Tim Hortons: rolling in dough

A bitter court battle is spilling intimate secrets about Tim Hortons’ hefty profits
Rolling in dough
Photo Illustration by Liz Sullivan

Last year, customers spent more than $5 billion at Tim Hortons. Five billion dollars. That’s $13.7 million worth of coffee and doughnuts per day. Which, in theory, should leave everyone—head office, shareholders and individual franchisees—with plenty of profit to go around. (Don Schroeder, recently fired as Tim’s CEO, pocketed $5.7 million just for walking away and keeping quiet.)

But not everyone agrees with how the pot is divvied up. Arch and Anne Jollymore, both long-time Hortons franchisees, were in a Toronto courtroom last week hoping to certify a hefty class-action lawsuit against the iconic company, arguing that Tim’s historic shift to frozen doughnuts nearly a decade ago has taken a huge bite out of their cash registers—while providing head office with “spectacular” returns. Their legal briefs are complex (the court file is tens of thousands of pages) but the couple’s claim boils down to this: Hortons “forced” franchisees to scrap their deep fryers, then sold them frozen fritters and crullers for triple the cost of the scratch-baked versions.

Three years after the lawsuit was filed, a judge will soon decide whether the action should be sent to trial or tossed out of court. But whatever the outcome, the high-profile case has already served up one revelation that some loyal double-double drinkers will have a hard time swallowing: the Jollymores aren’t the only Hortons operators who think they should be making more money.

Among the evidence disclosed so far are a number of internal emails that discuss “fear” and “discontent” among franchisees, some of whom “are just keeping their mouths shut for fear of retribution” from management. “Every owner that I have talked to has expressed dissatisfaction with the bottom line,” reads one note sent to Roland Walton, head of Tim’s Canadian operations, weeks after the lawsuit was launched. “[T]he feeling is that [the company’s] attitude is ‘We’re still the best game in town, if you don’t like it or aren’t happy, there is a waiting list to get stores.’ ”

The email concludes: “I have yet to be in the company of Tim Franchisee’s [sic] whether at meetings or social situations that there isn’t lots of bitching and complaining.”

For a brand so beloved (and so lucrative), squabbles over money seem almost laughable, if not offensive—especially since, as first reported in Maclean’s, the average Hortons store earns more than $265,000 a year (before taxes and depreciation, but after paying salaries and expenses). But the frozen doughnut case has thawed out a long list of company secrets that were never meant for public consumption. The result is a rather unflattering portrait of Canada’s favourite coffee shop, where bitter infighting, alleged “bullying” by senior management, and age-old grudges are all part of the menu.

Adding to the intrigue is the lingering question of who is actually behind the lawsuit. Arch Jollymore is himself a former senior executive who became a franchisee in Burlington, Ont., after retiring. He is also the first cousin of Hortons co-founder Ron Joyce, who sold his company to Wendy’s 15 years ago—and has regretted the decision ever since. Joyce has never been shy about his stance on frozen doughnuts (“They will never be as good as the fresh product,” he wrote in his autobiography), and his distaste for current members of the executive team, including his successor Paul House, is well known.

When pressed by Hortons lawyers during a pretrial hearing, the Jollymores refused to say if a third party is funding their claim. In court documents, however, the company urges Justice George Strathy to consider the “irresistible inference” that the couple is receiving “the financial support of a relative with yet another and different axe to grind.”

Although the backstory certainly makes for rich courtroom theatre, the case will ultimately live or die on questions of law, not gossip. The Jollymores claim that Hortons (i.e., TDL Group Ltd.) breached its duties of fair dealing and good faith when it introduced “par-baked” goods back in 2002. They allege that the company not only charged owners a “commercially unreasonable” price for each frozen glob of dough, but knowingly misled franchisees about that price—and then punished operators who dared to question the supposed discrepancy.

Hortons, of course, says the lawsuit has more holes than the honey dips in Jollymore’s display case. The company insists that the switch to frozen goods was a godsend for franchisees, who no longer spend months training highly paid bakers (or working the overnight shift when those bakers call in sick). Waste is down, labour costs are down—and profits, despite what the suit claims, are healthier than ever. “The Plaintiffs have done very well financially as Tim Hortons franchisees,” company lawyers wrote in one factum, requesting that the case be summarily dismissed. “For the Defendants, that is the inexplicable and somewhat sad background…Their claim is, in effect: ‘Yes, we are making very good money as franchisees and are getting a good return on our investment, but we think we would be making even more money if you had done things differently as a franchisor.’ ”

What Hortons did do made for some scandalous headlines back in 2003, when customers first learned that the chain had gone frozen. But eight years and one lawsuit later, a much more complete story has emerged, shedding fresh light on what was happening inside head office during the switch—and what franchisees were (and were not) being told.

According to the court file, Hortons started searching for a scratch-bake alternative in the late 1990s, experimenting with automatic equipment and other emerging technologies. By 2000, it had settled on a solution: a European process that “flash freezes” doughnuts as soon as they leave the grease, allowing product to be trucked across the country and reheated in a matter of minutes. Hortons dubbed the new method “Always Fresh.”

Franchisees got their first taste test in July 2000, during an annual convention. David Clanachan, the senior executive in charge of the frozen doughnut file, later wrote in a sworn affidavit that the reaction “was almost overwhelming…They wanted par baking to be implemented as soon as possible, and in some cases sooner.” Management assured owners that although the cost of each doughnut would increase, that hike would be offset by payroll savings and reduced waste.

What the company didn’t tell franchisees during the convention was how much they were going to pay for each doughnut—a price tag that is now at the heart of the lawsuit.

The figures differ depending on the source, but under the old system store owners spent anywhere between five and nine cents to produce a single doughnut (before glazing and icing). That all changed when Hortons signed its joint venture agreement with IAWS, an Irish firm, to build a massive production facility in Brantford, Ont. As revealed for the first time in court, both sides agreed to the deal on the basis that doughnuts would be sold to franchisees for 16 cents apiece (4.6 cents per Timbit). Add distribution costs, and store owners were about to pay 18 cents for a cruller that used to cost less than half that.

According to the Jollymores—and an Ottawa franchisee named Greg Gilson—the company actually told owners that the price would be somewhere between 11 and 12 cents per doughnut. “We all knew that that was more than we were paying to bake in-house, but we all felt the same,” Gilson testified during a pretrial hearing. “The convenience of it would be worth the offset of the three to four cents.” Only after the conversion, Gilson said, were franchisees hit with the 18-cent figure.

Gilson heard enough complaints from fellow owners that he promised to ask about the price gap at a regional meeting with senior executives. “I asked Mr. House, who was on the stage at the time, why the price of doughnuts had come out at the 18-cent mark,” Gilson recalled, under oath. “He kind of looked around, and then looked at the others on the stage with him, and said that he did not recall ever having talked about the 11- to 12-cent doughnut.”

The following week, Gilson said he received a visit from his regional vice-president. “One of his very first questions was: ‘Why would you stand up and ask the president of the company why the cost of doughnuts were what they were?’ ” he recalled. “I could tell that he was not very happy with the fact that I had done that, and it was shortly after that we talked about maybe it would be time for me to give back some stores.”

Gilson was not the only owner speaking out. In 2004, John Montgomery, then the regional VP for Ontario, typed a blunt email to his superiors, outlining more beefs from franchisees. “As you might imagine,” he said, “I could write a book on all the feedback.” Operators were angry about the new doughnut price, saying it looked like a “transfer of profit from owners to TDL.” It only reinforced the feeling that “TDL believes that owners are lazy and make too much money.”

“Don’t assume this is coming from the nuts alone,” Montgomery warned.

Seven years later, Hortons insists that no executive ever mentioned a 12-cent doughnut. The company also claims that the vast majority of franchisees support the par-bake process, not only because it’s convenient, but because bottom lines have flourished: Hortons says store profit margins have climbed more than 47 per cent since the arrival of “Always Fresh” baking. “The Joint Venture was not pursued with the motivation of diverting profits from Tim Hortons franchisees to TDL,” company lawyers wrote. “Tim Hortons franchisees have always been able to generate exceptional returns on their investment.”

Everything else that has surfaced in the court file—the hard feelings, the alleged intimidation, the explosive emails—is nothing more than an “attempt to create atmosphere,” head office says. “Simply put, in comparison to other franchise systems, Tim Hortons franchisees have a great situation.”

Should that situation—financially speaking—be even greater? The judge will answer that.