TORONTO (Reuters) - Tim Hortons Inc unveiled a fresh strategy on Friday to take on Starbucks and Dunkin Donuts in the U.S. market, saying it would open hundreds of new American cafes that break the mold of Tim’s iconic Canadian coffee shops.
As part of a plan to open 900 stores in North America over the next three years, the company said it will build 300 more outlets south of the border, increasing its total there by more than 50 percent. Its shares rose 2.7 percent on the news.
Rather than sticking with a format that has become a part of Canadian culture, Tim’s said it would open what it described as “redesigned upscale cafe/bake shops” that feature a menu that differs from the Canadian fare, including pastries baked on premises.
The Oakville, Ontario-based company also plans to open 600 more outlets in Canada, bringing its total to nearly 4,000. It already dominates its home market, and analysts say it is quickly running out of room to expand there.
At the same time, critics say Tim’s growth strategy has been haphazard, especially in the United States, calling on the company to spell out the number of outlets it wants to open.
In a presentation to analysts on Friday, the company said it would locate the 300 new cafes in parts of the United States in which it already had a presence, mostly in New York, Ohio and Michigan, states on the border with Canada.
Brian Yarbrough, an analyst at Edward Jones in St. Louis, Missouri, said the U.S. strategy will work only if the company targets the right areas.
“If you just start throwing up 100 stores in the U.S., that’s the wrong way to do it,” Yarborough, who has a “hold” rating on the stock, said. “They are making the right move by targeting current markets. You just can’t continue to throw more stores out there. It’s like throwing bad money after bad money.”
Tim Hortons currently has 3,015 shops in Canada and 563 in the United States. Those numbers pale compared with Starbucks, which has more than 11,000 outlets in the United States alone, and Dunkin’ Donuts, which has 6,400 in its home market.
By the end of 2013, the company expects to have about 4,000 stores in Canada with new openings targeted for Ontario, Quebec and British Columbia.
With a ubiquitous presence in Canada’s big cities, the company will focus mostly on rural markets and kiosk stores in gas stations, airports and within large retailers. It is also testing an upscale format in Canada with expensive fixtures and furniture.
“The bottom line is that the Tim Hortons you know today, will be dramatically different in four years from now,” Don Schroeder, its chief executive, said.
As well, it plans to open 60 new Cold Stone ice cream shops in Canada this year. The company signed an exclusive Canadian agreement with the U.S. ice cream chain in 2009.
The company forecast earnings per share growth of 12 percent to 15 percent over the next three years. For 2010, it sees earnings of C$1.95 to C$2.05 per share. Last month it reported 2009 EPS of C$1.64.
Also for 2010, the company expects sales at stores open for at least a year to increase by 3 percent to 5 percent in Canada and by 2 percent to 4 percent in the United States. The company plans to spend C$180 million to C$200 million this year mostly on the new store expansion.
In 2009, sales growth in Canada was 2.9 percent, and in the United States it was 3.2 percent.
The company, which has a few stores in Britain as well as on some military bases in the Middle East, said it was eyeing a handful of other countries for expansion and expects to name them by the second half of this year.
Tim Hortons shares, which have risen about 8 percent in the past year, were up 2.7 percent at C$32.78 on the Toronto Stock Exchange on Friday.
Reporting by Scott Anderson; editing by Peter Galloway