Brand management

At last year’s Cymbria day, we discussed the idea of how our proprietary insights typically fit into four broad categories of change. One of the categories commonly misunderstood by the public markets is management change.

A new management team doesn’t show up in the trailing performance of the business. In many cases, some great managers make short-term sacrifices to create long-term value. Even when improvements begin to appear in operating and financial performance, there’s often a lag before investors recognize and are willing to invest behind that positive change.

We describe these management teams internally as “marshmallow management teams”. Inspired by the famous Stanford marshmallow experiment, the best operators are willing to delay gratification to increase long-term value. To illustrate, I’ll use one of the businesses we own: Restaurant Brands International Inc. (“Restaurant Brands”).ⁱ

Coffee break

Before joining EdgePoint, I worked at Tim Hortons, where I ran finance, marketing and technology functions, and served my share of coffee along the way. Most of my career has been in investing, but after moving back to Canada, I found it difficult to get excited about most of the Canadian asset management landscape and decided to build some operational experience instead.

There’s probably no better way to gain an appreciation of the quality of a business than from the inside. As a franchisor, Tim Hortons earns a royalty on every dollar of sales at all of their restaurants. More importantly, this royalty grows without requiring any additional capital. If a franchisee builds a new restaurant or if inflation increases the cost of coffee, this royalty grows. The result: exceptional returns on capital.

Equally as important is the simplicity of the business model. As a franchisor, Tim Hortons doesn’t run the restaurants or manage the tens of thousands of employees across the country. Its main role is finding the right franchisee partners, making sure that they do well and doing everything possible to improve the brand and guest experience year after year.

Before my first day of work at Tim Hortons, I spent weeks studying one the most successful restaurant turnarounds in recent history, Patrick Doyle’s resuscitation of Domino’s Pizza after he joined in March 2010. From 2009 to 2019, Domino’s was one of the best-performing stocks in S&P 500 Index. It returned 48% per year over that ten-year period.ⁱⁱ More importantly, he transformed its brand, from a company known for having the worst pizza to the largest and best pizza restaurant group in the US. So, imagine my surprise when Patrick Doyle became the executive chairman at Restaurant Brands in 2022 and started executing on the same playbook that he’d written at Domino’s.

On brand

When Patrick took charge of Domino’s, they were the third-largest pizza chain and better known for pizza that “tasted like cardboard”. Patrick rebuilt the pizza recipe from scratch, changing the dough, sauce and cheese blend. He doubled down on ingredient quality, simplified the menu and focused on their “hero product”. This was the foundation for the turnaround.

The first thing a Canadian thinks of when they think about Restaurant Brands is Tim Hortons, while an American probably thinks about Burger King. Despite Burger King’s US business being less than 20% of earnings, the latter chain is probably what worries investors south of the border.ⁱⁱⁱ

Patrick, along with (former Domino’s executive and) new Burger King US President Tom Curtis, took their learnings from the Domino’s turnaround and applied them at Burger King. They focused on making the Whopper their “hero product”, making incremental improvements in ingredient quality and product taste. They also reduced complexity with a simplified menu while improving in-restaurant operations and the guest experience.

We’re beginning to see the results with pleasing same-store sales growth. Over the last four years, Burger King’s same-store sales growth has outperformed the industry despite an intense competitive environment.

What about Tim Hortons? In a way, Covid offered a glass half full scenario for Tim Hortons. Before Covid, there was a tendency to set aggressive sales targets every year. While it can be good to dream big, nigh-impossible targets can be demoralizing and create an unintended incentive to go all-in with new products. Even worse, the added complexity hurt the brand. Covid created some breathing room and stability for Tim Hortons’ leadership team of Axel, Hope and Naira^iv to repair franchisee relationships, improve the guest experience and build the right platforms to continue to take share in the breakfast, cold beverage and lunch dayparts. Tim Hortons today is completely different than the Tim Hortons of seven years ago. The new team is growing market share and has delivered more than 19 consecutive quarters of positive same-store sales growth.^v

The importance of partnering with the right people

At Domino’s Patrick was obsessed with franchisee profitability. He understood the importance of good franchisees and helping them become more profitable. More profitable franchisees will be more engaged, their stores will be run better, sales will increase and they will open more stores. When he left Domino’s, they had the best unit economics in the industry.

A common mistake made by franchisors is underappreciating the importance of the franchisees. When you sit at head office, you can trick yourself that the most important drivers of the business are the newest jingle you created, the new espresso machines you’re rolling out or even a new app. All those pale in comparison to the guest experience and that’s driven by the quality of the operations and the franchisees running them. We all experienced this at Tim Hortons, the coffee recipe never changed, we just had poorly run restaurants.

When Patrick joined Restaurant Brands in 2022, franchisee profitability was hurt by high labour and food-cost inflation following Covid-19. Within a few months of starting at Restaurant Brands, Patrick prioritized improving franchisee profitability just like he did at Domino’s.

This is harder than it sounds because you will have to make trade-offs that hurt a franchisor’s short-term profitability to benefit your franchisees. Patrick and the team chose to close down unprofitable stores despite the negative impact on restaurant growth and royalty revenue. They invested US$400 million in national marketing and to renovate and remodel the stores even though there wasn’t an immediate return on investment.^vi Restaurant Brands shared in the costs of food inflation rather than passing all of it to the franchisee.

Today, franchisee profitability has increased significantly across all major brands. Customer satisfaction at Burger King US has matched its highest levels since data was collected. Believe it or not Tim Hortons has the same number of restaurants in Canada as they did in 2017 and for the first time in eight years, unit growth has started to pick up.

Cutting the fat

The two biggest problems at Restaurant Brands were Burger King US and Burger King China.

The Burger King US franchisees had weak unit economics and dated restaurants. For Burger King to be successful, every Burger King in the US had to be modernized so they wouldn’t hold back the strong local operators running the restaurants.

Burger King China, in what should have been the fastest growing and the largest restaurant market in the world, was in decline and run by a Turkish franchisee with financial issues that hadn’t stepped foot in China since Covid.

To fix these two situations, Patrick made an aggressive and rare decision for a franchisor, going back into the business of operating restaurants by acquiring Carroll’s, the largest US franchisee, and Burger King China. Not only does this bring about significant operational challenges, but this is also almost always received poorly by investors due to increased capital intensity and complexity.

When Geoff MacDonald and I met with Patrick, I asked him what gave him the conviction to make big changes that were bad for the share price in the short-term but potentially good over the long term. Patrick’s answer was that he knew that the only way to set them on the path to greatness was to own and operate the restaurants temporarily.

Since the acquisition, about 60% of the restaurants across the Burger King US system have been remodelled with a clear uplift in sales post renovation.^vii They are now in the early innings of transitioning to a stronger operating model, one where they are refranchising their purchased restaurants to individual owner-operators who were the core to both the Domino’s franchisee system and Tim Hortons’ original success.

The Restaurant Brands leadership team in Asia, Thiago and Rafael,^viii was crucial in getting the turnaround started at Burger King China, hiring a number of local restaurant executives to kickstart the process. We’ve already seen the impact of this turnaround with approximately 10% same-store sales in the second half of 2025. Burger King China has since been resold to CPE, a local private equity firm with experience in the restaurant industry and have put US$350 million of capital on the balance sheet, enough to build 1,000 restaurants with the goal of doubling the number of restaurants by 2030.^ix

And what better example for both countries to follow than the international business. With over $20 billion in systemwide sales and over 16,000 restaurants, alongside Tim Hortons, the international business is the crown jewel of Restaurant Brands. This is a business that has grown at approximately 14% per year over the last five years while running at just under 70% operating margins.^x The quality of Burger King outside of North America bears little resemblance to the domestic business. In several of the more developed markets (e.g., France, Spain) average revenue per restaurant is more than double a typical US restaurant.^xi

Josh and Sami were able to successfully grow Burger King internationally from 6,000 in 2013 to almost 13,000 restaurants today and are repeating the process with Popeyes growing it from just under 500 restaurants in 2017 to more than 1,800 restaurants today and growing.^xii We are hopeful that the U.S. and China will follow.

When Patrick Doyle joined as executive chairman, we received many comments from investors questioning his “massive pay package”. We liked the structure, not only did Patrick make a personal investment of approximately C$40 million, but his compensation package was also tied to the share price performance over the next five years. He did not take a salary or a bonus and if the share price did not go up, he would not get paid.^xiii

It’s been three years and the share price hasn’t moved materially since Patrick joined. In two years, if the share price is around the current share price, his performance shares will not vest. At C$140/share, or about 35% higher than the current price, Patrick will make around C$300 million. And at C$170/share, or about 65% higher than the current share price, Patrick will make more than C$500 million.^xiv

Patrick has spent the last three years building the foundation for Restaurant Brands but as we get into the last two years, we feel like the focus will be squarely on creating value for shareholders.

Brand loyalty

We have been investors in Restaurant Brands for the last five years. Over that time, earnings per share (EPS) has grown at low-teens while having a dividend yield of ~4%/year.^xv The internal rate of return (IRR) of our investment has been 13.7%^* per year and lagged the intrinsic growth of the business because the price-to-earnings ratio has contracted from 26x next twelve months earnings in the month before our first purchase to 18x today.^xvi In contrast, McDonalds and Yum! Brands (owner of Pizza Hut, Kentucky Fried Chicken and Taco Bell) both trade at approximately 23x next twelve-months’ earnings.^xvii