Underestimating Tim Hortons: Dunkin Donuts’ $16-million mistake

There's a price to be paid for ignoring Tim Hortons - $16.4 million, to be exact. That's how much a Quebec Superior Court judge dinged Dunkin' Brands Canada Ltd recently for failing to protect its brand.

The saga here stems back to 1996, when Dunkin' Donuts dominated the Quebec coffee market. The company had more than 200 stores across the province, and although headquartered in the U.S., was very much a distinctive Quebec entity. The rest of Canada had Tims, Second Cup and later Starbucks, but Quebec had Dunkin' Donuts. In Montreal, there was one it seemed on every major street corner.

And so it would last forever. Or at least that's what the parent company, at the time called Allied Domecq Retailing International, appeared to believe. Its franchisees, however, looked somewhat further afield and didn't like what they saw. Coffee was morphing from a morning drink into an all-consuming national obsession … and Tims was fast becoming the embodiment of caffeine in this country.

According to court filings, 21 Dunkin Donut franchisees alerted Allied Domecq in 1996 to the gathering storm that was Tims. The chain only had 60 outlets in Quebec, but it was rapidly expanding across Canada, and had just merged with Wendy's International, enabling it to scale up even faster. Between 1991 and 1995, it doubled the number of stores, from 500 to 1,000.

Although the Dunkin operators had enjoyed years of essentially no competition in Quebec, they knew a predator when they saw one. They filed a 50-point action plan with the parent company, signaling that immediate action was needed to safeguard the brand.

Allied responded, four years later ,with a refurbishment program that promised a 15 per cent sales increase for franchisees who participated. Daunted by the cost of the renovations, and declining sales, few pursued the option.

By 2008, Dunkin' Donuts presence in the province had tumbled from 210 outlets to 41. A partnership with Alimentation Couche-Tard, a major convenience store chain, was briefly trialed. Throughout, sales slipped while Tims rolled on.

Today there remain fewer than 15 Dunkin Donuts in Quebec. Tims, in the meantime, just opened its 500^th store in the province. Surveying the rout, Quebec Justice Daniel Tingley offered a stinging assessment before awarding the $16.4-million plus costs verdict to the franchisees. "A successful brand is crucial to the maintenance of healthy franchises. However, when the brand falls out of bed, collapses, so, too, do those who rely upon it. And this is precisely what has happened in this case."

Correction: An earlier version of this article indicated that Quebec was only Canadian province with Dunkin' Donuts outlets. There have also been outlets in Ontario.