Tim Hortons and Dutch Bros. go together like cream and sugar.
I don’t know if the executive or board members over at Dutch Bros. Coffee and Restaurant Brand International read my stuff, but perhaps someone can pass this one along.
I’ll have a double-double, please. That’s two growing coffee retailers, with twice the foot traffic, to go big.
Overview
On paper, Dutch Bros. and Tim’s are more than compatible, they are complementary.
Dutch Bros. calls the west home, barely tip-toeing across the Mississippi. Tim Hortons works from the northeast, staying above the Mason-Dixon line. Though they address a similar demographic and share some elements of location strategy, the two never directly compete in any market.
Dutch Bros. will average about 5 visits to one of their stores to every 4 to a Tim Hortons, giving the west coast brand about a 20% lead in national foot traffic. Dutch Bros. business was growing faster as of 2022 but Tim Hortons has been finding its legs after a tough start to life in the U.S. market.
Both brands are small in comparison to category leaders Starbucks and Dunkin’ Donuts and face stiff competition from others in their respective regions. On their own, Tim Hortons and Dutch Bros. standout as strong regional concerns. Together, they could form a national player with improved economies of scale.
Here’s why I think a merger or otherwise joining of the ways would be accretive for both shareholders and customers of Dutch Bros. and Tim Hortons/RBI.
Dutch Bros.
The publicly traded Dutch Bros Coffee (BROS) chain is headquartered in Oregon and has a current market capitalization of ~$6.3 billion. TSG Consumer Partners is by far the largest institutional shareholder, while Vanguard, BlackRock and others also participate.
The company operates ~500 stores across 14 states in large and small markets alike, predominantly in the west, with a small presence in Missouri and Tennessee. The scrappy chain operator actually beats Starbucks in several smaller counties through the west -- a difficult thing to do, even outside of the city.
On its own, Dutch Bros. can’t stand up to Starbucks in a broader sense -- the foot traffic delta is simply too large. At the same time, Dutch Bros. must defend against rival Krispy Kreme’s further incursion to the central states, where Dutch Bros. is most vulnerable.
Growth then has to come from one of two places: aggressive expansion by the opening of new stores in both held and targeted territory, or the acquisition of the same.
While outright buying the Tim Hortons brand from RBI may or may not be economically feasible for Dutch Bros., merging, or otherwise fusing business interests with them certainly is.
Tim Hortons
The owner of Tim Hortons is $20 billion conglomerate Restaurant Brands International (QSR), which was formed in 2014 by the merger of Burger King and Tim Hortons, and grown by the purchase of Popeyes in 2017. The primary institutional shareholders are Capital World, Pershing, RBC and Vanguard.
After Subway, McDonald's, Starbucks and Yum! Brands, RBI is the fifth largest QSR company in the world. Tim Hortons currently operates 624 locations across 10 states as a regional concern in the Great Lakes, the northeast, and down into Virginia and Kentucky.
In addition to Starbucks, Tim Hortons has to compete with the firmly-entrenched Dunkin’ Donuts brand, which dominates much of the northeast United States. In this region, Tim’s struggles to climb beyond 1-10% foot traffic share vs other coffee retailers.
In Michigan, so close to the Canadian border, it’s a different story. Here, where the Tim Hortons brand reaches across the water, the coffee chain wins the state and several urban markets over both Starbucks and Dunkin Donuts, proving Tim’s brand veracity in areas where it gets its message out.
For Tim Hortons and RBI, growth can come from opening a lot of stores in new locations. That will be challenging in the northeast, perhaps a little easier in the Great Lakes area, and somewhat of a crap shoot in the south outside a handful of markets.
Or, RBI can do what RBI does, which is acquire part or all of another QSR brand, such as Dutch Bros.
Unlike the west coast coffee retailer, RBI unquestionably has the capital resources to make the deal and a proven history of acquiring brands that are accretive to their broader portfolio. They are also smart enough to realize that Dutch Bros., while not a direct competitor now, probably will be one day.
Summary
My personal feeling is that Subway choosing Q1 of 2023 to announce they are putting themselves up for sale will start a bit of a consolidation run in the QSR industry.
Investors and brands will step outside their normal comfort zones and apply alt. data and analytics to identify new paths to growing market share and revenues, while very consciously streamlining operational efficiencies in the face of rising food costs and supply chain issues.
On paper, the match between Dutch Bros. and Tim Hortons is pretty good, though, from a corporate culture standpoint, I expect the two brands are miles apart. Dutch Bros. still feels like a founder involved business, whereas Tim Hortons is probably just another page in the portfolio at RBI.
If a transaction were to go down, I expect it would be RBI doing the buying, with Dutch Bros. retaining their brand and operational processes, and perhaps transplanting some to Tim’s side of the business.
