Selling Like Hot Cakes

When krispy kreme opens a new store, it’s a ritual for ravenous fans — lured by mouth-wateringly positive coverage by local media — to camp out a night or two beforehand, the better to ensure they’ll be able to grab a few dozen. Sweet-toothed America loves the company’s hot, glazed doughnuts made fresh on the premises. And Wall Street has developed a taste for them too. Krispy Kreme stock has more than tripled since going public in April 2000, fueled by rapid growth and strong sales. And Krispy Kreme has only scratched the surface of the U.S. market: it has a mere 226 stores

nationwide, compared to Dunkin’ Donuts’ 3,500. Nevertheless, confident that its deep-fried, sugary confections will also find favor elsewhere, the Winston-Salem, North Carolina company has begun an international expansion: the first European Krispy Kremes should open in Britain and Spain in early 2003.

Last December, the company took its first small step beyond U.S. borders when it opened a store in Toronto. In June it announced franchise agreements for 30 stores in Australia and New Zealand, and expects to name its British and Spanish partners soon. Other likely foreign locales include Japan, South Korea and Mexico. “We’re ready, and we know where we want to go,” insists Phil Waugh, executive vice president for worldwide development. Waugh says the company is already eyeing other European sites, but the first two beachheads were obvious ones. Britain is always high on location lists when American retailers venture into Europe, mainly because of supposed cultural similarities and a somewhat common language. And Spain is known for having a particular taste for doughnuts — of Dunkin’ Donuts’ 59 European outlets, 23 are there.

Krispy Kreme’s international expansion is the latest step in its metamorphosis from a sleepy Southern retailer into a modern fast-food chain selling nearly 2 billion doughnuts a year. It was 65 years ago this month that Vernon Rudolph opened the first Krispy Kreme in Winston-Salem. As the company grew into a regional institution, Rudolph ensured consistency by providing the mix to each franchise and creating specially designed machines to automate the doughnut-making process. Beatrice Foods bought the company in 1976, three years after Rudolph’s death, and the franchisees took control in 1982. Expansion beyond its Dixie roots began in the mid-1990s. New York got its first Krispy Kreme just six years ago. Before its 2000 flotation, “it was basically run like a co-op by the franchisees,” notes Andrew Wolf, an analyst at BB&T Capital Markets. It’s still considered a highly conservative company that treads cautiously into new markets.

Nevertheless, its overseas expansion isn’t likely to be a cakewalk. Krispy Kreme must avoid the mentality of “We like it in America, so you ought to like it too,” says John Stanton, a food-industry expert at St. Joseph’s University in Philadelphia. “If it tries to force the American doughnut down the throats of Europeans, it will fail.” Stanton argues that Krispy Kreme should market its treats not merely as a fast food, but also as “getting a little bit of Americana.” And while the local press in the U.S. eat up Krispy Kreme store-opening stories, European media may consider a new doughnut shop in town as something less than newsworthy. “In Europe they may not have people sleeping in the streets waiting for the stores to open,” says Kathleen Heaney, an analyst at Brean Murray & Co. And unlike Americans, who enjoy starting the day with sweet cakes, Europeans’ breakfast tastes tend toward the savory. After all, a British breakfast tradition is a kipper, a smoked herring. Waugh insists it’s wrong to consider Krispy Kreme doughnuts merely a morningtime food. “That’s the great thing about our product, they can be eaten throughout the day.” In the U.S., 40% of its sales occur after 5 p.m.

Europeans tend to think of doughnuts as being leaden and greasy, and easily bypassed in favor of a flaky croissant or a properly made scone slathered in fresh cream and strawberry jam. Consider Dunkin’ Donuts, owned by the British beverage company Allied Domecq. It doesn’t release separate figures for its European shops, but they’re not considered a success. “I’d be amazed if Dunkin’ Donuts makes any money at all in Europe,” says Andrew Holland, an ABN AMRO analyst in London. Indeed, Dunkin’ Donuts closed its last U.K. outlet earlier this year. But the quality of Krispy Kreme’s doughnuts is its biggest selling point. Even supposedly objective analysts gush when they talk about eating them. “It really is a cheap delight,” says Wolf. That’s why free tastings are a big part of the company’s business model. Once they try one, Europeans may love Krispy Kreme doughnuts too. But getting them to take that first bite may prove harder than a three-day-old croissant.