Should Tim Hortons Inc. Bet the Farm on… Robots?

How robots could lead to a new era of profits for Tim Hortons Inc. (TSX:THI)(NYSE:THI).

The Motley Fool

Tim Hortons Inc. (TSX: THI)(NYSE: THI) might be the best brand in the nation. It’s synonymous with Canada, just like hockey, beavers, and maple syrup. Nearly eight out of every 10 cups of coffee sold in Canada are poured from the company’s coffee pots. There are more than 3,500 locations in Canada, and close to 1,000 in the U.S., with more on the way.

The company released quarterly earnings last week that were terrific. Thanks to increased sales of breakfast items and its new crispy chicken sandwich, same-store sales growth in Canada was 2.6%, shrugging off previous quarters of weaker growth. In the U.S., results were even better, as stores open for more than a year had sales surge by 5.9%. This led to an increase in revenue of more than 9%, and an increase in earnings per share by more than 10%.

The stock was up sharply on the news, up nearly 6%, to a new all-time high. Is it time to buy?

Well, I’m not sure. Even though the company did deliver great results, I’m worried about oversaturation, especially in Canada. The company plans 500 new stores here, and I have no idea where it’s going to put them all without cannibalizing existing stores. It’s also facing stiff competition from McDonald’s Corporation (NYSE: MCD) and Starbucks Corporation (NASDAQ: SBUX), who continue their assault on Tim’s coffee fortress.

Additionally, franchisees face potential staffing shortages now that the federal government has kiboshed the Temporary Foreign Worker Program. Certain markets are still able to bring in foreign workers, but the costs to do so are much higher. Over the longer term, this could cause labour shortages.

Plus, fast food employees around the world are beginning to protest their crummy wages. Capitalists argue that low fast food wages are a product of too many workers chasing too few jobs, but the fact is that the disparity exists, and many in the industry aren’t happy with it.

Which is why Tim Hortons should lead the way to get rid of them. Well, some, at least.

I recently read a story about a robot that makes hamburgers. The robot did it all, from frying the hamburgers to cutting fresh tomatoes for each burger. It created a burger that was consistent each time, and took only 10 seconds to do so. Imagine a kitchen full of them.

This technology is coming, and I can’t see a scenario where fast food employees do anything but lose jobs. McDonald’s is already testing out touchscreen technology where customers can place their own orders. Instead of having three cashiers in place, a busy fast food joint could cut it down to just one supervisor who makes sure people get their orders right.

Fast food joints have been training customers to do this for decades. Most make folks pour their own soda and get their own ketchup and napkins. Imagine a combination of automation in the back, self-service in the front, and only a small number of staff members making sure the whole thing runs smoothly.

Suddenly, a Tim Hortons franchisee could see their biggest cost go down significantly. This would make owning a franchise all the more attractive.

If the company can develop some sort of technology in-house that automates even some of the process, it’s pretty easy to go to current franchisees and offer to install it for them at the cost of a higher royalty payment. Everybody wins in that scenario.

At this point, the technology isn’t close to replacing workers. However, it will come to market, and a chain like Tim Hortons is a logical choice to try it out, considering all the coffee it sells. It could have a huge advantage if it can build a coffee-pouring robot. Or, more than likely, it’ll continue to do things the old-fashioned way. As the old saying goes, if it ain’t broke, don’t fix it. But having robots serve coffee would increase profits, plus it’d be pretty cool.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of Starbucks.

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