Web Exclusive | August 2014 | By Tamara Omazic

Burger King’s Big Move

Miami-based burger giant merges with Canadian brand Tim Hortons to spur global growth.
Fast food giant Burger King stirred up controversy with purchase of Canada brand Tim Hortons.
Burger King
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In a move that shook the fast-food industry earlier this week, Burger King announced its official merger with Canadian coffee-and-doughnuts concept Tim Hortons. The new company, to be headquartered in Canada, will be the third-largest quick-service company in the world, with more than 18,000 locations across 100 countries and nearly $23 billion in sales.

Some have criticized Miami-based Burger King for the tax savings it could reap upon establishing the new company, but brand executives have been quick to dismiss the claims. During a press teleconference on Tuesday, Burger King CEO Daniel Schwartz stressed the potential growth the merger will spur for both brands; the focus is on creating value through accelerating international expansion for both brands, he said during the call. Canada, he added, was chosen as the home base because it represents the largest market for the new combined company “by any real, meaningful metric,” including unit count, sales, and number of employees.

“Tax[es] [weren’t] really the driver for this deal,” Schwartz said. “The tax rate we pay at Burger King today is in the mid 20s—that’s consistent with the effective tax rates in Canada, which is consistent with what Tim Hortons pays. Burger King has and will continue to pay taxes in the U.S.” This includes federal, state, and local taxes, and Burger King will continue to operate from its Miami headquarters, Schwartz said.

Though the tax benefits may not be as great in the eyes of Schwartz and the Burger King team, financial analysts point to the growing number of regulations the quick-service industry will face in the coming years as additional factors that could have swayed the move to Canada.

“It’s in Burger King’s best interests to retain its strength and equity for a year, at least, so people can get used to the idea their favorite brand hasn’t been taken away form them.”

“A lot of management teams are looking five or 10 years out, looking at some of the legislative changes going on, and I think a lot of these management teams are seeing a situation where taxes are going to be a bit more of a burden in the coming years,” says Jason Moser, a senior analyst with Motley Fool One, a finance solutions advisory service.

That the primary reason for the merger is growth can’t be disputed, Moser adds, as “most management teams out there know that tax strategy is not a reason to do a deal.”

American consumers have been up in arms, too, with many Burger King fans taking to social media to voice their disapproval. During the press teleconference, Schwartz and Tim Hortons president and CEO Marc Caira stressed that the two brands will remain independent entities with their strong brand personas well intact. Burger King attempted to ease the uproar over Facebook, posting a message to its fans that read, “We hear you. We’re not moving, we’re just growing and finding ways to serve you better.”

Despite the companies’ insistence that each brand will operate independently of one another, at least one industry expert says cobranding might be a smart move in the future. “It’s in [Burger King’s] best interests to retain its strength and equity for a year, at least, so people can get used to the idea that their favorite brand hasn’t been taken away from them,” says Leeann Leahy, president and general manager of The VIA Agency, a national marketing firm. “After that, the opportunity to cobrand should be leveraged, but if it’s forced on [the consumer], it dilutes both brands.”

Tim Hortons stands to gain a great deal of exposure in the U.S., Leahy adds. The coffee chain celebrated its 50th anniversary this year and 30th in the U.S., and now has about 850 U.S. locations.

The brand is expanding its menu beyond the morning daypart with sandwiches and bowls. Leahy says the business leverage is evident for Tim Hortons, provided company leaders engage in proper portfolio management and recognize the strengths of each chain. In the meantime, getting consumers to take to the business decision shouldn’t be the primary concern for either brand, she adds. Rather, the focus should remain on delivering the food and consumer experience guests expect.

“These are two iconic brands. The success of how they come together and form this new entity is [to] separate their business from their brand,” Leahy says. “The business of whether it’s more cost efficient to operate in one market versus the other or more sensitive to the workforce … shouldn’t impact how the consumer interacts with and has a relationship with the brand.”

As Burger King said to its fans on Facebook, “The WHOPPER isn’t going anywhere.”