Collapsed donut chain Krispy Kreme expanded too rapidly and selected extremely poor sites for its products, Sumo Salad founder Luke Baylis has said in a withering analysis of the chain’s demise.
And he says that while Australian consumers are generally shifting towards healthier take-away food options, he says the market for “fat, greasy food” remains large and it was Krispy Kreme’s expansion strategy that led to its troubles, and not the healthiness of its food.
While the owners of Krispy Kreme Australia, who include rich list member John Kinghorn, are hoping to restructure the chain and bring it out of voluntary administration in the coming months, Baylis says a major rethink on strategy is required to give the chain a point of difference in the hyper-competitive Australian retail food sector.
“You really need to have a good point of difference,” Baylis says.
“When they started out they had big donut factories in the suburbs, and they were selling their donuts by the box, which really gave that feeling that you’d just been to the factory and got the freshest donuts you could find.”
While Baylis says Krispy Kreme’s original cult status was built on this straight-from-the-factory-to-you feel, the company’s rapid expansion to 50 outlets saw it lose its novelty value.
“We were sitting back in 2003 and saying, this is an amazing business. But once they decided to expand and they weren’t overly clever in the way the expanded, in terms of their site selection and the positioning of their stores, they started to struggle.”
Baylis is blunt about what would have worked best for Krispy Kreme.
“In lower socio-economic demographics, their product would have had more appeal. People generally aren’t as health conscious in those areas, according to our research.”
Instead, many of the new Krispy Kreme outlets were located within the food courts of major shopping centres, were rents are high and consumers can immediately compare retail offerings.
“There has been a huge shift in the way consumers are viewing food,” Baylis says.
“There is still a big market for fat, greasy food, however consumers are frequenting those places less and less. And when consumers do go to their places, they want something different.”
Krispy Kreme’s decision to focus on donuts and not include a strong fresh coffee offering with its products may have also hurt the company’s chances in Australia.
Baylis says Sumo Salad is performing well in what remain reasonably difficult economic conditions. He says revenue for 2009-10 was up $8 million on this previous year, which takes the chain’s total revenue to about $50 million. Sumo expects similar growth in the current financial year.
“It’s a bit hard in the shopping centres. There is not as many people going to the shopping centres and the retail spend is a bit down due to the interest rate hikes.”
What Baylis is concentrating on most at present – and what he says any retailer should monitor very carefully – is picking the right sites.
“Krispy Kreme needed to look at each site on an individual case basis, and make sure every site is profitable, and not just look at the consolidated group picture.”
“That’s what you learn particularly when you are franchised – you are very careful with the sites you select and the profitability of those sites.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
