Winchell’s Scrambles to Meet Krispy Kreme Challenge

Winchell’s Donut House has 110 restaurants in Southern California. Krispy Kreme Doughnut Corp. has two. And therein lies the problem.

Despite an enormous size advantage and a 50-year presence in the Southland, Santa Ana-based Winchell’s is facing a marketing nightmare. Krispy Kreme is basking in hordes of free ink and air time, thanks primarily to the two-hour lines that greeted the openings of its first two stores, in La Habra and Van Nuys.

With 40 more Southland stores on the way and a highly anticipated initial public stock offering early next year that will generate national media attention, the Krispy Kreme juggernaut probably won’t fade any time soon.

In expanding to Southern California, the North Carolina-based doughnut maker is entering the nation’s most competitive market, with more doughnut shops--1,600--than anywhere else. But most of those are independent mom-and-pop operations with little or no marketing budgets, and no national reputation.

“Most national chains would view [the crowded field] as a deterrent, but we viewed it as an opportunity,” said Roger Glickman, president of Great Circle Family Foods of Los Angeles, which is building and operating all Southland Krispy Kreme franchises. “We feel that we serve a product which is superior to any other doughnut in the market. One taste will tell you that.”

The 293-unit Winchell’s, owned by Shato Holdings Ltd. of Canada, reacted almost immediately to Krispy Kreme’s arrival by testing a program it calls Warm ‘N’ Fresh, which guarantees patrons freshly made doughnuts every morning. It hopes to further combat the Krispy Kreme aura by rolling out new lines of low-fat fare, linking up with bigger-name food companies and opening mini-stores in nontraditional locations.

“The goal is to really grow the brand and bring it back to prominence,” said Winchell’s Chief Executive Tom Dowling. “People have come to take us for granted.”

A month after Krispy Kreme opened its La Habra store, Winchell’s launched Warm ‘N’ Fresh as a pilot program in seven of its shops. It calls for doughnuts to be replaced every 15 to 20 minutes between 6 and 9 a.m. each day. A flashing red light on the display case means that a fresh batch of doughnuts is coming out of the oven.

In June, Winchell’s expanded the program to all 110 locations in Southern California. Dowling said it has led to sales increases of as much as 10% in some locations.

Among the other initiatives Winchell’s has in the works: expanding the hours of the Warm ‘N’ Fresh program; introducing Winchell’s Lighter Side, a line of low-fat doughnuts, muffins and bagels; and possibly bringing back the Winchell’s traditional doughnuts, which are glazed and jelly doughnuts about 40% smaller than the size now offered.

Tie-ins with other companies are another plan of attack. One involves a partnership with Hershey’s Chocolate U.S.A. to include Hershey’s chocolate in some of Winchell’s doughnuts and muffins.

Winchell’s also is trying to increase its visibility by teaming with companies such as Los Angeles-based Lucy’s LaundryMart, opening mini doughnut shops inside 11 Lucy’s locations. Winchell’s also is pursuing a catering business, courting companies and universities that might want to serve doughnuts at meetings and functions.

“We are going for points of sales, not looking to increase the number of stores,” Dowling said. “Our goal for the next five years for Winchell’s as a corporation is to triple our sales.”

In the near term, “Winchell’s only needs to worry about their stores that happen to be in the immediate vicinity where Krispy Kremes are opening,” said Brea restaurant industry analyst Robert L. Sandelman. “Krispy Kreme is going to get people who come some distance, who are going to go out of their way because it’s new and has such a great reputation.

“But I think there’s probably a limit beyond where most doughnut eaters will go.”

Sandelman likens the Krispy Kreme craze to that of the popular In-N-Out Burger chain, which is small in terms of number of restaurants but big in terms of drawing a crowd.

“With In-N-Out, people are willing to drive further because of their reputation and high customer satisfaction,” Sandelman said. “Krispy Kreme will also draw people from more than a two- to three-mile radius, which is standard in the fast-food business.”

So far, Great Circle Family Foods has not had to do any formal advertising for the new Southern California locations, although it has enlisted the powerhouse public relations firm of Hill and Knowlton.

It is the word-of-mouth buzz from Southern and Eastern transplants who grew up eating Krispy Kreme doughnuts that has been the most effective advertising of all.

“I remember them from back East,” said Long Beach resident Gordon Pinkney, who visited the La Habra store recently. “They’re not very large, are creamy and melt in your mouth.”

The La Habra store, the chain’s first in California, opened last January and was an instant hit. Within three months, it was the No. 1 store in the chain and has sold more than 10 million doughnuts since its opening.

Krispy Kreme, based in Winston-Salem, was regional for more than 60 years until it began branching out more than four years ago. Glickman’s company has a deal to develop 42 stores in Southern California over the next several years.

“We are looking for population density first and foremost,” Glickman said. “We want to be accessible but not convenient, and we want to make sure we’re at capacity at every location. We’ll never be at every corner.”

Krispy Kreme’s next two stores are scheduled to open in early November at Mills Corp.’s the Block at Orange and Ontario Mills. Each store costs about $2 million to build.

The Southern California expansion comes at a time when Krispy Kreme is planning to sell shares to the public for the first time, sometime next spring. Wall Street is abuzz about the deal, hoping the company’s near cult following will be passed on to investors.

The company plans to use proceeds from the offering to grow to a 500-store chain over the next seven years. Krispy Kreme has yet to file an offering prospectus.

The notion of more Krispy Kremes is appealing to customers like Irma Santos of Whittier, a retired elementary school teacher.

“I love doughnuts, but these are different,” she said. “It’s terrible for your weight because when you eat just one, you feel like you’ve barely tasted it. You want more. It’s like popcorn.”

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Doughnut Duel

Despite a huge size advantage in Southern California, Winchell’s Donut House is facing an onslaught of publicity for newly arrived Krispy Kreme. Here’s a look at the two chains.

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Winchell’s Krispy Kreme Founded 1948 1937 Headquarters Santa Ana Winston-Salem, N.C. Stores 293 137 SoCal stores 110 2 1998 sales $60 million $238 million 1998 profits N/A

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Source: Companies listed