Growth in Upscale Doughnut Chains Becoming A Little Strange

St. Louis based Doughnut shop, Strange Donuts recently launched a franchise program to expand its locations across the US and Mexico. Strange Donuts is increasing the local footprint by adding two new stores in the next few months. Although the donut segment is highly competitive with global brands Dunkin’ Donuts and Krispy Kreme continuing to expand their operations, the emergence of upscale, cult shops has found a niche within indulgent consumer demand.

The upscale donut trend took shape years ago with the success of cupcake shops like Crumbs and Sprinkles which grew in New York City and Los Angeles.  The trend evolved to mashups like the Cronut in Brooklyn, cookie shops and has now evolved toward local, independent donut shops to deliver sweet craveability. The consumer white space was built on the demand for an affordable indulgence which every consumer could pay for and treat themselves to on both good and bad days.  So what makes an affordable indulgence? Generally consumers are looking for locally-made items that incorporate local ingredients that are more common and suit consumer taste preferences.  The items are usually baked on location and made fresh daily. Donuts in particular should be visually appealing, include more adventurous ingredients and generally are packed full of sugary sweetness. Prices can vary on low end of $1 to prices around $5.

According to CHD Expert, there are more than 13,000 donut shops in the US including 9,140 Dunkin’ Donuts, 316 Krispy Kreme and 470 Daylight Donuts.  Since almost every bakery, supermarket and gas station offers some form of branded or unbranded donut offering, the donut is one of the most available and competitive products in the foodservice industry.

Competing with big brands can be difficult for small shop owners and growing the number of stores for a brand means economies of scale, better purchasing power, greater investment in human resources and improved opportunity to lease key site locations.  Often restaurant operators need to reach a critical mass with between 20-25 locations in larger markets and 10-15 in small markets before the customer base recognizes a brand and will frequent their restaurants.  In addition, local chains which have 10 or more restaurants have the ability to leverage billboards, radio advertising and direct mail promotions to further build awareness of their restaurant and promote trial. Smaller brands are often more nimble, and enjoy the speed to market for new innovative products that can be big winners and draw crowds.  National chain restaurants are slow to roll out new products taking 12-18 months to test ideas, perfect recipes, build their supply chain and develop and execute a marketing campaign. Smaller shops can experiment in their kitchen and test products immediately with customers to see if they will be within the “customer zone of creativity”. This zone is the range of items that a customer will give an operator permission to sell.  For example, a customer will not give a fast food restaurant permission to sell eggs benedict because of the culinary skills, equipment and quality ingredients necessary to accomplish the menu item. When it comes to donuts, the sky is the limit on innovation and creativity.

Like Voodoo doughnut in Portland, Oregon, Firecakes in Chicago or Dough in New York regional shops are taking the country by storm.  Small groups that look to expand outside of their home town will face challenges competing with other favorite donut houses but ultimately, have an opportunity to steal share for big chains that have focused on high-margin beverages, breakfast and sandwich items and low cost, high value offerings.  The variety, creativity and hip factor surrounding these strange new donut shops will continue to drive indulgence, cravings and snacking occasions.Link to Original Forbes Article

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