July 11, 2018 / 11:46 AM / 5 months ago

UPDATE 4-Tim Hortons to enter China as part of new strategy to boost profits, perception

(Adds details about franchisee issues, updates share price)

By Nichola Saminather and Karan Nagarkatti

July 11 (Reuters) - Canadian coffee-and-donut chain Tim Hortons will open 1,500 outlets in China over the next decade, capitalizing on a growing cafe culture in the world's second-largest economy, the chain's parent Restaurant Brands International Inc said on Wednesday.

Restaurant Brands shares rose almost 3 percent after the company announced the Tim Hortons move into China in a joint venture with private equity firm Cartesian Capital Group, the chain's biggest expansion outside the core Canadian market.

The move is part of a two-pronged strategy by Tim Hortons' new President Alex Macedo, who is trying to cope with mounting competition in the fast-food industry at home while also fixing the chain's reputation, bruised after some franchise operators alleged that Tim Hortons mismanaged its franchise operations and bullied some restaurant owners.

"One is improving and increasing our leadership in Canada, and the second is taking a little bit of Canada to the world," Macedo told Reuters in an interview at the parent company's Oakville, Ontario, headquarters.

Tim Hortons will keep its beverage offerings the same in China but will customize its food menu for the local market, Macedo told Reuters. The move into China adds to the chain's global footprint, after last year's entry into the Philippines, Britain, Spain and Mexico.

Tim Hortons has operated in the United States since 1984 and the United Arab Emirates since 2011. It lists 4,256 locations across Canada, 725 in the United States, 125 in the Middle East and between five and 20 in the countries it entered last year.

Macedo, who took charge in December, is seeking to stem profit declines and sweeten customer sentiment. A bitter and public feud with a group of unhappy franchisees in Canada and the United States pushed public perception of the chain to 50th place in a January survey from fourth a year earlier.

China's coffee and tea consumption is expected to climb to 750,218 metric tons by 2020, from 693,748 in 2015, according to market and consumer data provider Statista. Shanghai alone has an estimated 6,500 coffee houses, with small chains, independent stores and bakeries battling for a slice of a market that research firm Mintel says could grow to 79 billion yuan ($11.84 billion) by 2022 from 60 billion yuan last year.

Starbucks Corp has about 3,000 outlets in China now and aims to have 10,000 there within a decade, which would make China a bigger market for the company than the United States.

Restaurant Brand shares were up 2.6 percent at C$83.22 at 1:31 p.m. in Toronto, their highest since November.

"I wouldn't say (Tim Hortons) has saturated the market in Canada, but they're mightily close," said Brian Madden, portfolio manager at Goodreid Investment Counsel in Toronto. Madden is waiting for the franchisee issues to be resolved and for valuations to come down to buy the stock.

Macedo said Tim Hortons could have communicated better with franchisees and acted faster to address the their issues. He said the chain is now acting on many of their ideas, and ticked off a slew of measures, including upgrading outlets, a new kids menu, all-day breakfast and a loyalty program. Tim Hortons also began testing deliveries this week and plans to introduce self-service kiosks, he said.

Macedo added that he was trying to improve relations by meeting disgruntled franchisees throughout Canada.

The Great White North Franchisee Association, formed last year, has filed two suits against the company alleging mismanagement of advertising funds and intimidation of franchisees. Its U.S. arm also has a lawsuit against the company.

A person who has spoken with many aggrieved franchisees, who asked not to be identified, told Reuters that members have not yet seen improvements in their circumstances or profits, even though some of them have met individually with the company and the franchisee advisory board, which represents all Tim Hortons restaurant owners across Canada.

The official franchisee advisory board has distanced itself from the association that is suing the company. Lou Gossner, chair of that board, attributed the association's grievances to miscommunications and misunderstandings.

Regardless, "public perception of this brand has really been tainted and tarnished over the last year to 18 months," Goodreid's Madden said. "It's going to require things that put money back into the pockets of franchisees to fix it."

$1 = 6.6715 Chinese yuan renminbi Reporting by Nichola Saminather in Toronto and Karan Nagarkatti in Bengaluru; additional reporting by Laharee Chatterjee and John Benny in Bengarluru; editing by Patrick Graham, Saumyadeb Chakrabarty, Jonathan Oatis and David Gregorio

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