Burger King Is Breaking Into an Overcrowded Mess With THI

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It’s sounds like a delicious tragedy but a donut war is the last thing Tim Horton’s (THI), Dunkin Donuts (DNKN) and Krispy Kreme (KKD) need. DNKN and KKD stock are off about 10% so far this year, and THI is only positive because of a buyout offer from Burger King (BKW).

burger king, tim hortons, dunkin donutsAfter all, donuts are not a growth business, and competition for coffee sales puts donuts shops up against some really big guns like Starbucks (SBUX) and McDonald’s (MCD).

Burger King’s deal to buy Canadian coffee-and-donut chain Tim Horton’s is about more than just paying less in corporate taxes. It’s about beefing up and complementing its offerings with coffee, a business that still has retail growth in it. Just ask Starbucks. Indeed, as Americans have become more health-conscious, Dunkin has doubled-down on coffee. McDonald’s has embraced coffee, too.

Burger King wants to be a player in coffee, and Tim Horton’s looks like a good way to do it — on paper. The new company would have a market cap of roughly $18 billion, generating revenue of $22 billion from 18,000 locations in more than 100 countries. THI would benefit from Burger King’s expertise in international expansion and development, while BKW would gain from having a partnership in the high-margin coffee business.

Most importantly, THI has more than 4,700 outlets, but only about 850 in the U.S., mostly close to the border with Canada. That leaves plenty of room for expansion.

Dunkin Donuts Offers Stiff Competition

BKW may rue the day it did this deal. For one thing, Wendy’s (WEN) tried this already. The No. 3  burger chain owned Tim Horton’s for more than a decade before spinning it off in an initial public offering in 2006. It had big plans for U.S. expansion — and they never took.

It’s a huge challenge. As noted, there’s not much growth in the business of selling donuts. That’s why coffee has become so competitive.

It’s also hard to see how Tim Horton’s can make inroads against Dunkin Donuts or Krispy Kreme when brand loyalty is so strong. New Englanders probably love Dunkin Donuts as much as Canada loves Tim Horton’s. Krispy Kreme has its own dedicated fans.

And then there’s the fact that Candians buy donuts all day long. In the U.S., sales peak in the morning. That means Tim Horton’s has to compete for breakfast traffic against entrenched champs like Dunkin, McDonald’s and Starbucks, as well as newcomers like Yum Brands’ (YUM) Taco Bell.

The U.S. doesn’t need more donut shops. Hell, it doesn’t need any new fast-food chains. New fast-casual players like Chipotle Mexican Grill (CMG) are doing well, but none of the old-school chains look too healthy these days.

Burger King needed to do something to bulk up and compete beyond burgers and fries, so it’s too soon to slam this deal. But it’s hard to see how Tim Horton’s is the key to profitable expansion. The donut business looks amply served by Dunkin, Krispy Kreme and the regional stores, and coffee probably couldn’t be more competitive.

Dunkin and Krispy Kreme already had their hands full with each other — and much of the rest of the industry. A big push by BKW to expand THI onto their turfs — even if it ultimately fails — promises to be a costly distraction for all.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/tim-hortons-dunkin-donuts/.

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