This donuts franchise report was written by Brian Bixler.
Quick! Think of the names of three national donut chains. The first two, Dunkin’ Donuts and Krispy Kreme are easy. But it’s coming up with that third name that gives some people trouble. For this report, in addition to the leading American brands, we’ll look at Canadian giant Tim Hortons, which already has a solid North American presence and plans to make a bigger push into the U.S. market.
The year 2014 had barely begun when Dunkin’ Donuts and Krispy Kreme reported some very sunny news about their performance the previous year and the fourth quarter of 2013. Smaller players in the segment may well look to the market leaders for trends and model strengths.
The last time IBISWorld market research took a look at the donut store franchise segment in 2012, the economy had improved and the firm’s forecast for this category of restaurants was bright. The donut store industry was estimated to be $11.6 billion and growing. Through 2017, IBISWorld projects industry revenue to accelerate to an annualized rate of 3.8 percent to $13.9 billion.
“The number of industry locations is also projected to grow, at an annualized rate of 2.7 percent to 20,653 by 2017, with the number of companies remaining largely stagnant because most growth will be dominated by industry giant Dunkin’ Brands,” IBISWorld said.
Coffee and other beverages account for 35 percent of total sales in donut stores and will continue to be important to the sector. Dunkin’ Donuts seems to have that part of the equation down as well with its own coffee that is well-branded.
America may run on Dunkin’ but the donut industry is driven by it. Ranked No. 10 this year on Entrepreneur magazine’s Franchise 500, the company is so dominant in its segment, it has nearly 60 percent of the market share and it’s taking some bold steps to make sure it holds on to it.
Dunkin’ executives have said, over the next two decades, the company plans to increase its store count in the United States to 15,000—nearly double the number it has today. It added 790 new stores in 2013 and plans to open another 800 in 2014, including some co-branded with Dunkin’s other company, Baskin Robbins.
The company’s reported annual earnings from 2013 showed increases in comparable same-store sales, new units, revenue and adjusted operating income. During the fourth quarter in the U.S. alone, same-store sales growth increased 3.5 percent.
How hard Dunkin’ will have to work to keep the momentum going may depend on other players in the broader fast-food industry. McDonald’s growth strategy includes grabbing a bigger portion of the breakfast daypart by beefing up its breakfast offerings with both food items and enhancements to its McCafe line of coffee beverages. McD’s already has 31 percent of the breakfast business, according to Technomic market reports. Even Taco Bell and Starbucks have recently announced a new focus on morning sales with the introduction of new products.
In a call with analysts earlier this year, Dunkin’ Brands Chairman and CEO Nigel Travis enumerated the company’s growth strategies that could accommodate changing trends and consumer demands. Becoming greener will be one of the priorities with a focus on responsible ingredient sourcing, energy efficiency and environmentally-friendly packaging, Travis said. Dunkin’ Donuts will replace its foam coffee cups with something more biodegradable within the next few years.
Otherwise, Dunkin’ strategies include domestic expansion as well as increasing its international presence. It will also continue focusing on improving customer accessibility by adopting new technologies such as mobile phone apps and even increasing the number of drive-through windows.
As other brands try to move in on Dunkin’s most important daypart—breakfast—the donut company will respond in kind, blurring the line between breakfast and lunch and offering more items for midday and late afternoon.
The first Dunkin’ Donuts opened in 1950, and the first franchise was operating by 1955, which gives franchisees tremendous brand recognition. As Grant Benson, CFE, vice president of development for Dunkin’ Brands Inc., told Franchise Chatter last year, donuts will always be the core product, but coffee sales, and particularly competition from Starbucks, cannot be ignored.
Perhaps that’s why Dunkin’ is striving to create the same atmosphere as a Starbucks inside its units with softer seating and a more inviting atmosphere where people can sit and enjoy their food and beverage while using the free Wi-Fi.
Once a struggling company that expanded too quickly and diluted its brand by making its product available in grocery and convenience stores, Krispy Kreme reported its 21st consecutive quarter of growth earlier this year, indicating it is still a contender as the No. 2 donut store behind Dunkin’. IBISWorld estimates market share for Krispy Kreme to be 4.6 percent, compared to Dunkin’s 57.5 percent.
The company’s performance is significant in the wake of the so-called fast-food breakfast wars with more companies competing for a bigger slice of the $50 billion morning market.
“Krispy Kreme’s growth also comes as fatty foods are under fire, and despite the chain’s overexpansion, which began in the late ’90s,” Advertising Age reported earlier this year.
Founded in 1937 by Vernon Randolph, Krispy Kreme produces more than 20 varieties of donuts along with a broad selection of coffees and other beverages. But a plain glazed donut remains the company’s staple product.
In the company’s heyday in 2005, it reached $1.07 billion in sales from 272 stores in the United States. The company scaled back in 2009 due to a sharp sales decline and currently has 253 stores in the U.S., 95 of which are company owned. Krispy Kreme generates revenue from those company-owned stores, as well as domestic franchise stores and more than 530 international franchise stores in 21 countries outside the United States.
Those units are performing well as evidenced by five straight years of growth. In the final quarter of 2013, operating income rose an impressive 27 percent and net income spiked 37 percent to $8.3 million.
Consistent growth and success spurred Krispy Kreme to announce last year its first expansion plans in a decade. Chief Executive Officer Jim Morgan said that will happen even as Krispy Kreme continues to repair its business. The company is focusing again on delivering hot, fresh donuts to customers, using a recipe and batter mix that hasn’t been changed in 75 years.
While it refuses to alter a tried-and-true product, the company is updating the look of its stores. Original Krispy Kreme stores were large enough to accommodate retail in the front, manufacturing in the middle, and a loading dock in the back to deliver to the wholesale market. As of last year, Krispy Kreme is shrinking the footprint of its stores to about 2,300 square feet that will handle retail only.
Like Dunkin’ Donuts, the company is also exploring non-traditional venues such as transportation hubs and sporting arenas.
Morgan did not point to any immediate menu changes for the chain other than a rollout of a gluten-free donut. It is also trying to bolster coffee sales with a revamped coffee line, which it hopes will take beverages from 12 percent of its business to 20 percent.
With Starbucks, Dunkin’ Donuts and Krispy Kreme all reporting robust sales growth, Tim Hortons still remains an unknown brand in many parts of the United States. The company’s concentration is in Canada where it has 3,588 restaurants named after the late hockey player Tim Horton, who founded the brand with a friend in Hamilton, Ontario in 1964.
Today, Tim Hortons is Canada’s No. 1 food service operator, having overtaken McDonald’s spot. Tim Hortons also dominates the Canadian coffee market holding about 75 percent of market share, far and above the next leading brand Starbucks. In recent years, Tim Hortons has been introducing lattes, espresso, iced coffee and other beverages to maintain its leadership in the sector and meet Starbucks head-on.
Meanwhile, Starbucks, which has more than 1,000 units in Canada, has a few tricks up its sleeve. The ubiquitous brand will open about 100 more units in the country this year. Plus, its baristas now offer a Canada-only brew named True North and it introduced a new Maple Macchiato earlier this year.
Despite Tim Hortons’ dominance in Canada, some analysts are waiting for the donut franchisor to make a big move, particularly in the American market, where it already has some 800 units—not a number to sneeze at. But while its biggest American competitors are trumpeting their sales and unit growth, the Canadian company recently missed analysts’ profit expectations for 2013.
Shortly after taking over as chief executive officer of the coffee-donut company last summer, Marc Caira told Bloomberg News that the company needed to make a big impact in the United States to offset slower growth in Canada, where it is quickly approaching saturation.
“The U.S. for me is what I call a must-win battle,” Caira said in an interview.
Tim Hortons plans to open about 300 new locations in the United States by 2018. It will also have about 80 percent of its existing restaurants remodeled with armchairs and flat-screen TVs by then.
When it started 50 years ago, Tim Hortons offered just two products—coffee and donuts. That menu has expanded to a variety of baked goods and home-style lunches. To meet the challenge of offering healthier choices to its customers who demand it, the company already this year launched a breakfast sausage sandwich using turkey and will roll out frozen green tea as well.
Yet, while Tim Hortons pushes into the United States, its Canadian operations remain important to the company. More than 80 percent of its restaurants are in that country, producing 90 percent of the sales for Tim Hortons and 99 percent of the company’s business unit operating income, according to the Financial Post.
While these three donut franchise brands—Dunkin’ Donuts, Krispy Kreme and Tim Hortons—are the leaders in the North American market, there are still smaller chains fighting for market share. Donut Connection, consisting primarily of units that used to be part of the Mister Donut brand, still exist in the Midwest. Sublime Doughnuts was mentioned by Entrepreneur but not ranked on this year’s Franchise 500 list. Technomic has tracked figures for smaller brands Winchell’s Donut House/Yum Yum Donut Shops, Honey Dew Donuts and Daylight Donuts. Finally, a new brand called Psycho Donuts is wooing customers with designer baked goods.
- Donut purveyors are recognizing the need to keep up with technology to improve efficiency, delivery speed and to attract a younger demographic of customers who use smartphones. In many ways, the donut stores are keeping up with Starbucks which has its own app for customer service and targeted marketing. Dunkin’ Donuts recently announced that its DD app has been updated to allow for mobile payments and a customer loyalty rewards program.
- Loyalty programs are becoming more prevalent throughout the fast-food industry and coffee and donut franchises will also follow the trend in an attempt to retain loyal customers and draw in new ones.
- Consumers might expect to see more mini-donuts or donut holes offered on menus as an increasing share of industry retailers offer smaller portion sizes to health-conscious consumers. Miniature donuts and donut holes generate about 5.4 percent of industry revenue, according to IBISWorld.