Restaurant Brands International Brings Tim Hortons to China

Tim Horton’s is coming to China. It’s aboot time, eh?

Imagine, Canadian coffee on the streets of Beijing. Imagine 1,500 stores competing directly with Starbucks Corp. (NASDAQ:SBUX) and its planned 5,000 store network.  Imagine Chinese going around wearing beanies and talking about hockey.

Yes, it’s a cute story, but what’s underneath is what fascinates me, not least because I’ve been invested in Tim Horton parent Restaurant Brands International Inc. (NYSE:QSR) since 2015. The company also owns Burger King and Popeye’s. It runs these brands as franchises with corporate partners, the model McDonalds Corp. (NYSE:MCD) has been moving toward.

Since I got into the stock its value has risen 50%. It opens for trade July 19 at $63.78 per share, a market cap of $29.8 billion. The stock pays a nice little dividend of $1.80 per year, a yield of 2.9%, so I’m a happy shareholder.

Will I remain one?

A Zero-Based World

QSR was created by 3G Capital, the same Brazilian investment fund that put together Ambev S.A. (NYSE:ABEV), the dominant player in the beer industry, as well as The Kraft Heinz Co. (NYSE:KHC), the packaged food giant.

Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A) admires the 3G guys, and has defended them despite the problems at Kraft.  That battle is a tough one for him, and them. The beer company hasn’t been lighting the world on fire, either. But no one is asking Buffett about QSR, because it’s doing great.

The 3G approach is based on “zero-based budgeting,”  the idea that managers must justify each year’s spending off a clean sheet of paper. It’s hard work, but increasingly popular, because it creates a culture of cost management — a key to success in any commodity business.

The World Was Wide Enough

The Tim Horton’s deal turns out to be even more interesting than it appears at first glance, once you dig into it.

First, you have Brazilian-inspired managers running an iconic Canadian brand, along with two important American brands, on a franchised model.

The franchisee side is the key to this latest deal. QSR has been working closely with Turkey’s Kurdoglu family, along with private equity. In 2012 they made the Kurdoglus the master franchisee for Burger King in China.

Guess who’s going to run the Chinese Tim Horton’s outlets? The Kurdoglus.

Before the Kurdoglus entered the picture, reporters were calling Burger King in China a bust. Now, working with the private equity Cartesian Group, the Kurdoglus have over 900 Burger Kings in China.

Unlike the U.S. market, these are often in high-end malls and airports, where they are tweaking the menu with things like cod pie, created with a local Chinese seafood importer.

You can expect the same thing with Tim Horton’s.  The goal is 1,500 stores in five years, the same goal they started with at Burger King, but that’s a goal, not an order. They may not be at the bottom of every office tower and along every highway, but they will be in high-traffic, high-prestige locations. They will also be well-run.

The Bottom Line on QSR Stock

Even before this deal, QSR revenues were growing at over 10% each year, with about 15% of that money hitting the net income line. During the March quarter, this meant net income of $147 million, about 59 cents per share, on revenue of $1.25 billion. The company has beaten earnings expectations for the last four quarters, and 12 of the 19 analysts following it call it a buy. 

I agree. QSR is a great example of Warren Buffett’s idea that you find good companies, put money in them, and wait.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in QSR.

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