UPDATE 3-McDonald's to spend $1 bln to update Canada stores

Wed Sep 7, 2011 2:12pm EDT

* To remodel majority of restaurants by year-end

* Sees double-digit sales growth as a result of overhaul

* McDonald's, Tim Hortons compete more closely (Adds background, comments from executive and analyst)

By S. John Tilak

TORONTO, Sept 7 (Reuters) - McDonald's Corp (MCD.N) will spend $1 billion renovating its stores in Canada, the restaurant chain said on Wednesday, as competition with Tim Hortons Inc THI.TO heats up.

The Canadian unit of the Oak Brook, Illinois-based company, which has been operating for 44 years, plans to refurbish most of its 1,400 restaurants by the end of 2012, with more than half finished by the end of this year.

McDonald's has been outperforming its fast-food rivals globally, reaping the benefits of broadening its low-cost food menu, introducing premium items such as espresso-based coffee, and sprucing up its restaurants.

The company plans new exterior and interior designs in Canada, including fireplaces and flat-screen televisions in some stores. It expects the changes to encourage customers to linger and make more purchases.

"We're in the midst of a brand transformation. It's time to make our restaurants more contemporary and comfortable," John Betts, chief executive of McDonald's Canada, said in an interview.

He said the renovations are also aimed at increasing the chain's capacity to serve customers its expanded menu. He sees close to double-digit sales growth at the restaurants when the changes are complete.

The news comes as McDonald's has been promoting its coffee aggressively, while Tim Hortons, Canada's No. 1 coffee-and-doughnuts chain, has been beefing up its food line-up.

McDonald's has doubled its coffee business in Canada in the last two years, and its breakfast business has grown by 40 percent in the last three years, Betts said. It has given away 15 million cups of free coffee, drawing in more breakfast customers, he said.

Tim Hortons continues to dominate breakfast sales, however, while McDonald's has a slim lead in the lunch category.

The revamp will have a negligible impact on Tim Hortons, though McDonald's could take share from other players, Edward Jones analyst Brian Yarbrough said.

Tim Hortons does not want its customers to linger in its restaurants and that strategy is working well for the company, said Yarbrough, who added he sees little need for Tim Hortons to respond to the McDonald's move.

Oakville, Ontario-based Tim Hortons is now targeting the U.S. market, where it is investing heavily in marketing and promotions. It reported strong quarterly U.S. sales last month.

Shares of Tim Hortons, which has almost 3,200 restaurants in Canada, were up 1 percent at C$46.30 on the Toronto Stock Exchange on Wednesday afternoon. McDonald's shares were up 0.3 percent at $89.05 on the New York Stock Exchange. (Reporting by S. John Tilak in Toronto and Lisa Baertlein in Los Angeles; editing by Peter Galloway)