Nearly a dozen Quebec franchisees are suing Tim Hortons QSR-T, claiming their profits have declined by millions of dollars in recent years. The store owners say the gap has narrowed between their own costs for supplies and menu prices, both of which are controlled by the company.
An application to initiate proceedings was filed in Quebec Superior Court in Montreal on Thursday, on behalf of 11 owners who operate 44 restaurants in the province and have seen their profitability “decrease significantly” since 2021, according to the document.
It is not the first time Tim Hortons has faced legal action from its store owners. In 2019, the company settled two class-action lawsuits filed on behalf of Canadian franchisees, who at the time had complained that actions taken by parent company Restaurant Brands International Inc. had hurt the reputation of the brand and their bottom line.
Tim Hortons currently has more than 3,900 locations in Canada, approximately 615 of which are in Quebec.
The profitability declines cited in the court filing echo those expressed by a dissident group of Tim Hortons owners, called the Alliance of Canadian Franchisees, which began speaking publicly about shrinking profitability last year. The company has acknowledged that franchisee profits fell during that time: The average Tim Hortons location made $320,000 in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2018, a number that declined to $220,000 by 2022.
Restaurant Brands reported last month that the average location’s profitability improved to $280,000 last year, but was still not back to 2018 levels.
According to the Quebec court filing, for years franchisees generally earned profits that corresponded with, or were close to, the projections for an expected profitability range that RBI subsidiary TDL Group Ltd. presented to store owners. That began to change in 2019, according to the document.
Many fast-food restaurants saw a precipitous drop in sales in 2020, particularly during the early months of the pandemic. But, according to the court document, the most significant profit declines for the Tim Hortons franchisees have occurred since 2021 – a period that corresponds with skyrocketing inflation, particularly in the cost of food.
In total, across the 44 restaurants, the plaintiffs say their profits have declined by $18.9-million among them in 2021, 2022 and 2023. Declines per franchisee ranged from $59,515 to as high as $4.5-million in that three-year period, according to the filing.
“Tim Hortons franchisees operate one of the most profitable and loved restaurant concepts in Canada and in Quebec,” company spokesperson Michael Oliveira wrote in a statement on Friday. “With 1,500 franchisees across the country, these 11 individuals do not represent the positive experience and views of the very large majority of Tim Hortons restaurant owners.”
Through its franchisee agreements, TDL controls restaurant operations including the suppliers that franchisees buy from, the equipment they use, the supply of goods and food ingredients, the cost of those foodstuffs and the prices charged to customers, according to Thursday’s court filing. Aside from rare exceptions, franchisees buy from TDL or TDL-designated suppliers, at a price that TDL determines. And because the company also sets menu prices, store owners have no room to manoeuvre when it comes to their profitability, the court document alleges.
The plaintiffs argue that TDL’s pricing policy failed to adequately adapt to market uncertainties or to take into account the consistent cost increases that franchisees faced. The franchisees approached the company more than once in recent years to ask for measures to alleviate the pressure, such as by agreeing on a price range for certain menu items, according to the document.
But Tim Hortons franchise contracts put the company in a position of “absolute dominance” over franchisees, who have no choice but to accept the terms set out by TDL, the document stated.
Traditionally, there have been some exceptions to this. For example, in the past, the franchisees in Quebec were permitted to negotiate to buy certain dairy products from local suppliers, according to the filing, but TDL moved to dissolve some of those agreements. The company instead imposed exclusive deals with other suppliers that franchisees were required to buy from at a higher price, the plaintiffs claim. They document also states that the equipment they were required to buy was expensive to maintain and repair. These costs come in addition to franchise fees and contributions to the company’s advertising fund that franchisees are also required to pay, and which are set by TDL.
These factors had a negative impact on profitability, according to the filing. This narrowing gap between costs and sales has left franchisees with a shrinking pool of funding to conduct renovations of their restaurants and other investments that the company requires – and which are disproportionate, the document alleges.
Some of the franchisees in the lawsuit have been with Tim Hortons since the early- to mid-2000s. The most recently a plaintiff signed on as a franchisee was in 2018.
Another complaint raised in the court filing was that the Tim Hortons loyalty program (called Tims Rewards in English or FidéliTim in French) slowed down service in the restaurants – particularly in the drive-through lanes – because of the time needed to connect to the mobile application during transactions. The filing also notes that when loyalty members exchange points for free items, the franchisees bear that cost.
The plaintiffs argue that TDL has breached its partnership obligations to them, that they are no longer able to sustain the profitability they have a right to expect, and that their restaurants have lost value.
This has occurred even as sales have risen, and while the parent company has reported growing profits, the court filing states. Restaurant Brands reported net income of US$1.25-billion in 2021, US$1.48-billion in 2022 and US$1.72-billion in 2023.
“Just in the last three years, we have seen 24 Tim Hortons franchisees buy 77 restaurants in Quebec – because it is well known that franchisees have the opportunity to earn substantial profits when they operate the restaurants well and according to our brand standards,” Mr. Oliveira wrote in the statement. “We will defend these baseless claims through the court process.”
Susan Krashinsky Robertson