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COVID-19 challenges Tim Hortons' overseas push in China as shares of its Chinese operation plunged more than 40% in less than three weeks

October 25, 2022

Share of doughnut-and-coffee chain Tim Hortons China (NASDAQ:THCH) have plunged more than 40% since it made its official debut on Nasdaq in September 29 due to bearish sentiment for global stocks amid macro uncertainty. While most analysts are bullish on Tim Hortons China stock, there is a certain degree cautiousness due to concerns of business uncertainties caused by China’s covid lockdowns. Tim Hortons China, abbreviate as Tims in mainland China, is operated as a venture between the private equity firm Cartesian Capital Group and Restaurant Brands International, the parent company of Tim Hortons as well as the franchises for Burger King and Popeyes. Tims China launched its first store in 2019 in Shanghai and begin trading on Nasdaq in September 29 2022 following a merger with special purpose acquisition company Silver Crest. As of end-2021, Tims China has opened 380 stores in China, which is nearly tripled from 137 outlets at the beginning of 2021. The Canadian coffee chain has big ambitions for the market with plans to open 800 stores in China by the end of 2022 and 2750 stores by 2026, underscores the coffee chain’s big bet on China despite recurring outbreaks of COVID-19 that has restrained consumer demand and triggered city lockdowns at the moment. The plan will make Tims China, which counts Tencent and Sequoia Capital China as investors, a much faster expansion empire than Starbucks. The U.S coffee chain opens 2,000th store in China about 17 years after it introduced the lifestyle of coffee drinking in 1999. Speed and scale are key to achieving the company’s ambitious growth plan. Less than four years after opening its first store in Shanghai, Tim Hortons China crossed the 500-unit mark last week after opening a new store in Dongguan, a city of over 10 million people on the Pearl River delta. Tims China continued investments in the business are starting to pay off, it grew consolidated revenue by over 70 percent in the first half of 2022 compared to the same period last year. According to its IPO prospectus filed with Nasdaq , the coffee chain booked a total revenue of 640 million yuan in 2021 that more than doubled compared to 2020, which was fastest growth for the Chinese market over the three-year period. China’s new wave of Covid-19 cases and city lockdowns made it difficult for companies to get back to business as usual, it is even worse for high growth companies like Tims China which has not yet to achieve profitability. In fact, Tims China’s net loss has been expanding. The coffee chain booked a net loss of 380 million yuan ($53.3 million), widening from 87.83 million RMB ($12.3 million) in 2019, 140 million RMB ($19.6 million) in 2020. During mandated lockdowns, in-house food and beverage consumption was not permissible in many places, including big cities like Shanghai. Despite the influence of restrictions, some customers have remained uncomfortable when spending extended time indoors among strangers as they eat or drink. That’s a problem for coffee chain, which counts China as one of its most important markets. Tim Horton’s rival-Starbucks, for example, saw its China store sales declined 23% for the first quarter compared to same period last year and a third of its 5,400 outlets in the country were closed as of early May. Its China store sales declined 23% for the quarter that ended in March from a year earlier and a third of its 5,400 outlets in the country were closed as of early May, pointing to another tough quarter in the making, executives said on a recent earnings call. Tims China’s expansion is not without risk. There have been many similar expansion plans for foreign brands that failed to materialize in China, most often because brands were too aggressive, opening stores in less lucrative locations with inadequate cost management. Apart from the impact of the pandemic, the rise in the cost of raw materials put pressure to its profit. The cost of coffee bean at Tim’s store increased 16.6% from a year, which resulted in an additional raw material cost of 207 million yuan ($28.5 million) that account for 32.3% of its revenue in 2021, according to Tims China’s IPO prospectus. Right now, the market positioning of Tims China is segmented between premium boutique coffee houses and small chains-large premium chains like Starbucks, and chains that focus on aggressive pricing like Luckin. Even in light of the difficult time, “the current high level of growth suggests there is room for future expansion. We thought there was big potential growth for a differentiated brand, Starbucks offers higher-priced products, while Tims positions itself as a “daily pleasure”, said Peter Yu, chairman of Tim Hortons China, who is also a minority owner of Burger King China (BK China) To draw in customers, Tims China has introduced localized products, including mochi Timbits, made with rice rather than wheat flour; Sichuan beef wraps; and salted egg yolk-flavoured Timbits. “Everything starts with local relevance, we need to continually innovate for the market,” said Yu, who emphasize Tims should launch a new product every 14 days on average to help the brand stay relevant in a country where consumer interest shifts quickly The importance of localization and development of market-specific products is something Yu familiar with—he implemented the similar strategy Burger King in China, which grow from 56 to more than 1,300 restaurants since 2012. The company has inked marketing partnerships with well-known Chinese tech firms. Through its relationship with Tencent, it has opened locations in Shanghai and Shenzhen that functions as an e-sports venue and café. It is also partnering with delivery platforms like Meituan and Ele.me to keep up with demand for delivery, which local competitors such as Luckin Coffee are really good at. Delivery now accounts slightly more than one-third of Tims China’s sales. Aiming to appeal to a young consumer that is the generation of digital consumers, Tims China engages deeply on social media platforms such as WeChat, Xiaohongshu, Weibo and Douyin (domestic version of Tiktok). For example, Tencent helped the Canadian coffee chain to digitalize its operation by launching online customer community on Wechat-embedded mini program. So far, Tim Hortons has obtained more than 8 million members through its WeChat mini program. Chinese consumers post daily about Tims' drinks and donuts on social e-commerce platform Xiaohongshu. Image Credit: PingWest Coffee consumption is still relatively low in China. By comparison, Canadians consume roughly 30 times more per capita. According to Mordor Intelligence market research, coffee consumption will grow at a 10 per cent annually in China over the next five years as demand boom among young professionals and in urban areas. Despite Tim Horton’s rapid growth in China, the number of its coffee store dwarfed by Starbucks and local competitor Luckin which operate 6,000 and 7,100 stores respectively. Other local competitors are also aggressively pursuing the market's rapid expansion Manner Coffee said in March that it would open 200 stores in 2021. The coffee shop chain that started in Shanghai operates 455 outlets in twelve cities as of May this year. As of February of this year, Nowwa Coffee had more than 1,500 locations, having established 100 stores in June and July.https://en.pingwest.com/a/10909



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