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  Krispy Kreme on the Rise   Krispy Kreme on the Rise  Robin Rusch  
Krispy Kreme on the Rise The doughnut is a round doughy fried cake - not quite a bagel, not quite a dosa, and definitely not a nut - with a hole in the middle, useful for dunking in coffee. The indisputable industry leader is Allied Domecq's Dunkin' Donuts, which makes a cake-like doughnut at over 5000 outlets in 40 countries. The much-smaller-but-rising brand is Krispy Kreme, which makes a yeast-based doughnut and has over 200 outlets in the US. Asked about threats to world dominance posed by the existence of each other, both companies demurred.
While Krispy Kreme's company literature cites Dunkin' Donuts, among Starbucks and New World Coffee, as its competition, Senior Vice President of Marketing, Stanley Parker says competition varies depending on the time of day. "Half of our business is done in the AM and the next half in the PM. So in the morning, we compete with anyone in the breakfast business. In the evening, we are seen more as a tasty dessert."

Krispy Kreme franchise manager, Thomas Michalski also remains undaunted by the global doughnut giant. "Dunkin' Donuts makes coffee," he says flatly. "They don't make fresh doughnuts like Krispy Kreme. We make our doughnuts fresh, in house, three times a day; Dunkin' Donuts ships them in from the factory."

Dunkin' Donuts says it has no direct competition and turns to McDonald's as its closest indirect competition. Brand Marketing Director Lyne Mongrain at Dunkin' Donuts International explains, "In many of our markets, Dunkin' Donuts is the only place where you can buy a donut." When asked about possible threats from the expansion of Krispy Kreme, Mongrain sticks closely to the chirpy Dunkin' Donuts line seen elsewhere in company press, "We welcome the presence of Krispy Kreme as it will raise awareness of doughnuts among all consumers." She goes on to cite increased sales in competing markets such as New York and Chicago as proof that Krispy Kreme is not diminishing Dunkin' Donuts sales in any way.

But Dunkin' Donuts may want to brew another cup of coffee to stay alert. Krispy Kreme appears to have something that all brands crave and Dunkin' Donuts lacks: buzz. Street-level buzz, celebrity buzz, in-store buzz. Buzz that makes people exclaim excitedly when the name is mentioned or seen. Buzz that accounts for the lines, which spontaneously appear outside a new franchise on opening day. Buzz that prompts Krispy Kreme staff and customers alike to describe the product as "like a drug."

How did the brand achieve such status in the minds of sleepy, sugar-starved consumers? The history of the little doughnut-that-could shows a brand that capitalizes on success and learns from its mistakes.

The look and feel of Krispy Kreme may strike the uninitiated as contrived retro-cool, but in fact it's the original brand image, unchanged since 1937. The business itself, on the other hand, has gone through a great many changes over the last 64 years.

Founder Vernon Rudolph originally began by selling doughnuts wholesale in North Carolina. The special yeast-based doughnut was a local hit and customers began lining up to buy directly from the delivery truck, until the first retail shop opened in Winston-Salem, North Carolina.

Eventually, Rudolph died and the company was sold to Beatrice Foods, which tried to make it more like a restaurant. The move toward other food caused the store to lose sight of the original product and by default many of the original customers. In the early 1980s, a group of franchisees bought the brand back from Beatrice and started to focus on the doughnut again. The lessons learned during Beatrice's watch are not lost on the company today. According to Marketing VP Parker, "The Beatrice era reminds us that we need to focus on the doughnut and what we do well."

What they do well, Parker continues, is make an exceptional product. "The fact that you can come in and watch it being made - you see the dough rising, it comes out and cooks on one side, then it flips and cooks on the other side, and then it goes to the glazing waterfall. Over time there is an emotional connection that happens with the brand. Krispy Kreme is where folks went after church on Sunday, as a family. Or it's the donut that kids sold at a fundraiser for their team uniforms. It's where young people went on dates on Saturday nights. It creates an emotional connection that goes beyond the product."

Franchise manager Michalski says that this ability to "interact" with the product and see if made fresh is what enhances the credibility of a Krispy Kreme doughnut. Couple this with the service, Michalski says, and Krispy Kreme has a winning formula to attract and retain customers. "The best part of the culture here at Krispy Kreme is that whole nineteen-thirties, -forties throwback where you can walk into your neighborhood place and feel like you're at home. It's the smile, the hot doughnut, the friendly relationship."

When asked if Krispy Kreme was in fact a limited novelty for new regions, Michalski seemed unfazed. "Look at Starbucks. When they first started out, it was a totally unbelievable thing that you could get a double mocha latte. And you'd say, 'yeah it's a fad.' Now 20 years later it's still around and growing. You develop a niche and that niche becomes a need. Our reputation proceeds us, everyone knows us and we get a lot of promotion in movies and television shows that's not even initiated by us. Krispy Kreme is the best kept secret that's not a secret at all."

That secret is apparently spreading fast. Krispy Kreme has grown from 95 stores at the beginning of 1996 to 174 stores at the beginning of 2001. The doughnut shop intends to add 40 more by the end of this year.

But can Krispy Kreme continue to expand as the US heads into recession? It seems that Americans like to drown their economic woes in rich sugary food, especially if that food is cheap. According to a recent listing in the Financial Times, earnings are growing at about 60% and sales were up more than 30% in the second quarter of this year. The outlook is good, and as the FT points out, ingredients are cheap. Michalski concurs, "The donut is recession proof. It's comfort food. What else can you share with 12 people that costs under six bucks? There's a built-in value in that."

Parker says that 1.8 billion doughnuts were sold last year, compared with Mongrain's figures at Dunkin' Donuts, which estimates 2.3 billion doughnuts sold each year. If these figures are correct, it means that Krispy Kreme sold 10.3M doughnuts per shop last year versus Dunkin' Donuts's less than half a million doughnuts per shop. Of course Dunkin' Donuts compensates by selling a self-reported 20 cups of coffee per second, but it is also this deviation from the core category that results in competition more from other coffee and breakfast shops then from other doughnut shops.

(It also leads one to ask if Dunkin' Donuts hasn't outgrown its name. According to Mongrain this is not a concern. "When people hear Dunkin' Donuts they think of more than just donuts or coffee. They also think of the experience. The power of the Dunkin' Donuts brand is such that we are not considering changing the name.")

Although Krispy Kreme has a formidable opponent against which to measure its progress, it can also benefit from Dunkin' Donuts's travels outside of the US. By introducing other cultures to the charms of the doughnut, Dunkin' Donut has laid the groundwork upon which Krispy Kreme can expand. Dunkin' Donut has also successfully combined regional tastes and local ingredients to achieve such local favorites as the fig doughnut in the Middle East, ube and kiwi doughnuts in the Philippines and the Dulce de Leche doughnut in Latin America. Additionally, Krispy Kreme's current expansion into coffee roasting will allow it to attract some of Dunkin' Donuts' loyal coffee market.

Still Krispy Kreme will have to get up pretty early in the morning to capitalize on Dunkin' Donuts' market. Dunkin' Donuts was first to market in many regions (helped by its buyout of Mister Donut in 1990) and has a strong parent company from which to benefit.

However, Krispy Kreme has active consumer devotion matched with a sturdy framework of quality control and internal brand loyalty that shines through to the product. Employees like Michalski and Parker seem genuinely passionate about the brand and completely committed to the Krispy Kreme mission. The company insists on weeks of rigorous training for managers and regularly monitors franchisees to ensure the brand is delivering on its promise from recipe to service to retail layout. As long as the world doesn't plunge into a sudden fitness streak, it seems likely that there will always be room for one more Krispy Kreme.    



Robin D. Rusch lives and works in New York City.

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