Krispy Kreme's Secret Growth Recipe (It's Not Paid Ads)

How Doughnut Chain Defied the Odds to Rack Up Five Years of Same-Store Sales Rises

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On a midwinter Saturday at 3 p.m., customers shuffled into the lone Chicago-area Krispy Kreme location for a cup of coffee, a just-off-the-conveyor-belt-warm doughnut, or a box of treats for Sunday morning.

Among them was Dilyana Lagadinova, who drove a half hour from her suburban Glenview home to the Krispy Kreme in Elk Grove Village, Ill., to pick up a dozen. "It's a trek, but I come here because it's way better than Dunkin' Donuts, and my mom loves them," said Ms. Lagadinova.

She's far from alone. The chain has a loyal fan base often willing to drive more than 30 minutes to one of its 240 U.S. shops for what CMO Dwayne Chambers calls a "kind of reward, a simple indulgence." Krispy Kreme's regular customers frequent the chain an average of one-and-a-half times a month.

That may be far less than the average fast-food customer, who will often make multiple visits per month, or even Dunkin's regulars, but something is clearly working: If Krispy Kreme reports an increase in same-store sales when it releases fourth-quarter earnings this week, it will mark the 21st consecutive quarter that all-important metric has risen.

Such sustained growth is highly unusual for chains, especially post-recession, according to Darren Tristano, exec VP at food industry-research firm Technomic. He noted chains like McDonald's and Chipotle have had sustained growth, but even McDonald's hit a snag after nine years of positive global sales. "It's like sports -- it's difficult to win every game, since growth in sales is usually year over year."

For its fiscal third quarter ended November 2013, same-store sales at Krispy Kreme's company-owned stores were up 3.7% from the previous quarter. Franchised stores showed even better performance, with a same-stores sales hike of 10.7%. (Of its 253 U.S. locations, 95 are company-owned.) The gains were attributed mainly to retail price increases.

That performance is even more impressive considering some major headwinds Krispy Kreme is battling. Dunkin' Donuts, McDonald's, Starbucks and others are all duking it out for a share of the $50 billion breakfast market. Krispy Kreme's growth also comes as fatty foods are under fire, and despite the chain's overexpansion, which began in the late '90s.

Krispy Kreme's Chicago location is the last one standing in the area after the company closed stores throughout the U.S. a handful of years ago, recognizing that it opened had too many stores too quickly and overreached by expanding into grocery and convenience stores. Krispy Kreme's sales peaked in 2005 with $1.07 billion across 272 U.S. stores, according to Technomic. But by the time it began to scale down in 2009, sales from its 222 U.S. stores had dropped to $468 million.

"They got away from what people got excited about with Krispy Kreme," said Elizabeth Friend, an analyst at Euromonitor. "They were in every grocery store and convenience store." The aggressive expansion cut into its cult status and damaged quality control. "Suddenly, when you're seeing old, dried out Krispy Kreme doughnuts in the [convenience] store, the brand loses cachet," she said.

Growth since then has been slow but steady. The chain, Ms. Friend said, has been focusing on improving operations and the customer experience at its shops, most of which are factory-style stores where customers can see the doughnuts being made. Wholesale operations are less of a focus, though the company still sells doughnuts through retailers like Sam's Club.

"It's unusual to be able to bounce back like that," said Mr. Tristano. "Once a restaurant starts to decline that much, it's difficult to recover." He added that much of the difficulty in rebounding has to do with aligning management properly, improving franchise operations and shoring up financials after sales declined so much. Even so, "they're moving in the right direction, but they haven't yet regained the footing they once had."

For the first nine months of its fiscal 2014 year it reported revenue of $347.6 million. It now has 253 U.S. locations, 95 of which are company-owned.

What's left now are well-performing operations and its trademark bare-bones marketing strategy, which includes very little measured-media spending and no agency of record. Mr. Chambers said the company hasn't changed its marketing approach since he arrived in 2010: It's focused on local and community outreach through digital, with a big social component.

The brand "was built on word-of-mouth," he said, making social media a natural fit. The chain will periodically invest in event marketing, like when it bought a 1960 Starliner bus, dubbed the Krispy Kreme Cruiser, and embarked on a tour of events and festivals in 37 states.

And while doughnuts will always be its primary focus, Krispy Kreme in 2011 started to integrate coffee into its main business in unorthodox ways. Last month, it rolled out two coffee-flavored doughnuts -- the Mocha Kreme and Caramel Coffee Kreme doughnuts -- on a limited-time basis. It also struck a deal with Walmart to sell two types of bottled iced coffee, Original Glazed Iced Coffee and Mocha Iced Coffee, in 9.5-ounce bottles for $1.98, in 900 locations. (Krispy Kreme already has a deal to sell 40-ounce bags of its House Blend coffee in Sam's Club stores across the Southeast.) The chain is also said to be planning to roll out a gluten-free doughnut this year.

"It's another opportunity to bring variety to our doughnut menu offerings," Mr. Chambers said.