ratios for Tim Hortons means it is in a better shape when it comes to short term liquidity. Debt to equity ratio has also been lower for Tim Hortons in all three years that may be due to its greater emphasis on licensing because it helps Tim Hortons avoid capital expenditures and thus, eliminate the need to issue debt to fund those capital expenditures. Even though both companies have improved their debt to equity ratios over the period, Starbucks does deserve praise for it has shown improvement by a greater margin. This shows that Starbucks management is dedicated to reducing company’s debt levels and improving financial health.

Even though Starbucks had higher earnings due to its bigger scale of operations in all three years, it earned less than Tim Hortons in all three years on per share basis. Moreover, Starbucks EPS has been declining where as Tim Hortons EPS has been rising over the same period. Tim Hortons earned a little more than 3 times than Starbucks on per share basis in the latest fiscal year. Starbucks has quite higher capitalization than Tim Hortons but earned only about $95 million in total earnings than Tim Hortons in 2009. This indicates Tim Hortons’ higher operation efficiency and better cost management. Both companies saw decline in return on equity though Starbucks return on equity fell by a greater margin. The challenges faced by both companies are a reflecting of the financial crisis that has severely reduced demand for premium coffee.

Recommendations/Conclusions:

If I have $10K to invest, I will choose Tim Hortons because the company has not only earned more on per share basis but also has better liquidity position than Starbucks. Starbucks may have over expanded where it is facing rising costs and operational inefficiencies because it has become too big. Moreover, Tim Hortons earnings have been improving over the year while Starbucks trend is reversed.  The factors that most influenced my decisions are current ratio and EPS ratios.

My overall conclusions are that coffee fast food segment has become intensely competitive due to McDonald’s and Burger King’s entry because they already own lot more stores than either Starbucks or Tim Hortons and they also appeal to the price aspect by providing cheaper alternatives. The competitive environment can be gauged by the fact that for the first time in its entire history, Tim Hortons closed stores and exited a market (New England, USA in this case) just recently (Freeman , November 2010). The prices are extremely important especially in times of crisis and moreover, coffee has become a commodity now thus, quality differentiation has become quite difficult if not impossible. The more troubling news is that McDonald’s and other cheaper alternatives have already received quite positive reviews for the taste of their coffees and even though Starbucks and Tim Hortons offer other breakfast alternatives, they still can’t compete with the offerings of McDonald’s and Burger King. Thus, the best way to stay competitive is through operational efficiency and minimum capital expenditures and it appears that Tim Hortons is playing the game better than Starbucks.

References

DataMonitor. “DataMonitor: Starbucks Corporation.” March 2009: p1-9. Print.

Freeman, Sunny. “Tim Hortons takes U.S. beating, but keeps fighting for American market share.” The Canadian Press 11 November 2010. Print.

Kamenetz, Anya. “What are you going to do about this damn cup.” Fast Company November 2010: 116-122. Print.

Kirby, Jason. “Tim’s takes on America.” Maclean’s 24 March 2008: p32-33. Print

Starbucks Coffee Company. Company Profile. Web. 23 November 2010 <http://assets.starbucks.com/assets/company-profile-feb10.pdf>.

Tim Hortons. Corporate Profile. Web. 23 November 2010 <http://www.timhortons.com/us/en/about/profile.html>.