After 53 years, Winchell’s is not about to let Krispy Kreme corner the doughnut market it has called its own There’s one on every corner. And, if there isn’t one on the corner, it’s likely you’ll find a Winchell’s doughnut shop inside a strip mall just when you need it the most, likely sandwiched between a 7-Eleven and a dry cleaners. But is convenience and brand recognition that’s as much a part of the landscape as black and white police cars enough to stave off competition from an out-of-state doughnut chain that has stormed into Southern California with more fanfare than a presidential motorcade? Absolutely, said Winchell’s President Bob Zanolli. In fact, he said Krispy Kreme Doughnuts Corp., which has opened two stores in the San Fernando Valley within the last 12 months and has 10 more across Southern California, has made it not only fun, but OK to eat doughnuts again. There are 168 more Krispy Kreme stores in 28 states across the country and Canadian expansion plans are just getting underway. As a result, Zanolli insists, sales have actually increased by as much as 10 percent for the privately owned Winchell’s Donut House in roughly 50 percent of the locations near where the 63-year-old publicly held Krispy Kreme has set up shop in Southern California. There are 17 Winchell’s stores in the Valley, about 110 in Southern California and another 100 stores in 12 states plus locations overseas. “I give them a lot of credit for the public relations job they’ve done, which has actually been very good for the doughnut-eating business,” said Zanolli. He was referring to the North Carolina-based company’s in-your-face marketing campaigns that include product placement in Mike Nichol’s political satire “Primary Colors,” spots on “ER,” NYPD Blue” and “Third Rock From the Sun,” and induction into the Smithsonian Institution in Washington D.C. “Now it’s become cool to eat doughnuts again,” said Zanolli. “So from that standpoint, we are thrilled about the brand itself.” But it’s not all sugar and spice over at Winchell’s, no thanks to Krispy Kreme. Digging into a doughnut is only one aspect of the Krispy Kreme experience. Every Krispy Kreme store gives customers an up-close view of the doughnut-making process. Visit stores in either Van Nuys or Canoga Park and you can watch literally hundreds of plain round doughnuts motor their way under a glaze dripping wall before being hand boxed and ready for sale. And it’s not unusual for employees to randomly pass out hot free samples straight from the assembly line. If you miss the free samples, just wait for the “Hot Doughnuts Now” neon to light up and you’re guaranteed a fresh one. Every one of the Krispy Kreme stores is a drive-thru perfect for the Southern California market. “It’s more of an experience here than at Winchell’s,” said Moorpark resident Sharon Evans who stopped into the Canoga Park Krispy Kreme store after a recent visit to the doctor. “If there’s a choice between Winchell’s and Krispy Kreme, I’d come here, unless the drive was too far.” Taking Winchell’s place And that’s exactly what Richard Reinis wants to hear. He is the CEO of Great Circle Family Foods, LLC in Los Angeles, the exclusive franchisee for Krispy Kreme Doughnuts in Southern California. “They (Winchell’s) don’t serve their customer directly from the conveyer belt, I can tell you that,” said Reinis. His company, launched in 1998, is set to open five more stores within the year, including one in Burbank. Reinis said he saw an opportunity for Krispy Kreme expansion here as he watched Winchell’s cut roughly 100 locations over the last few years as part of a cost-cutting and internal restructuring program. And the rapid growth of what now amounts to about 1,600 independent doughnut shops across Southern California, he said, suggested the market was primed for something new. “So we came to Krispy Kreme and saw that Winchell’s chains had dropped from 300 down to about 200 and that we were serious about being a franchisee,” Reinis said. Great Circle is now the largest Krispy Kreme developer in the country. Although Reinis wouldn’t reveal specific revenues for his stores, Krispy Kreme has moved quickly since it launched its initial public offering in 2000. Net income for the fiscal year ending in January 2001was $14.7 million, or 55 cents per diluted share, on revenues of $300.7 million, up from $6.0 million, or 30 cents per diluted share, on revenues of $220.2 million in fiscal year 2000. “One thing they have done is they have really worked to differentiate their product by providing a unique environment, by allowing you to view the doughnut making process,” said Corey McElveen, an analyst with the Chicago-based firm Morningstar. “But another thing that is really in their favor is the doughnut or pastry industry is really fragmented. So they can really send a message out that their product is superior and they can capture part of the market share.” “I can tell you that we normally do in a month or less what the typical doughnut shop does in a year,” said Reinis. He said combined, the Canoga Park and Van Nuys Krispy Kreme stores sell upwards of 400,000 doughnuts a week. So, take the glaze off Zanolli’s welcome mat and what’s really brewing at Winchell’s still the largest doughnut chain on the West Coast is clearly a full-scale effort to, if not reclaim its territory, hold on for dear life. Winchell’s has halted expansion of its partnership stores in gas stations and mini-marts across the country in order to cover expenditures linked to a “back to the basics” approach. The company has come out with a new “Warm and Fresh” ad campaign and logo, which includes TV spots during Los Angeles Lakers and Los Angeles Kings games. Winchell’s has put up new signs at roughly 40 stores so far this year and employees are getting new uniforms. In 1999, the company opened Winchell’s World in Pomona, a 3,000-square-foot “see ’em made,” 24-hour doughnut production line, offering walk-up and drive-thru service. And Winchell’s will begin rolling out a remodeling effort in many of its stores. “One of the things that I recognized as I came on is the (Winchell’s) brand had kind of wallowed,” said Zanolli, who was appointed president earlier this year. He joined the company as general manager in 2000. “So our marketing strategy is to basically do what we can to say that Winchell’s still exists in California.” Krispy Kreme isn’t the enemy Zanolli said Krispy Kreme doesn’t pose as big a threat as do the smaller mom-and-pop shops which, although perhaps less recognizable by brand, are dotting the landscape faster than you can say apple fritter. “Even as Krispy Kreme continues to grow, at best they would only have about a third of the stores that we will have in Southern California,” said Zanolli. “We want to be the neighborhood doughnut shop, that’s our focus.” Reinis said his biggest competitors on the West Coast are actually fast-food chains because of Krispy Kreme’s unique need for locations big enough to accommodate drive-thru operations, which account for roughly 35 percent of sales. “Winchell’s locations are really not a significant factor for us,” Reinis said. “We are more likely to vie for space alongside a Taco Bell or a McDonalds. Morningstar’s McElveen suggested that because the two companies aim to offer such a different kind of doughnut-eating experience, there is likely plenty of room for both to co-exist. For now. “Krispy Kreme is more for someone who wants to come inside and buy their doughnuts and leave,” said McElveen. “And they aren’t taking the approach of high density locations, so concentration isn’t really a factor.” And what about competition from designer coffee houses? After 53 years, Winchell’s still brews its own coffee, but recently added a dark roast bean to its menu to appeal to expresso drinkers. And it has plans to roll out a frozen mocha cappuccino drink this summer “to give people a reason to come back in the afternoon,” said Zanolli. Not surprisingly, Krispy Kreme, too, has its own cold coffee drink: the Original Ice Blended beverage from The Coffee Bean & Tea Leaf, which is served exclusively at the Canoga Park store along with the company’s other premium hot blends. Other Southern California locations are serving up the regular Krispy Kreme blends. However, Krispy Kreme Donut Corp. recently purchased Chicago-based Digital Java, and plans to bring that coffee and its other products out west later on this year, Reinis said.