
To go for the glazed or the old-fashioned. The jelly-filled or the one loaded with cream. One or a dozen. These are the decisions that more Western Pennsylvanians may face over the next few years as the nation's largest doughnut makers turn up the ovens on expansion into the market.
A new franchise group representing New England's Dunkin' Donuts is set to sell its first chocolate frosted out of a Market Square shop later this month, the first of 105 new stores planned for 16 counties in the region within eight years. Meanwhile, the franchisee that brought Southern creation Krispy Kreme to the market is plotting a comeback after being forced to retrench.
Surprisingly, the success of either chain here probably won't come down to its doughnuts. Instead, the bottom line will be about strategy -- choosing store locations and store sizes, adding menu items such as breakfast sandwiches or ice cream and winning customers over with their coffee.
"The industry right now, per se, is not advertising doughnuts," in the opinion of James Morton, chief operating officer and general manager of the Donut Connection chain, a cooperative buying and marketing group linking more than 180 small shops across 15 states.
At Dunkin' Donuts -- which uses the doughnut-free slogan, "America Runs on Dunkin'" -- beverages, including coffee, accounted for more than 60 percent of last year's $5.3 billion in global sales. "We're all about coffee and beverages now," said John Dawson, chief development officer for the chain.
The doughnut isn't going away, of course. It's a calling card, a temptation and an indulgence that consumers still appreciate on occasion. But it's hard to feed a business on doughnuts alone anymore.
Certainly the hot treats that gave Wall Street a sugar rush a few years back couldn't glaze over problems at Krispy Kreme. The chain based in Winston-Salem, N.C., had been a longtime favorite in its own region. A rapid expansion plan that drove constant sales increases made the treats accessible nationwide.
Then, accounting problems turned up. Top executives were forced out. There were lawsuits. Stores were closed. But the stock market was encouraged earlier this week when Krispy Kreme reported a profit compared to a net loss during the same period last year.
"It's still a great brand. It's a great business," said Ken Crisafio, director of operations for franchisee Metz & Associates. "It's sustainable."
What wasn't sustainable, he said, was the pace of store openings as well as placing big stores too close together. Metz opened its first, almost 5,000-square-foot Krispy Kreme in Cranberry in 2001 and quickly grew to nine locations. It has since pulled back to four, including that first one in Cranberry as well as sites in Washington, Pa., Erie and Altoona.
Now the franchise is looking for real estate again. "We're looking for smaller satellite locations," said Mr. Crisafio. The 600- to 700-square-foot shops would be supplied by the hub locations. He could eventually see putting 30 to 40 between the Ohio line and Harrisburg.
Rivals point to Krispy Kreme's policy of selling doughnuts wholesale to other retail operations as another problem for the brand. Mr. Crisafio doesn't see it that way but that piece of the business has received attention. "We are being much more selective and careful about that."
But there's a sense the stores need to offer more. Mr. Crisafio said new products, such as a line of fruit-topped doughnuts, are starting to roll out more regularly. He also has been to Seattle where another franchisee developed an ice cream offering named Kool Kreme. Metz might test that next year while keeping an eye on the same entrepreneur's efforts to develop a bakery concept.
Beverages matter, too. In a move to adapt the Southern concept to the tastes of the local market, Metz offers Green Mountain Coffee rather than the blend offer by the corporate parent.
Dunkin' Donuts also has gone through changes over the past few years. The Dunkin' brand was sold to private equity investors who have backed an expansion of the menu and plans to grow from 7,900 locations now to 15,000 by 2015. The chain's coffee line has grown as have its offerings of doughnut alternatives such as breakfast sandwiches and even pizzas.
In recent years, the company's presence in the Pittsburgh region has been sustained by a handful of franchisees with a few stores each. At the moment, this region is a little bit unusual in the Dunkin' Donuts world in that coffee doesn't dominate sales.
"Pittsburgh is what I would consider a doughnut market," said Jeff Gentile, a six-year franchisee with locations in Pine, Cranberry and Monaca. That is changing, he said, as the new offerings roll out.
The shift could accelerate if the region's newest franchisee comes through on its ambitions and more consumers are exposed to those new items. The Heartland Restaurant Group, a partnership formed last year that includes three real estate professionals and two recruits from Dunkin' Brands, expects to average about 13 openings a year with a variety of store sizes.
Dunkin' Donuts has been making similar deals in markets around the country, choosing to award a large area deal to a single franchisee that can expand as quickly as possible. Rivals say some franchisees have moved slower than originally planned.
The new Pittsburgh group has spent the past months creating an infrastructure to support stores, said Robyn Frederick, Heartland's vice president of human resources and marketing. So far, deals have only been announced for the Market Square site and a location in Belle Vernon.
"We're going to be very smart about it. We're not interested in hitting targets for targets alone," Mr. Dawson said.
Doughnut shops have more challenges than just competition amongst themselves and grocery stores and bakeries. Mr. Morton, who handles Donut Connection administrative functions out of his McCandless home office, said he told a gathering of coop members last month that the sluggish economy is sure to test their ability to survive.
In past recessionary times, he said doughnut shops picked up sales as people sought less expensive ways to treat themselves. Today there is competition from fast-food chains trying to pick up breakfast business and coffee shops sprouting on seemingly every corner.
Donut Connection is trying to be smart about its strategy. The group formed in the 1990s after a chain called Mister Donut merged into Dunkin' Donuts. A number of stores that weren't picked up in the merger formed a cooperative to boost their buying and marketing power.
Much of the co-op's growth lately has been in the South, Mr. Morton said. Although individual members can choose which items they carry, the next couple of weeks will bring the launch of a menu expansion including new breakfast sandwiches and iced coffees.
"We're actually marketing coffee," he said. "We want to sell coffee."