IB Question 5 –Tim Hortons and its US Franchisees – Sanjay Ajayakumar

Q) Tim Hortons' has been taken to court by its franchisees on a number of occasions in the past. In
February of this year, a group of US franchisee holders filed a lawsuit accusing the franchisor of illegal
and fraudulent business practices. What might be the underlying reasons for the continuing law suits
between the franchisees and the Company? Please use course concepts to support your analysis.

Answer

Tim Horton’s success in Canada was its franchising strategy of partnering with small-scale franchisees
who are dependant on Tim Hortons for almost every aspect of running their restaurants. However, in
the US, Tim Hortons used more established and larger franchisees which weakened Tim Hortons control
over them and resulted in Tim Hortons facing many challenges in the American Market. Tim Hortons
would have used this strategy to overcome the huge competition from brands like Dunkin, Starbucks,
and McDonalds. Tim Hortons, being a regional brand of Canada, struggled to generate customer base
and enthusiasm in the US market as the coffee market in the US is saturated with huge competition. This
had resulted in the sales falling year over year reporting 17% decline since 2015 (George-Cosh, 2018).

Being a franchisor, Tim Hortons had more control over the franchisees. The franchising strategy provides
the organization with ultimate control over the franchisees who are bound by legal contract. I believe
Tim Hortons would have passed on the loss burden that they are facing on from the U.S market onto the
franchisees by making them to pay more for the supplies and store operation. Bound by the contract,
the franchisees must operate according to the whims and wishes of the franchisor. Shecter (2020) has
observed that it is difficult for the franchisor to come out of the agreement due to the sunk costs
involved, onerous contractual provisions and threats of litigation from the franchisor.

Tim Hortons rapid international expansion strategy would have also been a factor leading to the losses.
Tim Hortons did not gauge the market well before implementing the rapid expansion strategy. Being a
regional brand of Canada, and U.S brand filled with loyal customers of Dunkin, Starbucks and
McDonalds, Tim Hortons should have overseen the difficulties it would face to penetrate the market.

References:

George-Cosh, D. (2018), Tim Hortons pulls back on U.S. expansion amid franchisee fracas, BNN
Bloomberg Business News, Canada: Ontario.

Shecter, B. (2020), Tim Hortons' parent sued by U.S. franchisee group in Florida for ‘price gouging ‘,
Financial Post Article, Canada: Ontario