Why Expansion Into China Is a Big Risk for Tim Hortons
The Motley Fool
Published Jan 15, 2019 08:00
Restaurant Brands International (TSX:QSR)(NYSE:QSR) struggled to find any growth last year, as its stock was down more than 1%. Investors simply weren’t excited with the company’s results — in particular, with Tim Hortons. The popular coffee chain has fallen out of favour with Canadians in recent years, and that’s a big problem.
In recent quarters, Restaurant Brands has seen Tim Hortons consistently generate growth of less than 3%. In its most recent quarter, the coffee shop’s sales were up 2.8%, and that was up from 2.2% in the previous quarter and 2.1% from the period prior to that. What’s alarming about those number is that they are system-wide sales, and same-store sales numbers are even worse.
Same-store sales growth looks at the growth achieved in stores that were in operation the previous year, whereas system-wide sales look at total sales numbers, which will benefit from an increase in locations. If we look at same-store growth, Tim Hortons achieved just 0.6% last quarter, no growth in the prior period, and -0.3% the period before that.
Growth is clearly an issue for Tim Hortons, as it continues to lag behind Burger King and Popeyes, the other two chains in Restaurant Brands’s portfolio. It’s keeping the stock from rising and achieving stronger sales numbers.
Focus is on global expansion In recent years, Tim Hortons has been eyeing markets outside Canada to expand into, and rightfully so. After all, with a saturated home market, it’s inevitable that the coffee chain would need to look beyond its immediate borders for more significant growth opportunities.
Previously, we heard of the company looking to expand into Spain . However, its biggest foray may be into China, where it expects to add 1,500 locations over the next decade. Many North American companies have been successful in expanding into the Far East, and it’s something Tim Hortons hopes can stimulate some much-needed growth. Many Chinese consumers are familiar with the Tim Hortons brand in Canada, and the brand recognition will likely give it a good head start once it launches its first store.
The company hopes to start building stores in China soon, although it’s unclear when we might see the first store open for business.
Get The App
Is Restaurant Brands being too aggressive? In a world where sales growth is vital to attracting investors, it’s not hard to understand why Restaurant Brands is looking to fix its Tim Hortons problem. The concern, however, is whether a company with over $12 billion in long-term debt is taking on more than it can chew. Expanding into many different locations could prove to be too big of a risk for the company. After all, it has a massive U.S. market available to it south of the border that is still largely untapped.
While Tim Hortons has expanded into the U.S., it hasn’t gone all that well. And if it has trouble in the U.S., it might be a bit premature to focus on other markets.
Bottom line I don’t like the idea of Tim Hortons expanding so much so quickly, particularly with a big market nearby. Although the move might pay off in the end, the stock is still a big risk today.
Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC.
This Article Was First Published on The Motley Fool
Written By: The Motley Fool
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.