Sweet taste of success for doughnuts
Krispy Kreme has boomed since launching in SA
● At a time when a number of international food and beverage brands are struggling to make headway in the South African market, Krispy Kreme — the “sweet treat” doughnut specialist — looks to be bucking the trend.
Independent analyst Anthony Clarke says Krispy Kreme, by leveraging social media and having good locations in centres such as Rosebank, Sandton City and Mall of Africa, has established itself as a preferred brand for upper-LSM customers and seems to be doing better than other players such as Dunkin’ Donuts.
Dunkin’ Donuts, which is operated by Grand Parade Investments in SA, contributed the most to GPI’s losses in its food division in the year to June 2018. GPI said at the time that the performance of Dunkin Donuts was below target due to doughnuts still being imported for most of that financial year.
But Krispy Kreme’s doughnuts are locally made. Much like KFC’s secret spices or the formula for Coca-Cola, the doughnut mix is proprietary and is imported from the UK.
Krispy Kreme SA (KKSA) is a joint venture between Fournews, whose brands include News Cafe, Brooklyn Brothers and Moyo, and John & Gerry’s Brands.
One strategy that seems to be winning over South African consumers is localised recipes. The six favourite flavours in SA are the 80-year-old “original glazed” doughnut and four local originals: Bar One, Milk Tart, Milky Bar and Lamington.
Krispy Kreme’s initial assessment of the SA market was to open 60 stores. But company MD Gerry Thomas said: “Our opinion was always that SA in the first five years cannot sustain more than 30 locations.”
In November 2015, the first outlet was opened in Rosebank, Johannesburg, with the intention of opening 30 more over five years, with a total staff of about 500 people.
“Market research said we should open first in Cape Town; we said Joburg,” Thomas said. “We only go to Cape Town at the end of the year.”
Focusing on a small-shop format at highend locations while keeping overheads low, the company now has 16 stores — employing 380 people — with plans to open six locations in 2019.
Thomas has operated coffee shop outlets since leaving university in the ’90s, and has sold two businesses to Famous Brands: Europa and Fego Caffe. He counts Mugg & Bean and Cinnabon as KKSA’s main competition.
In 2003, the US-based Krispy Kreme began its global expansion by opening in Harrods in London. An attempt to enter the Australian market was less successful.
Clarke said: “One of the biggest mistakes that companies make when going into a new jurisdiction is that they think their one model fits all. We have seen when local retailers or fast-food companies go offshore, they take their South African ideas and models into the UK, New Zealand or Australia … it doesn’t work out.”
Three years ago the JAB Holdings investment company acquired Krispy Kreme for about $1.35bn (R18bn). Of the new owners, Thomas said: “The team is more in tune with the ways of the world.”
Consumer prepackaged goods (CPG) — the marketing model whereby Krispy Kreme sells its products in partner retail locations — is a new revenue stream KKSA is using to bolster its balance sheet. Locally it is partnering with Pick n Pay and Engen.
“We have prepackaged product in 27 locations between Johannesburg, Pretoria and Durban,” Thomas said.
KKSA wants to expand this side of the business in Gauteng, KwaZulu-Natal and the Western Cape in the coming months.
Paula Disberry, retail executive at Pick n Pay, said: “Our customers are loving this new addition to our bakery range.”
Thomas says CPG offers promising growth potential, and KKSA also wants to build its beverage operations. “We want to be a big coffee player.”
KKSA operates on a hub-and-spoke model, sending products to outlets from three central production facilities, in Linbro Park, Rosebank and the Gateway mall in Durban. The Johannesburg and Durban facilities are “theatre stores” doing both retail and production. “We make everything fresh daily,” Thomas said.
Using proprietary machines, KKSA’s Linbro Park facility can produce 200 dozen doughnuts an hour, 24 hours a day, allowing deliveries twice a day to outlets. There are plans to double capacity at this plant.
“For a competitor to come into the market and copy this product, from ingredients to machinery, would be very hard,” Thomas said.
KKSA, with its sugar-intensive doughnuts, has to deal with the perception that its products are not good for you.
But Thomas says it’s a low-frequency business, and any one customer would buy doughnuts only once or twice a month. “It’s a treat, not an everyday thing.”
KKSA is cautious about trying to grow too fast, a trap other brands have fallen into. “We want to grow, but on our terms.”
For a competitor to copy this product would be very hard Gerry Thomas
MD of KKSA