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1 Microeconomic Case Analysis University Canada West MBAF504 Professor Jamil Chaya August, 2023

2 Microeconomic Case Analysis Introduction Tim Hortons is a Canadian fast-food restaurant brand started in 1964 by former NHL player Tim Horton and Jim Charade. The brand, which began in Hamilton, Ontario, as a coffee and doughnut store, has expanded into a cultural phenomenon with a broad menu that includes sandwiches, beverages, and treats such as the famed "Timbits." Tim Hortons and Burger King joined in 2014, becoming Restaurant businesses International (RBI), which handles both businesses. Under RBI's leadership, Tim Hortons has expanded abroad while being a valued part of Canadian culture. In contrast of remarkable achievement and underlying challenges, Tim Hortons, the renowned Canadian fast-food restaurant chain, has recently achieved a milestone by recording an unprecedented $2 billion in quarterly sales. This impressive feat underscores the brand's widespread popularity and consumer demand. However, amidst this record- breaking success, concerns have emerged regarding the profitability of its franchisees. The mismatch between skyrocketing sales figures and franchisee profits raises questions about the sustainability and equitable distribution of benefits within the Tim Hortons business model. (Edmiston, 2023b) This complicated situation compels us to investigate deeper into the dynamics of the fast-food industry, franchise operations, and the broader economic effects.

3 Figure 1 Revenue of Tim Hortons from 2015 to 2022, by Segment (in Billion U.S. Dollars) Note . From Tim Hortons, & Restaurant Brands International. (February 22, 2023). Revenue of Tim Hortons from 2015 to 2022, by segment (in billion U.S. dollars) [Graph]. In Statista . Retrieved August 12, 2023, from https://www-statista-com.ezproxy.myucwest.ca/statistics/291515/annual-revenues-tim- hortons-by-segment/ , Copyright 2023 by Statista Supply and Demand Dynamics On the demand side, the success of Tim Hortons' cold beverages marks a significant shift in consumer preferences. With cold beverages now constituting 40 percent of all beverage sales, up from 30 percent in 2019, it reflects a response to evolving tastes and demands for refreshing options. This change in preference underscores the influence of consumer behavior on shaping the product mix. The strategic focus on expanding the market share of cold beverages aligns with the demand for innovative, appealing options, particularly among younger customers who seek novel and exciting experiences.

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4 Simultaneously, the emphasis on food sales during lunch and dinner hours addresses another dimension of demand. By catering to the preferences of younger customers and capitalizing on their propensity to spend more during meals, Tim Hortons is strategically tapping into specific demand patterns. The result is an improvement in sales, traffic, and overall profitability, reflecting a demand-driven strategy that enhances the brand's offerings in alignment with consumer desires. On the supply side, the concerns raised by the Alliance of Canadian Franchisees (ACF) reveal the interplay between supply costs and franchisee profitability. (Edmiston, 2023b) The inflation-driven increase in ingredient costs, as noted by the ACF, has squeezed store margins and led to diminished profits for franchisees. This highlights the supply-side challenges faced by the franchisees in maintaining profitability. This situation underscores the delicate equilibrium between supply costs, profitability, and the sustainability of franchise operations. The decision by RBI to disclose franchisee profit levels indicates a response to the concerns raised by the ACF. By sharing this information, RBI acknowledges the importance of transparency and addressing supply and profitability issues. The decline in average earnings before interest, taxes, depreciation, and amortization (EBITDA) from $220,000 to $100,000 compared to 2018 illustrates the impact of both demand and supply factors on franchisee earnings. In summary, the evolving sales landscape at Tim Hortons is a result of demand and supply factors intersecting. The success of cold beverages and strategic food offerings speaks to changing consumer preferences, driving demand patterns. Concurrently, concerns about ingredient cost inflation highlight supply challenges and their effect on franchisee profitability. As Tim Hortons navigates this landscape, it demonstrates the intricate interplay between demand and supply considerations in the pursuit of sustaining growth and profitability.

5 Responsiveness and the Value of Markets Tim Hortons' incredible achievement of breaking $2 billion in worldwide quarterly sales graphically displays market dynamics, underlining a tremendous hunger among customers for its product choices. This increase in sales indicates not just the realization of efficient market outcomes, but also the presence of consumer surplus, in which consumers are prepared to pay premiums over market pricing for Tim Hortons' products. However, against this backdrop of success, a distinct issue emerges from franchisees' vocalized displeasure with falling profitability, shedding light on possible inefficiencies inherent in the wider franchising system. This huge disparity in earnings across franchisees raises critical considerations about fairness and the equitable distribution of income throughout the franchise network's participants. This scenario has the potential for negative externalities in addition to the implications for parity and efficacy. If the current trend of diminishing franchisee profitability continues, the consequences might cascade into local economies, accelerating consequences such as limited employment prospects and decreased service quality. This ongoing story emphasizes the complex interaction of microeconomic principles. The Tim Hortons instance is a moving example of how the dynamics of consumer-producer relationships, market efficiency, and the rippling effects of externalities come together in the physical world. Achieving a robust business environment that serves all stakeholders equally is dependent on a delicate balance of these multiple characteristics.

6 Figure 2. "Global Spread of Tim Hortons Locations: International Presence Snapshot" Note . From Map with the number of Tim Hortons by country. Flytrippers . https://flytrippers.com/map- countries-tim-hortons/ , Copyright 2023 by Flytrippers The performance of Tim Hortons in exceeding $2 billion in worldwide quarterly sales highlights the complex interaction of price responsiveness and demand elasticity. This achievement represents a certain amount of price responsiveness, indicating that consumers' demand for Tim Hortons products is elastic. Consumers' willingness to pay a premium for these goods implies relatively elastic demand, in which price changes cause corresponding modifications in the quantity desired. Elasticity may be caused by variables like brand loyalty, perceived quality, and the nature of the items supplied. Furthermore, Tim Hortons' success is likely due to the income elasticity of demand. Although not expressly stated, the positive income elasticity implies that as customers' earnings rise, so does their proclivity to indulge in high-priced items such as those from Tim Hortons. These dynamic highlights the importance of income fluctuations in shaping demand patterns and, as a result, market outcomes. Tim

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7 Hortons' exponential sales growth emphasizes the importance of an elastic supply chain that can adapt to changes in demand. Failure to manage supply-side elasticity may result in shortages, surpluses, or operational inefficiencies, all of which have an influence on overall profitability and customer satisfaction. In terms of larger ramifications, the idea of demand elasticity might include taxation impacts. Changes in taxation, albeit not specifically addressed, might cause variations in the demand curve for Tim Hortons' products, with the incidence of taxes possibly shared by customers and franchisees. We saw how these principles interact, impact one another, and ultimately shape market outcomes and the well-being of many stakeholders via the lens of Tim Hortons. This exercise emphasizes the significance of a balanced approach to economic decision-making, in which efficiency, equity, elasticity, and externalities converge to generate optimal results for all parties involved. Production Analysis Now that we have had a short overview of Tim Hortons, we must understand that the analysis of costs and production is crucial to any industry whether small-scale or large-scale, and as far as Tim Hortons is concerned, there is very little doubt that the process as a whole can be complex, it being a multinational firm. Here are some benefits that can be attained by going through insights of costs and production: (i) Profit Maximization – Determination of the optimal level of production for maximum profit is made possible through cost and production analysis. (ii) Pricing Strategy – Pricing plays an important role in driving potential customers. For instance, overpricing can prevent customers from completing purchases while prices too low can bring about losses to the industry. (iii) Risk Management – Production cost trends facilitate industries to assess future risks or disruptions in normal functioning and develop plans prior to such uncertainties.

8 (iv) Production Capacity – Cost analysis helps industries plan on whether they must increase or decrease production capacity with respect to demand in the market. In simple words, it evaluates the optimal production capacity. (v) Cost Control – Considering the production costs at various stages can help industries mark areas of inefficiencies and act suitably to reduce unnecessary costs incurred. (vi) Investment decisions, forecasts, reaction to environmental hazards, resource allocation, the introduction of sustainable practices, etc are some other merits of analysis on the basis of costs. The considerations Tim Hortons will take into account during cost analysis are categorized into two wide perspectives, namely the short-run and long-run perspectives. It is important for any industry to be aware of both scenarios, current as well as future operations. Let us take a look at these:  Short Run Production and Costs (i) Variable Inputs – manpower and ingredients are examples of variable inputs. Changes are made to these in accordance with the demand. In short, increase of staff and supplies during peak hours and reduce their numbers at hours that see fewer customers. (ii) Challenges faced due to Diseconomies of Scale – With the development of the industry, difficulties in communication and teamwork can arise leading to inefficiencies, over- exploitation of resources due to large-scale production, chances of reduction in the quality of end products, etc might increase costs to the firm. (iii) Staffing costs, costs for maintenance, and quality assurance are some factors that can decide production costs.

9  Long Run Production and Costs (i) Investment in Infrastructure – Development of existing equipment on the preparation desk, and kitchen, appropriate software, and technological advancements for efficient processing may add up to long-run costs. (ii) Expanding Operations – Demographics are crucial for a firm’s progress as they must start supplying to locations where there is demand. During this expansion phase of an industry, it must bear expenses right from setting up production at new facilities to planning supply chain strategies specific to the location. (iii) Efforts to Improve Sustainability – Sourcing materials that are eco-friendly, proper waste management systems, equipment that run economically, taking actions that satisfy customer preferences on social responsibility, etc can add up costs. *****Aditya Part******* Market Structure In the context of market structure analysis, we explore the content of a recent news article. The article discusses Tim Hortons' achievement of surpassing $2 billion in quarterly sales and highlights concerns about franchisee profitability. This analysis is undertaken within the framework of concepts related to imperfect competition and monopoly. In a Monopoly there is only one player and that very player is also the industry since there are no competitors and hence, total market power lies with the firm enjoying monopoly position. Thus, it can be clearly inferred that Tim Hortons and the parent company Restaurant Brands International Inc. (RBI), are dominant players in the restaurant market however they do not enjoy a monopoly position in the market because there are many competitors in the coffee and fast-food chain industry who offer substitute goods and services at different prices to consumers.

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10 However, RBI has high amount of market power in fast-food chains because it owns various famous fast-food chains. Thus, RBI has a stronghold on the fast-food market and Tim Hortons is a dominant business in coffee and fast food therefore, the same market power provides higher leverage and bargaining power while conducting business with the suppliers and distributors thereby, giving it an upper hand. It is to be noted that the high sales figure should be read in light of same-store sales. Further, the stores which are recently opened or closed are excluded from the calculation. As discussed in the above paragraph, it can be said that there exists an imperfect competition in the franchise system because imperfect competition refers to a market wherein there are many buyers and sellers and some have high market power while other small business are price takers. So imperfect competition exists when there is neither monopoly nor perfect competition. the franchise is individual business owner functioning under the label of Tim Hortons. Therefore, the business units with a higher market power dictate their terms due to which the franchise are burdened with the pressure of High cost of raw materials due to inflation which would reduce their profit margin. Thus, despite the record high sales by Tim Hortons, “the franchise profits are not where they need to be. Moreover, 40% of the sales of the Tim Hortons can be attributed to sale of cold beverages which is a good strategy.

11 Figure 3. "Global Spread of Tim Hortons Locations: International Presence Snapshot" Note. Team. (2017, June 1). Here’s Why Restaurant Brands International Needs To Focus On Tim Hortons Franchise Partners. TREFIS. Retrieved August 12, 2023, from https://www.trefis.com/stock/qsr/articles/410041/heres-why-restaurant-brands-international-needs- to-focus-on-tim-hortons-franchise-partners/2017-06- , Copyright from trefis To conclude, the present article emphasis and explains the concepts of imperfect competition in light of the fast-food chain industry with reference to Tim Hortons and RBI which are big market players with high influence. Moreover, the article highlights that these big Companies are misusing their market power and dictating the price, terms and conditions of business to the Franchise owners. Thus, the high inflated prices of raw materials etc cuts the profit margin of the individual franchise owners. Thus, there is an inequality within the franchise system and the Big Companies should strive to come to an agreement and enter into such a contract which is fair i.e., wherein both parties can have equal amount of influence in the carrying out the business.

12 Conclusion In conclusion, Tim Hortons' remarkable achievement of surpassing the $2 billion mark in quarterly sales underscores its strong market presence and consumer demand. Nonetheless, the concerning decline in franchisee profitability presents a significant challenge to the brand's sustainable growth. The divergence between robust sales and diminishing franchisee earnings necessitates a comprehensive approach to resolution. Tim Hortons should implement a multifaceted strategy, encompassing transparency, operational enhancements, and strategic adjustments. Open communication between the parent company, Restaurant Brands International (RBI), and franchisees is imperative to collaboratively address concerns and devise effective solutions. Enhancing supply chain efficiency, mitigating ingredient costs, and harnessing technological innovations to streamline processes can collectively bolster operational efficacy. By embracing these measures, Tim Hortons can not only tackle the issue of dwindling franchisee profitability but also continue its trajectory as a cherished brand while adapting to evolving market dynamics. Moreover, it is crucial for Tim Hortons to reassess its menu and offerings to align with evolving consumer tastes and expand its reach to different market segments. By fostering a collaborative atmosphere, prioritizing operational efficiency, and embracing innovation centered around customer needs, Tim Hortons can adeptly tackle the issue of declining franchisee profitability. In doing so, the brand can continue to thrive as a cherished Canadian icon on the global platform.

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13 References Edmiston, J. (2023b, August 8). Tim Hortons quarterly sales hit $2 billion for first time, but franchisee profits not where they need to be, exec says. Financialpost . https://financialpost.com/news/retail-marketing/tim-hortons-quarterly- sales-2-billion-first-time Tim Hortons . (n.d.-b). https://www.timhortons.com/ca/en/corporate/history.php News | Restaurant Brands International TM . (n.d.). https://www.rbi.com/investors/press-releases/press-release-details/2014/Burger-King- and-Tim-Hortons-Complete-Merger-to-Form-Restaurant-Brands-International/default.aspx Robertson, S. K. (2023, February 18). Tim Hortons turfs key store owner amid a battle with franchisees over profitability . The Globe and Mail. https://www.theglobeandmail.com/business/article-tim- hortons-franchisees-profitability/ Martin, B. (2021, November 15). Supply chain disruptions: The risks and consequences . RAND Corporation. https://www.rand.org/blog/2021/11/supply-chain-disruptions-the-risks-and- consequences.html D’Amours, A. (2023, May 9). Map with the number of Tim Hortons by country . Flytrippers. https://flytrippers.com/map-countries-tim-hortons/ Production and Cost Analysis | Encyclopedia.com . (n.d.). Production and Cost Analysis | Encyclopedia.com. https://www.encyclopedia.com/social-sciences/applied-and-social-sciences- magazines/production-and-cost-analysis Reading: Short Run vs. Long Run Costs | Microeconomics . (n.d.). Reading: Short Run Vs. Long Run Costs | Microeconomics. https://courses.lumenlearning.com/suny-microeconomics/chapter/short-run-and- long-run-costs/

14 Tim Hortons | Company Overview & News . (n.d.). Forbes. https://www.forbes.com/companies/tim- hortons/ Team, N. (2023, March 27). Short Run and Long Run Cost . NAVI-pedia. https://navi.com/blog/long-run- costs-short-run-costs/ Robertson, S. K. (2023, August 8). Tim Hortons’ franchisee profitability improving, Restaurant Brands says. The Globe and Mail . https://www.theglobeandmail.com/business/article-restaurant-brands- results-burger-king-tim-hortons/ Team, T. (2017, June 1). Here’s Why Restaurant Brands International Needs To Focus On Tim Hortons Franchise Partners. Trefis . https://www.trefis.com/stock/qsr/articles/410041/heres-why- restaurant-brands-international-needs-to-focus-on-tim-hortons-franchise-partners/2017-06-01

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