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Second Cup brewing new strategies for a comeback following management shakeup

The seats at the outdoor patio of the Second Cup coffee shop at Queen St. West and John St. sit unoccupied on August 16, 2016.

Fred Lum/The Globe and Mail

Michael Bregman returned to Second Cup Ltd. 3 1/2 years ago to oversee its comeback as a go-to café chain, but today he acknowledges the turnaround hasn't taken shape and new leadership is needed.

Mr. Bregman, chairman of Second Cup since December of 2013, says the company has now replaced chief executive officer Alix Box with franchise food industry veteran Garry MacDonald on an interim basis to get the upmarket chain back into financial health.

"The company has not achieved its plans," Mr. Bregman told the annual meeting on Friday. "And so a change was needed."

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Mr. Bregman returned to Second Cup to give it the jolt it needed to revive its fortunes after he had helped build the chain in its heyday of the 1990s as a pioneer of the upscale café.

But in its most recent makeover, including a chic café redesign and fresh menu offerings, Ms. Box failed to win back enough customers in an intensifying market dominated by Starbucks Corp., Tim Hortons Inc. and McDonald's Corp.

Now shareholders and franchisees are getting more frustrated.

"How do you compete with Starbucks or Tim Hortons or McDonald's?" Second Cup shareholder Frank Wong asked the company's leaders. "Do you have a plan?"

Mr. Wong pointed out that the chain's latest cup, which marks Canada's 150th birthday, fails to prominently feature the company's name – a lost marketing opportunity.

Mr. Bregman said the company doesn't disagree with Mr. Wong's disappointment in Second Cup.

"We haven't been able to advance the store sales and profitability to the degree that we need," he said. "We recognize it. You're absolutely right … We share your disappointment but we see tremendous opportunity."

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He said the sliding share price is also a reflection of the setbacks. Second Cup shares have fallen to $1.63 at closing on Friday on the Toronto Stock Exchange from close to $5 in early 2014.

Mr. Bregman said the experience inside Second Cup cafés "sometimes is amazing and sometimes not." He said the experience has to match the high quality of the cafés' locations; the company got rid of "substandard" sites. The chain was "a mess" when he arrived in late 2013 and Ms. Box, a former luxury-fashion and Starbucks executive, built a solid foundation for recovery, he said.

Mr. MacDonald, the interim CEO and a board of directors member since Feb. 24, said he is developing initiatives to breathe new life into the company.

A key effort he unveiled is teaming with yogurt chain Pinkberry, which is owned by the Serruya family that founded Yogen Fruz. Second Cup is set to start carrying the premium Pinkberry in four cafés this month, while Pinkberry is already testing Second Cup coffee at its BCE Place store in downtown Toronto.

As Mr. Bregman said: "If it does work out, it will be rolled out. If it doesn't work out, something else will be tried."

The Serruya connection is important to Second Cup because the family's private-equity firm provided the chain with an $8-million secured term loan in December. Second Cup was facing a Jan. 1 deadline when its former debt facility was due. As well, Mr. MacDonald has worked with the family in the past as a consultant to its various businesses, including Pinkberry.

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Mr. MacDonald said he is looking at co-branding opportunities with other chains. And he is talking to other companies about operating mini Second Cup cafés in gas stations, convenience stores and other non-traditional locations. It's a strategy that rivals such as Tim Hortons are also rapidly adopting.

As well, he is working on new product innovations, including carrying more food for snacks, lunch and casual dinners.

The Serruya family has built its name on such established brands as Yogen Fruz but it has also made some controversial investments, including in struggling fashion chain American Apparel, which went into bankruptcy protection a second time last year.

In its first-quarter ended April 1, Second Cup's revenue dropped almost 20 per cent to $6-million from a year earlier but its loss of $475,000 or 4 cents a share improved from a loss of $606,000 or 5 cents a year earlier.

The company also said chief financial officer Barbara Mallon is leaving at the end of June and being replaced by Ba Linh Le, its finance director since January.

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