The key quotation is the following:
Under what’s known as the “Always Fresh Conversion” several years ago, the company stopped making baked goods from scratch in each location every day, and instead started shipping partially baked items that had been flash frozen before final baking in ovens at all Tims locations every morning.
This “several years ago”, to my own experience was nearly a decade ago. While I was not a huge consumer of doughnuts to begin with, they were good for parties and the like. After they did this conversion I no longer purchased them and notably did not find any substitute products that were baked of sufficient quality that I could go to.
I’m somewhat surprised that Tim Hortons is able to retain such a high amount of customer share despite the perception of product quality being somewhat worse than McDonalds (NYSE: MCD). Financially, Tim Hortons is quite well managed, with them reporting a 2011 fiscal year earnings that was about 11% better in operating income than in 2010 (adjusting from a one-time gain from the sale of their bakery). Their balance sheet is relatively clean, with a year’s worth of income of long term debt.
They do appear a tad expensive, with a valuation of 22.5 times 2011 earnings.
The lesson for investors is that product branding is a very strong intangible asset of a business. It takes more than flash-frozen not-so-fresh doughnuts to turn off consumers and their fast food habits.
I guess my sour grapes is still remembering staring at my computer screen in 2003 and seeing McDonalds trading at $15 a share and thinking that despite its operational woes at the time, the company was worth purchasing. The original parent of Tim Horton’s, Wendy’s (NYSE: WEN) just doesn’t have the allure at current valuations either – their branding is much, much less valuable. Everybody around the planet knows about McDonalds and this is what makes their brand so powerful.