Tim Hortons' success: It's not just the coffee

Tim Hortons (THI), the Canadian coffee giant that recently opened stores in New York City, reported profit rose 3.7 percent in the second quarter, despite aggressive promotions from competitors, especially offers of free morning coffee from McDonald's (MCD) in Canada.

But the biggest fast-food chain couldn't dent Canadians' love for their Timmies, and Tim Hortons revenue grew 8.9 percent in the quarter as a result of its own menu and marketing initiatives.

Some initiatives, though, were more surprising than others, especially the success of the Cold Stone Creamery one. It seems coffee and ice cream go well together. What may have sounded like an odd combination when Tim Hortons announced in February the partnership with Cold Stone Creamery, the U.S.'s sixth-largest ice cream vendor, turned out to be quite the success. The idea was for the two restaurant chains to sell each other's products. Tim Hortons has 2,939 restaurants in Canada and 536 in the U.S., while Cold Stone Creamery has 1,450 locations in 11 countries, including Japan, Korea, China and Taiwan.

The initiative was especially successful in the United States, where same-store sales grew 3.3 percent, even higher than in Canada. It was the 39 Cold Stone Creamery co-branded locations that were credited with the results, as well as the strong menu promotional program. Together, they helped to more than offset the early Easter holiday, which negatively impacted same-store sales, Tim Hortons said.

Tim Hortons opened six locations in Toronto that co-branded Cold Stone Creamery, and it plans to expand with an additional six sites in other Canadian markets this year.

Yes, the initiative with the Texas-based Cold Stone Creamery exceeded expectations and performed so well that now the company is contemplating co-branding more than the planned 50 Tim Hortons locations in the U.S.

Tim Hortons has been pushing hard to expand into the U.S. It announced in July plans to open 12 locations in New York City at such key sites as Penn Station and Times Square, as well as co-brand three Cold Stone Creamery locations in Manhattan. A total of 10 restaurants were opened in the U.S. during the quarter.

Still, it is at home that the coffee company faces more problems -- same-store sales grew only 1.7 percent in the quarter in Canada -- due to higher cost pressures and economically strained customers. And of course, the competition from McDonald's has taken its toll, despite president and CEO Don Schroeder's insistence Hortons actually "grew transactions over the two weeks of this competitive activity." Schroeder warned the company may have to increase prices in Canada soon as a result.