National Post (National Edition)
THE SWEET RETURN
AFTER YEARS (AND HARD TIMES) IN CANADA, KRISPY KREME IS READY AGAIN TO EXPAND.
For many consumers, Krispy Kreme’s legacy in Canada recalls the grand failure of Target a decade later: a popular American brand takes the country by storm, gets too ambitious and makes a humiliating retreat.
Except unlike Target Corp., Krispy Kreme Doughnuts never really left: 11 years after the U.S. parent company bought out the first Toronto-based Canadian frnchisor, who put the business under bankruptcy protection, six outlets remain open in Quebec and Ontario.
After years of steady growth, its new owners now say they are again ready to expand the business in a significant way, opening up to 50 additional stores in the two provinces with an operational model that is far less expensive, before setting their sights on the rest of Canada.
“We are going to be embarking on a major expansion across the country,” says Keith Stein, chairman and partner of Krispy K Canada Inc., which is now run by partners and co-CEOs Chris Lindsay and Kelcey Hamaker.
The two CEOs have been affiliated with Krispy Kreme since its first dip into Canada’s coffee-and-doughnut loving market in 2001, as managers of stores.
After the vision of original investor and CEO Roly Morris flamed out, Lindsay and Hamaker stayed on and remained in charge of operations at the handful of remaining Canadian locations. In 2008 they bought back the Canadian rights, not including B.C., for an undisclosed amount.
Stein, who came on board as an investor in 2010, had originally met with Morris 15 years ago as an interested investor, but didn’t sign on.
“I didn’t really believe in the valuation and I was a bit concerned about the initial business model, which revolved around these big factory stores,” he said, adding they cost $2 million to $3 million to build.
“The return on investment isn’t always there when you are building that sort of great, big, expensive structure.”
This time around, he says, “we are going to be playing a much more prominent role on Canadian streetscapes in the future.”
Before you think the Krispy Kreme partners are giddy from eating one too many original glazed doughnuts fresh off of the production line at one of its socalled “hot-light” factory stores, they are keen to highlight some key differences between the reworked business model and the original one that fared badly.
Many doughnut lovers remember the scene of pandemonium outside the opening of Krispy Kreme’s first Canadian outlet in suburban Mississauga, Ont., in December 2001, as hundreds of customers lined up outside in the wee hours of the morning to buy the first hot doughnuts. Morris, a retail veteran who had managed the successful expansion of Starbucks Coffee Co. across Canada, had secured the rights to roll out Krispy Kreme across Canada, excluding B.C.
His KremeKo Inc. committed to opening 32 of the 5,000-square-foot “hot-light” outlets. Therein, the centrepiece is a conveyor belt that rolls hot fresh doughnuts from kitchen ovens to the front of the store. A red neon “Hot Doughnuts Now” sign outside alerts customers every time a new batch rolls off the assembly line, accompanied by a pungent waft of dough and sugar over the surrounding area.
By 2003, KremeKo had gone as far west as Alberta and had built 18 of the giant stores, amid rumours that the overhead on some units was too costly for the amount of customer traffic they attracted, particularly given the rising popularity of the low-carb diet. Two years later, the company closed 10 Canadian stores and filed for bankruptcy protection. North Carolina-based parent company Krispy Kreme Doughnuts Inc., by then suffering its own losses as the low-carb trend took hold, acquired KremeKo’s assets in December 2005.
Today, the latest Krispy Kreme format is showcased at a new café adjacent to Toronto’s diverse Kensington Market neighbourhood, a densely multicultural area that is home to vintage clothing shops, artisanal bakers, multiple Chinese grocers and marijuana dispensaries.
Most critically, it has its costs under control, the partners say, with its remaining three large “hot-light” factory stores in Montreal, Quebec City and Mississauga delivering fresh-baked doughnuts at least twice a day to the smaller locations, a so-called “hub and spoke” model, which requires far less overhead.
“The big turnaround for us, and we observed it from a template used in some parts of the U.S., (is to use factory stores) as commissaries to supply the much smaller satellite cafés,” Stein said. A factory store can serve as a hub for five or six cafés.
“That’s what we have been emulating, and that is why we are much more confident now. It’s a much more efficient busi- ness model. We have been very pleased with the revenue growth and our profitability.”
The café sells a range of new menu items beyond its classic doughnuts, which can be served at room temperature or hot from its “re-thermalization” oven, which leaves a signature aroma of warm glazed doughnuts in the air inside and outside the shop.
Stein said the handful of stores have attracted a new base of very diverse consumers, including new Canadians and millennials, and that will affect the partners’ future site selections.
“Millennials and young people embrace this brand and they seem to think it is cool,” he said. “I’m older, and I think we live in a post-carb world; many of us think carbs are bad. But people coming from other cultures and parts of the world don’t necessarily have the same mindset. They can be physically active and understand the occasional indulgence is fine.”
In addition to doughnuts, there are savory “pull-aparts,” oatmeal, fresh fruit, muffins and bagels on the menu. The drinks list features kombucha, coconut water and espresso, in addition to classic drip coffee, tea and milk.
Sales have been growing in the double digits for the past five years, Lindsay said — despite pulling boxes of the brand out of grocery stores and gas stations many years ago, though the com- pany distributes doughnuts on a limited basis to some Costco stores.
“The lineups still exist out the door on any given weekend day,” Lindsay said. A key difference now is, “we have got a scalable model that we can fit into any location, small or large. We don’t have to build a 5,000-square-foot suburban store for $3 million.”
The partners have no desire to bring the doughnuts back into widespread circulation at grocery stores and gas stations.
“We have a premium product and we don’t want to do anything that is dilutive,” Stein said.
Ken Wong, marketing professor with Queen’s University’s School of Business, believes the brand has a chance of success again, despite the past missteps, and said a warming oven will help the company retain the sensory experience of hot-baked doughnuts at its satellite stores.
“Warm doughnuts are essential to the Krispy Kreme experience,” he said. “But I think the real key here for them is discipline” in terms store selection and pace. “The nation has shown considerable interest in nutrition and roughly 70 per cent of Canadians think that watching what they eat is the No. 1 thing that they can do to improve their health. Krispy Kreme runs counter to what all the packaged goods companies are doing right now.”
Bruce Winder, partner in Toronto-based Retail Advisors Network, said the hub-andspoke model may improve the company’s financial picture, but achieving broader brand resonance is of paramount importance.
“In my opinion, it is less about the delivery mechanism and supply chain of the product than how they are going to re-position the brand,” Winder said. “Consumers are as indulgent as ever — even more so with millennials — but they pick their spots, and when they indulge, they indulge big time. The question is, how can Krispy Kreme become the favourite destination for folks to go when they want to indulge in high-calorie sweets?”
Appealing to consumer indulgences has been a hit for Popeye’s Louisiana Chicken and the Canadian chain BeaverTails, so it’s a question of how well Krispy Kreme can execute as a niche player.
“They may even want to dial up the menu to become even more extreme on the indulgence scale to differentiate from Tim Hortons or others,” Winder said.
Stein said the company will expand carefully as it aims to carve out a bigger niche of the specialty quick-serve restaurant segment.
“We don’t want to bang our chest too loudly right now,” he said, adding they have no intention of growing aggressively to compete with Tim Hortons and Starbucks. “We are not trying to be (like the) big guys … we don’t ever expect to have thousands of stores.”
THE LINEUPS STILL EXIST OUT THE DOOR ON ANY GIVEN WEEKEND DAY.