SECOND CUP LTD.
Annual Report 2016
VISION
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To be the coffee brand
most passionately
committed to quality
and innovation.
Table of Contents
Letter from the Chairman
Letter from the President & CEO
Revitalizing the Network
Driving Innovation
A Look at 2017
Financial Highlights
Management’s Discussion & Analysis
Audited Financial Statements
Notes to the Financial Statements
Shareholder Information
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Letter from
the Chairman
Over the past three years, Second Cup has vastly improved as a company.
After taking necessary bold action to repair serious structural issues, the
company’s foundation is much more secure. Second Cup has invested
heavily to improve franchisee profitability. Successful franchisees are the
lifeblood of Second Cup.
While much damage has been repaired, the company has struggled
to resume its growth trajectory. We aim to see improvement in key
measures including average sales per store, same store sales growth,
store count and store profitability. When Second Cup stores deliver
an outstanding experience for customers, everything falls into place.
Sales and profitability grow, franchisees earn better returns, company
profitability rises and growth will resume.
It is no easy task to fix a long ailing specialty retailer, but we have
some important advantages. The quality of Second Cup’s real estate is
exceptional. The capital structure has been strengthened and there is
a shared commitment to create value. To date, we have not succeeded
in creating value, and alternatives will be considered if Second Cup is
unable to maximize value independently.
There is a level of shared impatience among shareholders, directors and
management. I regard this as healthy,
as our commitment to maximize long term value is not subject to
compromise.
We are grateful for your support as Second Cup pursues its journey,
committed to realize its full potential success.
Michael Bregman
Chairman
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The Board of Directors continues to be
supportive and I thank them for their
guidance and encouragement. I also
want to thank our incredibly hard-
working franchisees, whose dedication to
our transformation has been invaluable.
Finally, I want to thank my management
team, and all the support staff at Coffee
Central, for the passion they bring to our
business every day.
Alix Box
President & CEO
Letter from the
President & CEO
In 2016 we focused on our strategic
priorities and we addressed major
structural issues in the company. The
related costs are largely behind us.
With fewer distractions and a solid
foundation, we are focused on building
sales and profitability. While we are not
satisfied with our performance, we are
encouraged by our quarter over quarter
improvement in our earnings throughout
the year. We are pleased by positive same
store sales growth in our largest market
of Ontario, and the continued optimism
and support from our franchisees.
We reduced our corporate store count
from 32 at the beginning of the year
to 22 by year end. We will continue to
pursue opportunities to further decrease
corporate stores as we return to an
asset-light model.
Bringing the best coffees in the world
to our customers is at the core of our
brand and 2016 was a year of coffee
enhancements. We took our coffee
quality to even higher levels of excellence
by examining and improving every step
of the coffee process from farm to cup,
engaging the talents of some of the
world’s most knowledgeable coffee
aficionados. We created a new and
unique blend called Batch49 that has
resonated well with our customers.
The modernization of our fleet of stores
continues with close to 30 new and
renovated locations in Ontario, Quebec
and Alberta. Each café reflects the
local community while delivering on
our commitment to superior quality
and innovation. We continue to make
enhancements to the concept. Each
renovation and new store re-energizes
the franchisees, their staff and customers
and the overall Second Cup brand.
We aim for more aggressive growth in
the next three years.
Second Cup’s Rewards program, a
strategic priority for the company and
important business driver continued to
gain members, recently achieving a key
milestone of 300,000 members and 25%
sales penetration in under two years.
In December we completed a successful
re-financing with Serruya Private Equity,
retiring our bank debt. We expect to
benefit from the Serruya family as
they have tremendous experience with
franchised concepts.
Our top priorities for 2017 are increasing
sales and profitability for both our
franchisees and the company.
Innovation is critical to our success.
We have streamlined our approach
to food and beverage innovation and
are set on delivering three major sales
building initiatives this year. In January
we launched our Better for You line of
healthy products including smoothies.
This spring will mark the debut of Flash
Cold Brew, a superior tasting cold coffee
offering that will be the best in the
market. We have exciting fresh food and
lunch ideas in test as well.
As I have observed in past years,
challenges remain and we must
continue to be uncompromising in our
commitment to excellence. We are
seeing some encouraging signs and we
remain focused on getting the business
to improve. The progress we have made
in improving our financial results, and
the progress we have made to focus
our business practices and to enhance
the store experience for our customers,
makes us optimistic for 2017.
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Revitalizing
the network
The roll out of the new café concept
continues with close to 30 locations in
the primary regions of Ontario, Alberta
and Quebec. We are continuously
working to evolve the builds, taking a
customized approach for each location
to reflect the local community while
delivering on our commitment to
superior quality and innovation. Each
renovation and new build re-energizes
the brand as well as the franchisees,
their staff and customers.
"The transformation of my café
after the renovation has been
dramatic – for customers, for
staff, for sales!"
“It’s always been a great location in a vibrant
downtown community but the design was
tired. The physical changes in colour and design
immediately changed the vibe of the café from
quiet solitude to social and energetic. The staff
and regulars love coming here, it makes them
happy. The contemporary design has attracted
a new premium quality customer too. We’re so
proud of the café and excited to show it off to
customers and friends. It’s exactly what Second
Cup needed and I’m excited about the future.”
—
Lisa Tirkalas,
Second Cup Franchisee
324 Bloor Street West,
Toronto, Ontario
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"The new café concept has
completely re-energized
our business, our staff and
our customers."
“We are seeing significant growth in all areas of
the business since last year and growth week
over week. The Second Cup development team
negotiated the best spot in the mall for our
relocation and the new design is so eye-catching
that people can’t help but stop and come in.
When our existing customers saw the new café
they said “wow”, and we’ve attracted many
new and younger customers—the design is very
appealing to everyone. The design of the café
really reflects the superior quality of the brand,
the products, the service, and our staff is so
proud to come to work every day.”
—
Martine Desbiens & Charles Carrier,
Second Cup Franchisees
Fairview Pointe Claire,
Montreal, Quebec
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Driving
Innovation
Driving innovation is fundamental
to the transformation strategy.
A number of key initiatives in coffee,
food and Rewards were furthered in
2016 to deliver the ultimate coffee
experience to customers. Second
Cup has always been known for
excellent coffee, and in 2016 we took
our coffee obsession to even higher
levels of excellence by examining and
improving every step of the coffee
process from farm to cup. A new
premium quality breakfast program
was introduced and the Rewards
program experienced significant
member and sales penetration
growth. The advancements made in
2016 set the stage for exciting and
significant sales growth opportunities
in 2017.
2016: The Year of Coffee
We made uncompromising improvements to
sourcing, blending, roasting and tasting to create
truly exceptional coffees that are Second to None.
THE BEST SOURCING
Second Cup only selects from the top 2% of the
world’s production of coffee – the highest quality
100% Specialty Grade Arabica beans.
THE BEST ROASTING
Second Cup is now working with an award-
winning Canadian artisanal roaster that develops
and enhances the flavour notes of every bean,
and every roast is tasted and tested by Second
Cup Coffee Expert, Chris Sonnen.
THE BEST PEOPLE
There is an entire team of coffee lovers behind
every Second Cup coffee including two of the
best Coffee Experts in the business: Alton McEwen
– a long-time leader in the specialty coffee sector
– and Chris Sonnen who brings an unrivalled
passion for the ultimate brew to Second Cup.
Our Coffee is Second to None
"I don’t know where you
can get a better cup of
coffee than Second Cup.
I’ve had the privilege
of working with Chris
Sonnen at Second Cup
who has been working
to ensure that Second
Cup is incorporating
every new advancement
in sourcing, roasting and
production to maximize
quality.”
Alton McEwen
Member of the Board,
Second Cup
30 years of specialty coffee
business experience, 25 years
with Second Cup.
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OUR COFFEE IS
SECOND TO NONETM.
Better. Not bitter.
OUR COFFEE IS
SECOND TO NONETM.
Better. Not bitter.
Chris Sonnen,
Second Cup’s Coffee Expert
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Being a Canadian company makes us proud. We wanted
to do something in a unique way that reflects our position
as the only Canadian specialty coffee retailer. Early in
2016 we introduced our new signature blend – Batch49 –
denoting the position of Canada on the 49th parallel.
Perfect hot or cold, we believe no other coffee comes
close to it. It is unparalleled in terms of taste and quality.
Our customers and franchisees loved it so much we made
it a permanent coffee offering.
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Better Breakfast Better Day
Premium quality food is an important part of
the ultimate coffee experience. Eating occasions
outside the home are growing and breakfast in
particular is ‘on the go’. Second Cup's strategic
focus on premium quality food innovation advanced
in 2016 with the introduction of the new breakfast
program featuring a line of premium quality
sandwiches including healthier choices like the egg
white and spinach on naan bread. These premium
quality sandwiches are made fresh through local
vendors across the country. Breakfast sandwich
sales doubled in 2016 and more innovation is
planned for 2017.
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Rewards
One of the biggest successes in the transformation
has been the Rewards program which continues to
grow. In February 2017 the program achieved a key
milestone reaching the 300,000 member mark and
25% sales penetration in under two years. Members
enjoy free rewards faster by earning points with
every dollar spent and through personalized bonus
point offers sent by email and on the mobile app.
Franchisees recognize the program’s ability to drive
incremental visits and sales. The Rewards program
continues to be a strategic priority for Second Cup.
"The Rewards program was one of the key
drivers of our significant sales growth
in 2016. Customers love when they earn
a free Reward; they get excited and will
come back to visit more often.”
Ed Grant, Second Cup Franchisee
Halifax Shopping Centre, Halifax, Nova Scotia
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ReWard Yourself
Members earn FREE coffee faster!
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A Look
at 2017
With a strong foundation set in
2016, our product and marketing
innovation is focused on
differentiated products with mass
appeal and superior quality that
have the ability to drive meaningful
incremental sales. With a new
test and learn approach, we will
confidently and boldly roll out our
new ideas.
Our franchisees are very proud of Second Cup’s Canadian heritage. To celebrate Canada 150 we created a
new beautifully designed cup, illustrated by world famous Canadian artist John Coburn, that reflects our
community brand pillar depicting iconic Canadian landmarks and valued traditions from coast to coast.
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Better For You Menu
The first big initiative launched in January is the Better
for You menu - a new line of "Better For You" products to
meet growing customer demand for healthier options.
The new menu includes smoothies made with a whole
fresh banana and added benefits like flax, protein and
greens and a healthy breakfast wrap with 10 grams of
fat. Marketing support is focused on driving trial. We are
excited by the customer adoption and franchisees are
enthusiastic about our plan to continue to expand the
line with innovative additions.
"In today's market the consumer
is looking for healthier choices.
Since we have introduced the
Better For You products our
smoothie and yogurt sales
have significantly increased
compared to last year. We are
receiving positive feedback from
our existing customers and
attracting new customers. They
are looking for better quality
ingredients, better taste and
without the calories."
Tom & Joanne Kastias,
Second Cup Franchisees
Hyatt Hotel, Toronto Ontario
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Lunch Innovation.
A CLASSIC REMASTERED – CHEESE MELTS
Lunch is the fastest growing daypart in the market and with
the introduction of Cheese Melts, we have a fresh, premium
quality sandwich to offer our customers. Regional roll out
began in March 2017.
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ReThink the Cold.
FLASH COLD BREW
In April, Second Cup introduces Canadians to
the ultimate cold coffee experience – Flash Cold
Brew. The cold coffee category is experiencing
tremendous growth. With the flash brewing
method and using our popular Batch49 coffee,
customers will enjoy full coffee flavour and a
smoother taste. Brewed directly over ice, we
believe the flash cold brew method delivers
the best cold coffee experience – an aromatic,
smoother, cleaner, brighter taste.
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“The innovation in 2016 helped us to strengthen
our superior quality position in coffee and
food and the Rewards program continues to
drive customer loyalty and sales. I value the
collaborative approach with Second Cup and
know franchisees are very optimistic about the
future with new product innovations like the
Better for You program.”
Steven Craig, Second Cup Franchisee and
member of the Franchisee Advisory Council.
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Shareholder Information
CORPORATE HEAD OFFICE
The Second Cup Ltd.
6303 Airport Road, 2nd Floor
Mississauga, Ontario
Canada L4V 1R8
Registrar and Transfer Agent
Computershare Trust
Company
of Canada
Auditors
PricewaterhouseCoopers LLP
Market Information
Shares Listed:
Toronto Stock Exchange
Symbol: SCU
Investor Enquiries
Barbara Mallon
Vice President, Finance
and Chief Financial Officer
Tel: (905) 362-1824
Fax: (905) 362-1121
E-mail:
investor@secondcup.com
Website
www.secondcup.com
THE SECOND CUP LTD.
Board of Directors
THE SECOND CUP LTD.
Senior Management Team
Michael Bregman (1) (2)
Chairman
Alix Box
Stephen Kelley (1)
Garry Macdonald
Alton McEwen (2)
Rael Merson (1)
Alan Simpson (2)
Committees of the Board
(1) Audit Committee
(2) Governance, Human
Resources and
Compensation Committee
Alix Box
President and
Chief Executive Officer
Barbara Mallon
Vice President, Finance
and Chief Financial Officer
Vanda Provato
Vice President,
Marketing and Category
Chris Sonnen
Vice President,
Coffee Experience
Audra Wosik
Vice President, Franchising
Ted Tai
Vice President, Operations
John Kazmierowski
Vice President, Development-
Leasing & Construction
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