Tim Hortons Coffee Can't Perk Up Burger King

PORTLAND, Ore. (TheStreet) -- Burger King  (BKW) bought Tim Hortons for a lot of reasons, but the one that affects consumers most is likely the weakest.

It may have spent $11 billion (with help from Warren Buffett) to make Brazilian backers 3G Capital and owner Jorge Paulo Lemann a fortune, which is fine. Or the deal may have been made to dodge U.S. taxes and mandates for employee health care in favor of a new home country with a universal health care system -- which is certainly its right. It may have been a search for higher ground on the sinking island that is the quick-service food industry, which isn't all that great a move, really.

But if it's to give the flagship chain better coffee while giving the company as a whole a means of ditching fast food for a foray into the fast-casual segment that's treating Panera  (PNRA) and Chipotle  (CMG) so well, then Burger King has a shorter memory than any of us could imagine.

Tim Horton's has been a welcome presence in Upstate New York and several Great Lakes states since the mid-1980s, but a push to expand its U.S. footprint back in 2010 slammed to a halt as it withdrew from Dunkin Donuts  (DNKN) territory and closed 36 stores in New England. The chain still has more than 800 locations in the U.S. -- up from 500 in 2008 -- but that pales in comparison to its more than 3,400 Canadian locations.

 

The same year that Tim Horton's hit the wall in the U.S., Burger King attempted to revamp its menu by offering coffee made by Starbucks subsidiary brand Seattle's Best. That not only failed to improve sales, but led to Burger King's $3.2 billion sale to 3G Capital later that year. But the Seattle's Best brand stuck around -- brewing a "Smooth Roast Coffee" especially for the burger chain last year -- and was soon surrounded pulled pork sandwiches, smoothies, sweet potato fries and even delivery in some markets back in 2012. As company-owned stores were sold to franchisees and sales improved, share prices more than doubled.

But its lack of breakfast sales and continued pummeling by McDonald's (MCD) , whose Egg McMuffin and McCafe coffee -- itself an upgrade from Newman's Own organic coffee that it used to give away for $1 -- still dominate fast-food breakfast. As other coffee competitors, including Caribou and Peet's, were bought up by German holding company Joh A. Bensicker in 2012 and both Dunkin Donuts and Starbucks expanded, Burger King saw both its breakfast options and burger niche -- now endangered by better-burger chains like Five Guys and Smashburger -- endangered.

Overall, the quick-service food industry that includes low-priced fast-food chains such as Burger King has never recovered from the recession. According to market research firm NPD Group, traffic at quick-service restaurants in the U.S. dove 3% in 2009 and another 2% in 2010 before reporting flat growth for two out of the three years that followed. Fast-food chains only saw increased traffic in 2012, and only a 1% increase at that. Traffic has been similarly flat for the first half of 2014.

Meanwhile, fast-casual establishments like Panera and Chipotle have added locations and watched traffic increase steadily each year since 2009. That's prompted steadily performing chains like Starbucks to add beer, wine and small-plate meals to the menu just to get a piece of that changing marketplace.

But that isn't what Burger King will be getting with its purchase of Tim Horton's. The Canadian chain just added espresso machines in 2011 and has a menu that's still stacked with donuts, muffins, bagels and Timbits. They branch out into egg sandwiches, hash browns, oatmeal, paninis, wraps and bowls of soup and chili, but they're more aesthetically akin to a Dunkin Donuts than they are to a Panera. You're more likely to find one with a few booths in a truck stop along the New York State Thruway than you are to see one with couches and smooth jazz in a downtown shopping district.

That's just not what Tim Hortons is. Loyalists love the quality of its coffee and pastry, its ease and convenience, its warmth on a cold day and its script on the ice at a hockey game. It's fast, but it's a step below casual in a shrinking segment of the restaurant market. Burger King made a bigger move toward fast-casual when it served up pulled pork and smoothies than it did by buying Tim Hortons.

If Burger King is OK with bankrolling Tim Hortons' fight against Starbucks and Dunkin Donuts in markets along the border and in snowbird locations along the coasts, then that's money well spent. If it's once again trying to take its breakfast menu upscale or trying to get within a sniff of Panera Bread, then a box of Timbits won't get it there.

-- Written by Jason Notte in Portland, Ore.

At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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