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Doughnuts to dollars

With cult status and sales rising, Krispy Kreme takes a look at malls

By Joseph DiStefano

Krispy Kreme shops offer customers a view of the production process, along with 19 varieties of doughnuts.

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They've been a roadside attraction in the Southeastern United States for more than 50 years, and have appeared in the movies and on television. They've also earned a place in the Smithsonian Institution. And, by all indications, the momentum of their cultlike following is building.

Krispy Kreme doughnuts have been marching north of the Mason-Dixon line since 1994, when the Winston-Salem, N.C.-based chain opened its first store outside its home area, in Indianapolis. Since then, this high-calorie indulgence has secured a place in the hearts and taste buds of Yankees and Southwesterners alike, in markets from New York City to Las Vegas.

"They're a phenomenon. They've captured the public's imagination," said Bob Golden, executive vice president of Technomic, a Chicago-based food-service consulting firm. There's still plenty of room for store expansion too, he noted.

Although Krispy Kreme Doughnut Corp. has been in strip centers since the 1940s, the bulk of its stores are freestanding. The freestanding units run from 3,400 square feet to 4,000 square feet, while in-line stores range from 2,000 square feet to 2,800 square feet. The company has a total of less than five stores in strip centers.

Moving to the mall

One place this Southeastern institution hasn't appeared yet, however, is in enclosed shopping centers. That may soon change.

At press time, Krispy Kreme was set to test a kiosk concept at a major enclosed shopping center in North Carolina, said Jack McAleer, the firm's executive vice president for brand development. The 240-square-foot kiosk will offer doughnuts by the dozen as well single doughnuts, soft drinks and various coffee beverages.

While McAleer would not divulge the name of the mall or the developer, he said if all goes well, Krispy Kreme may make the move to malls and perhaps airports.

By moving into malls, the retailer hopes to generate new customers while also penetrating new markets, according to McAleer.

Since most malls aren't open in the early morning, kiosks would open later than traditional Krispy Kreme stores. "We need to determine if people will purchase doughnuts at those times of day," he said.

Doughnuts are baked fresh at each store daily, except at six satellite locations, which are smaller than typical Krispy Kreme stores and tend to be in areas with a lot of foot traffic, such as New York's Penn Station. As for other forms of distribution, the company also has partnerships with major supermarket groups, including Cincinnati-based Kroger, to sell doughnuts.

But these doughnuts, which seem to sate the inner child's sweet tooth so well, are a very serious business. The company reports that overall dollar sales have soared 82% since 1995, when they were $150 million, to reach $238 million last year. And dollar sales are expected to rise to $273 million this year, according to the privately held firm.

Krispy Kreme's retail sales accounted for $95 million last year, according to Technomic, which ranks Krispy Kreme third in retail sales behind its competitors. Technomic president Ron Paul, however, says the company could soon overtake Tulsa, Okla.-based Daylight Donuts, which did $150 million in sales last year. The category leader, Randolph, Mass.-based Dunkin' Donuts, still has a stronghold on the market, with $2 billion in U.S. sales last year.

As for unit growth, Krispy Kreme has increased the number of stores by 83% since 1995, from 80 locations to 147, spread across 26 states. Its strongest market remains the Southeast, which is home to more than half of its stores.

Last year, Krispy Kreme opened 15 stores, and expects to have opened 22 more by the end of this year. Plans call for 325 more stores over the next five years, according to McAleer.

The chain is focusing its expansion strategy on "premiere locations that have a lot of traffic and density" in markets with 100,000 households or more, McAleer said.

Of the 22 openings this year, several bring the doughnut maker into new markets. Krispy Kreme will enter the Dayton, Ohio, region with one store this fall, and make its debut with one store in Philadelphia toward the end of the year. The company plans to open in Northern California in the first quarter of 2000, McAleer said. There are plans to go into every major market in the United States, he said.

Krispy Kreme is just beginning to investigate expansion outside the United States, and Europe, Asia, Mexico and Canada are all possibilities, McAleer added.

As of now, about half of the firm's units are franchised, though the company is holding off on franchising for now in order to further company-owned store expansion, he said.

Big boxes drive business

Part of the company's strategy has been to place stores in power centers.

"It's helpful to be around traffic near big-box retailers. I think we create a draw," he said, noting centers also benefit from the traffic Krispy Kreme's stores generate.

One developer that has seen the difference a Krispy Kreme store can make is The Mills Corp., which added a freestanding shop on an outparcel at Arizona Mills in Tempe in June. The frenzy surrounding the opening caught the Arlington, Va.-based firm by surprise.

"It had traffic jams unlike anything I've ever seen," said Jim Mance, vice president and regional manager for West Coast operations at Mills. "It's a very lucrative little venture."

Customers were already waiting outside the Tempe Krispy Kreme when it opened at 5:30 a.m. The company said it has been the most successful store opening yet. The store did $247,000 in business during its first week, according to Mance.

McAleer attributed the grand opening's success to Krispy Kreme's cult-like loyalty. "Each store we open outside the Southeast has a phenomenal opening."

Mance said he is mystified by crowds drawn to the Tempe store at 11 a.m. and 4 p.m., not exactly prime time for doughnut consumption.

"It just fascinates me. I don't understand it. It's one of those things you can't figure out why it's working, but we know it's working."

Two more freestanding stores are slated to open at Mills centers in November, one at Ontario (Calif.) Mills and the other at The Block at Orange, the developer's new open-air project in Orange City, Calif.

If the reaction of local law enforcement is any yardstick, the Krispy Kreme at The Block at Orange should be a smash, Mance said.

"The police here are so excited about it. I think it's going be wildly successful."

McAleer said the location meshes well with Krispy Kreme's strategy of keeping its brand in the public eye by targeting high-traffic locales. "We're looking for places that would provide good visibility for the brand."

Showmanship wins fans

Another kind of visibility is one of Krispy Kreme's hallmarks -- the chain has provided customers with a view of the doughnut-making process since it was founded in 1937 by Vernon Rudolph.

The glowing red neon "Hot Doughnuts Now" sign, which signals that the glazed treats are rolling down the conveyor belt for all to see, seems to evoke a Pavlovian response in the store's fans.

The fun factor makes it a good fit for Mills' centers, which increasingly feature entertainment, said Mance, who counts himself among the doughnut's fans.

"Showmanship is what people are looking for," he said. Part of the draw, Mance explained, is that the process of making the doughnuts involves the customer by appealing to all five senses.

"We feel that we provide entertainment in the way we manufacture our doughnuts. It's quite something to see. We encourage nose prints on the glass. It's for the kid in all of us," McAleer said.

In addition to doughnuts and coffee, the shops sell T-shirts and baseball caps emblazoned with Krispy Kreme's logo. The company's Website, <www.krispykreme.com>, offers collectibles ranging from boxer shorts to toy delivery trucks.

"There are enough true-blue fans that love to wear our brand. It does pretty well for us," said McAleer of the collectibles, which the company started selling three years ago.

Only once in its history has the company tried to sell food other than doughnuts. It was not a success.

In 1976 Beatrice Foods bought the chain. In an attempt to spark sales during the shops' afternoon lull, management decided to serve soups and sandwiches. Beatrice also dumped the chain's stylized retro signage, deciding to go with a more modern image.

In 1982 a group of franchisees led by Joseph McAleer bought the company in a $22 million leveraged buyout. Today the company is half-owned by the McAleer family.

Nostalgia plays a big part in Krispy Kreme's marketing strategy, as can be seen in the black and white photos sprinkled throughout its Website and on the walls of its stores. But Jim McAleer said that's not what's winning over converts.

"I don't think it's the heritage that draws them, it's the product. Once they experience Krispy Kreme, they become fanatic. Only then do they notice the history."

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