Given the slightly addictive nature of a hot glazed donut right off the Krispy Kreme (KKD) conveyor belt, it’s remarkable that so many people still buy them cold, in a box, at the supermarket. Between one-half and one-quarter of the company’s revenue comes from sales to supermarkets and convenience stores. It’s looking to change that, starting with 157 more U.S. stores by 2017, up from 243 right now.
To do so, it is changing its strategy. As of now, its existing stores sell donuts retail and wholesale. Some of its new stores, which will be smaller and cheaper to build and operate, will sell only retail.
Originally, Krispy Kreme was primarily a wholesaler, which required big spaces that ranged from 4,000 to 6,000 square feet and included a retail area, a manufacturing area, and a loading dock. The chain started developing its retail business in the mid-1990s, but even the smaller factories were about 2,800 square feet. Sales fell through the late 2000s. The new design, which is exclusively for retail, measures about 2,300 square feet, and the stores will be able to produce from 65 to 110 dozen doughnuts per hour, compared with 150 to 600 dozen at traditional factories.
Why the change now? Wholesale is less profitable, for one thing. Also, Krispy Kreme’s popular yeast-raised doughnuts spoil in about two days. They also account for 80 percent of its wholesale sales, which requires frequent shipments to supermarkets to keep them stocked with fresh products. It also means “substantial product returns [from grocers] stemming from the relatively short shelf-life of our signature yeast-raised doughnut,” according to its last annual report. Most unsold product costs are absorbed by the company.
The future holds different donuts for the supermarket shopper. “Over time, we expect our wholesale product line to become increasingly differentiated from the products offered in our shops in order to improve the economics of this distribution channel,” the filing states. That could mean fewer of its popular glazed doughnuts in supermarkets. (The company wouldn’t say.) As Krispy Kreme tries to improve the shelf life of its yeast-raised doughnuts, it’s also marketing longer shelf-life products, such as honey buns, to grocers.
In retail, on the other hand, there are “higher selling prices, much lower waste, higher quality and freshness, and lower cost since there’s no truck to deliver, diesel, etc. Much better margins overall,” explains Stephens research analyst Will Slabaugh in an e-mail.
“Smaller stores with lower overhead will make it easier for our franchise partners to open new locations and ultimately make the brand more accessible to our customers,” says spokeswoman Lafeea Watson. The Winston-Salem (N.C.) company will focus on the southeast and leave development in other regions to franchisees.