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The Real Reason Why Tim Hortons Is Seeing Weak Comps

Comparable store sales at Tim Hortons have been underwhelming of late, and while investors point the finger at the dispute between its parent company, Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR), and its franchisees, the reason for lacklustre comparable store sales is due to management’s inability to keep up with the latest tech trends and a lack of menu innovation that has allowed competition to swoop in and steal Tim Hortons’s share of the Canadian coffee market.

Fierce competition in the Canadian coffee space is a drag for Tim Hortons

Tim Hortons has some tough competition in McDonald’s Corporation (NYSE:MCD) and Starbucks Corporation (NASDAQ:SBUX), both of which have been investing a great deal in technology and menu innovation. McDonald’s in particular has been really aggressive on efforts to steal the Canadian coffee market share with its recent $1 promotions.

Sure, Tim Hortons is practically a staple for Canadians, but McCafé is a serious threat, especially with the rise of all-day breakfast, and if Tim Hortons can’t adapt and provide menu innovations of its own to keep customers intrigued, comps will continue to suffer. I think management recognizes this, and we may see major menu innovations at Tim Hortons, as we’ve seen with Burger King over the years.

Recent menu innovations, in Canada in particular, have been underwhelming in the previous quarter. Dark roast coffee and new sandwiches haven’t jived with Canadians, and the results speak for themselves.

I believe the U.S.-based Tim Hortons menus have seen more innovation over the last few months. Cinnabon-themed beverages, holiday koozies, and cute festive cookies have been introduced exclusively to the U.S. market. I believe these holiday items will be absolute hits in any market they’re offered in.

Besides, what Canadian could resist a Cinnabon iced cap? That’s essentially the cure for lacklustre comps at Tim Hortons, but if they’re kept out of Canada, many Canadians will likely be tempted by Starbucks’s Christmas Tree Frappuccinos or $1 McDonald’s coffee with an Egg McMuffin.

Tim Hortons has new peppermint lattés for the holiday season in Canada, which is a great response to Starbucks’s holiday beverage offerings, but it may take a bit more to really beef up comps as competition heats up.

In addition to a lack of menu innovation in the Canadian market, the tech has also fallen behind McDonald’s. If you’ve walked into a McDonald’s recently, you’ve probably noticed the touchscreen ordering stations. These days, the last thing millennials want to do is speak with someone behind the counter who may get their order wrong, so such tills are an incredibly efficient way of grabbing orders.

Yes, Tim Hortons is still arguably Canada’s best brand, but if management falls asleep at the wheel, investors will eventually lose patience with lacklustre comps quarter after quarter.

Bottom line

Tim Hortons has an order-ready app similar to the one that Starbucks has, but many consumers still opt to stand in line to place their order the good, old-fashioned way. I think touchscreen order stations could be coming soon to a Tim’s near you; however, the biggest issue right now is the lack of real menu innovation.

It’s definitely a solvable problem, and given Restaurant Brands’s incredible track record of menu innovations at Burger King (like chicken fries and angry whoppers), I think a tonne of menu innovations at Tim Hortons’s Canadian locations could be in the cards in 2018.

I believe the Tim Hortons’s low comps issue is temporary. Restaurant Brands knows how to drive comps through menu innovations like nobody else, so it’s probably just a matter of time before we see strong comps from Tim Hortons.

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Fool contributor Joey Frenette owns shares of RESTAURANT BRANDS INTERNATIONAL INC and Starbucks. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC and Starbucks. Starbucks is a recommendation of Stock Advisor Canada.

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