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Dunkin’ Donuts vs. Krispy Kreme: Is a Charlotte doughnut war coming?

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Who makes better doughnuts?

As hundreds of Krispy Kreme customers braved long lines early Friday for the reopening of the company’s Matthews store, less than a half-mile down the road, Dunkin’ Donuts was just hours away from gearing up for a new day.

Only one-third of a mile separates the two shops on East Independence Boulevard, signaling that the doughnut industry in North Carolina – once dominated by Winston-Salem-based Krispy Kreme – is now changing.

These days, Krispy Kreme is getting plenty of company. Dunkin’ Donuts, the Massachusetts-based company that aggressively expanded throughout the south for years, is looking to double its presence in the state, the company announced in May.

The growing presence of the two breakfast shops has sparked an unspoken doughnut war, with both competing to dominate the Charlotte area.

Dunkin’ has launched new interior designs – on display at a new Kannapolis location – to encourage customers to linger. Krispy Kreme is moving forward with a small store concept to improve its bottom line.

Company executives deny they are even competitors: Krispy Kreme says it sells doughnuts first, then coffee. Dunkin’ sells coffee, then doughnuts – a small distinction, but one both companies say makes a difference.

But restaurant analysts say otherwise.

“If a consumer thinks, ‘I want a doughnut and coffee,’ they’ll think of going to Dunkin or going to Krispy Kreme,” said Darren Tristano, a restaurant industry analyst at Technomic, a market researcher. “If that is the consumer mindset, it doesn’t matter what the restaurants think.”

And as both move into the Charlotte market, many are questioning how the doughnut shops stack up.

America’s hottest brand turned cold

After nearly five months of renovations, the Matthews Krispy Kreme store re-opened Friday at midnight, drawing hundreds for the traditional hot glazed doughnuts as they rolled off the conveyor belt.

The location marks the 25th Krispy Kreme in the state, and the seventh in the Charlotte area. The shop closed in February after opening in 1994 to make room for new designs and a drive-thru.

The renovation is a smaller part of Krispy Kreme’s long-term growth plan to restore the brand after devastating losses between 2004 and 2009, when the company was plagued by a tough economy and legal problems.

But Krispy Kreme’s history wasn’t always tumultuous: In the three years following the company’s initial public offering in 2000, its shares soared more than 500 percent, reaching an all-time high of $49.37 in August 2003. The company opened more than 400 stores and was dubbed “America’s hottest brand” by Fortune that same year.

But when the Securities and Exchange Commission began to investigate accounting irregularities in 2005, the company’s rapid success began to plummet. Stocks hit a record low of $1.08 in February 2009, and the company closed more than 240 U.S. stores in five years, including the only store in Charlotte city limits in 2007.

Around that time, Dunkin began an aggressive expansion in the south, announcing in 2002 a more than $45 million plan to add between 90 and 95 Dunkin’ Donuts in North Carolina. Soon after, Dunkin’ exploded with success. Today, the company operates more than 10,500 shops across the world, including 294 in North Carolina. That’s more than Krispy Kreme, which operates about 775 global locations.

Another sign of Dunkin’s growth: Its 71 locations in the Charlotte area – outpacing Krispy Kreme.

As Dunkin’ expanded, so did its strategy. In the past two years, Dunkin’ has rolled out an overhaul of its interior design, launching a look likened to Starbucks. The environment is contemporary, encouraging customers to linger.

D.J. Mehta’s franchise, the Dunkin’ Donuts on Spider Drive in Kannapolis, is the first in the area to launch the look.

“The soft seating, music and televisions makes the store feel much more 21st century, rather than the older ‘80s or ‘90s look, which was much more grab-and-go,” he said.

The side of the street you’re on

For both companies, the Charlotte market is attractive.

“There is probably more potential in the Charlotte market than anywhere else in the state,” said Grant Benson, vice president of franchising and business development for Dunkin’ Donuts. “It’s really a function of the population, with almost 3 million people. We know there is an under-serviced population of guests that do not have easy access to Dunkin’.”

Krispy Kreme CEO Jim Morgan said he is interested in Charlotte because it’s his weekend-hometown. “I guess I’m a little biased,” Morgan said.

But he added that that Krispy Kreme is also committed to North Carolina.

Both companies have closed in on the Charlotte market: Krispy Kreme opened locations in Rock Hill, Indian Land and Charlotte in 2012, and Dunkin’ Donuts opened locations in Kannapolis and Shelby this year.

But when deciding which company will dominate, analysts diverge.

For Conrad Lyon, a restaurant-industry analyst at B. Riley, a Los Angeles investment bank, Krispy Kreme is the clear winner.

“The regional element really plays into (Krispy Kreme’s) success,” Lyon said, touting a trend where southeast customers gravitate toward the hot, glazed doughnut.

But for Tristano, Dunkin’s broad menu allows the company to triumph, discounting Morgan’s mantra that Krispy Kreme customers identify with the brand.

“Consumers are very fickle with their loyalty to brands these days,” Tristano said. “They’re willing to trade off if it’s more convenient or cost effective.”

“Often times, it comes down to what side of the street you’re on,” he added. “If you’re on the right side of the road and so is Dunkin’, you’re going to Dunkin’.”

But analysts agree on one thing: both companies’ earnings are on par. Both companies’ revenue jumped mildly in the first quarter: Dunkin’ Donuts jumped 8 percent to more than $124 million – a number that includes both its U.S. and international divisions. Krispy Kreme’s global revenue rose 11.1 percent to more than $120 million.

Both also saw boosts to profit. Krispy Kreme soared 32.7 percent to $8 million, and Dunkin’ Donuts jumped 7.6 percent to almost $90 million in the first quarter.

Customers sink their teeth in

Many customers hold lifetime allegiance to the companies.

Theresea Bryan Bellavia, a Krispy Kreme customer from Matthews, said she makes the 15-mile drive to the Krispy Kreme on Sharon Amity Road for the glazed doughnuts that her dad treated her to as a child.

“There’s a Dunkin’ that’s a mile and a half from my house,” Bryan Bellavia said. “But I just cringe when I think about Dunkin’.”

“(Krispy Kreme doughnuts) are sweeter, fresher, they just melt in your mouth,” she said.

She said she dislikes Dunkin’ because she always leaves smelling like coffee. “It’s pungent, I don’t like that,” Bryan Bellavia said, adding that Dunkin’ often fails to carry its powdered-sugar doughnut – her son’s favorite.

But a coffee smell draws some customers to Dunkin’.

“I always come here for the coffee, especially their iced coffee,” said Amy Rose, of Charlotte. She is from Winston-Salem, Krispy Kreme’s headquarters, but said she prefers Dunkin’ because of the convenience.

“There are Dunkin’s everywhere in Charlotte,” Rose said. “I couldn’t even tell you where the closet Krispy Kreme is.”

Terri Leyton, of Charlotte, said Krispy Kreme doughnuts have too much glaze. “It just coats your mouth with sugar,” she said.

Leyton said she prefers Dunkin’ coffee to Starbucks or McDonald’s – two companies Dunkin’ considers to be competitors, said Benson, the Dunkin’ executive.

In securities filings, Dunkin’ does not list Krispy Kreme as a competitor, instead naming McDonald’s, Tim Hortons and Burger King, among others. Similarly, Krispy Kreme excludes Dunkin’, listing brands like Little Debbie and Sara Lee.

“While bakery and doughnuts are very important to us, we have continued to broaden the menu,” Benson said, referencing Dunkin’s line of breakfast sandwiches. “The beverage business is a more significant portion of the business.”

Looking ahead

Beverages account for the majority of Dunkin’s sales – a developing transition that has ousted the company’s iconic “Fred the baker” image, seen in television ads as waking up early because it was “time to make the doughnuts.”

In 2012, 58 percent of Dunkin’s sales came from coffee and other beverages, and the company sold 7.5 billion servings of coffee that year, according to securities filings.

By contrast, Krispy Kreme’s beverage sales only accounted for about 12 to 13 percent of sales, Morgan said. Securities filings show the remaining 88 percent of sales were from doughnuts.

“Our goal is to always have our doughnuts rule supreme,” Morgan said. “That is what differentiates us.”

But he said Krispy Kreme aims to double beverage sales to 20 percent in the next three years.

Tristano, the analyst, said that isn’t enough.

“I’m not sure doughnuts are a sustainable model,” Tristano said. “Singularly focused concepts don’t necessarily have a future because other brands can adapt, and can add things to their lineup.”

Tristano anticipates growth for Dunkin’ with its healthier options, such as egg white flatbreads and gluten-free items.

But Lyon said Krispy Kreme will improve as it focuses on its small store concepts – allowing the company to expand into new locations, while lowering overhead costs.

Its growth plan is promising, he said. Krispy Kreme projects that existing franchisees will open 10 or more units this year, and 400 domestic shops by January 2017 – up from the 241 domestic locations it now holds.

Meanwhile, Dunkin’ is accelerating efforts to double its footprint.

“Is there a clear winner?” asked Tristano. “It’s hard to say. They’re both still competing – competing well.”

McCabe: 704-358-5197; Twitter: mccabe_caitlin
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