How Krispy got creamed

Nothing is going right for Krispy Kreme: its sales are falling, some franchisees are in financial trouble, and the company has been tainted by an investigation into its accounting practices. Its share price has fallen by about 75 per cent since August, 2003, a decline that has wiped out more than $2-billion (U.S.) worth of investors' wealth.

The Globe and Mail
December 18, 2004

How Krispy got creamed
Remember the Great Doughnut War? Uncle Sam's holey warrior didn't stand a chance, Derek Decloet reports.
Derek DeCloet

Mid-morning on Bay Street: The stock market has been open for half an hour, and the pedestrian traffic in downtown Toronto's underground mall has thinned. In the basement of Scotia Plaza, one corner is still busy.

Tim Hortons can get so crowded that a portable barrier like the ones used to corral passengers at airport counters is needed to keep the lineup from spilling too far into the food court. Even now, after the morning rush has eased, harried workers keep all four cash registers running at full speed.

Michelle Porlier emerges from the fray, coffee in hand. Her morning ritual is as much about loyalty and habit as a physiological need for caffeine. "I'm from Hamilton, and there's a Tim Hortons on every corner there," she says. "I was raised on Tim Hortons."

At the Krispy Kreme outlet one block away, there's no need for crowd control. For that matter, there's hardly a need for any staff.

America's most famous doughnut holds no appeal for Ms. Porlier. "It's too sweet, too cake-like," and she appears to speak for many Canadians. Business is so slow that this location will close soon, along with five others. By next month, Krispy Kreme will have shrunk to 13 franchises in Canada, a decision announced this week in the face of deep financial losses. KremeKo Inc., which develops stores in Ontario and Quebec, dropped $2.1-million (U.S.) last year, prompting a cash infusion from parent company, Krispy Kreme Doughnuts Inc. of Winston-Salem, N.C.

It wasn't supposed to work out this way. Just three years ago, people were happy to line up on a cold December night in Mississauga waiting for the opening of the first Krispy Kreme location outside the United States.

On that day, KremeKo chief executive officer Roly Morris talked of building 32 stores across the country; Scott Livengood, the parent company's boss, flew in to mug (and eat) for the cameras. Police officers were called to impose some order on the parking-lot chaos.

Krispy Kreme was a marketing phenomenon, a company that enjoyed the endorsement of celebrities such as Nicole Kidman and whose doughnuts found their way into episodes of Sex and the City and other popular TV programs. On arriving in Canada, it was ready to show the citizens of Doughnut Nation what they had been missing while eating all those uninspiring apple fritters served up by their favourite chain.

"Tim Hortons — the previously undisputed doughnut king in Canada — had better get ready for an all-out war on its home turf," Canadian Business magazine declared.

Well, Tim Hortons was ready. It has been teaching its arrogant American rival a few lessons about fast-food marketing — on both sides of the border.

It would be hard to find two consumer franchises with more opposite trajectories. Nothing is going right for Krispy Kreme: its sales are falling, some franchisees are in financial trouble, and the company has been tainted by an investigation into its accounting practices. Its share price has fallen by about 75 per cent since August, 2003, a decline that has wiped out more than $2-billion (U.S.) worth of investors' wealth. Mr. Livengood, the CEO, has blamed low-carbohydrate diets. Others blame an over-heated expansion plan.

Tim Hortons, meanwhile, continues to astound for very different reasons. In Canada, the chain has grown to 2,400 stores from about 1,700 in five years, yet there is still no sign of saturation. Sales at the existing outlets have increased 7.5 per cent this year.

The company's biggest growth plans are in the United States, where existing-store sales have climbed 10 per cent. Business is so brisk that its owner, American burger giant Wendy's International, plans to double the number of U.S. Tim Hortons outlets, to 500, by the end of 2007. If this is a battle, it's been awfully one-sided.

How did Tim Hortons manage to crush an American icon? With a game plan that it put in place more than a decade before Krispy Kreme even showed up. And apparently, the key to winning the doughnut war is to talk about doughnuts as little as possible.

"The era of the doughnut has gone," says Richard Talbot, president of Talbot Consultants International, a retail advisory firm in Toronto. Slowly, but steadily, Tim Hortons has been excising the doughnut from its image: changing the signs outside the stores to remove the word, adding sandwiches to the menu, and rarely even mentioning their sugar-coated confections in their advertising.

The strategy was in place long before low-carbohydrate diets came into vogue — in fact, several years before co-founder Ron Joyce sold the chain to Wendy's in 1995. "I think he saw, even at that time, that just being a doughnut shop was not going to be enough," says executive vice-president of marketing Bill Moir, who joined the company in 1990.

Inside Tim Hortons, they have dismissed the low-carb diets as "a fad," Mr. Moir says. What's not a passing trend is customers' desire for less-fattening food. And reliable Tim Hortons — usually open, usually clean — has been feeding it to them in increasing quantities, particularly since the late-1990s introduction of sandwich counters.

As a result, the company's reliance on doughnuts and other sweet treats has declined: 77 per cent of its Canadian sales are items other than baked goods. Ten per cent now is lunch food. (Coffee remains the biggest seller, at 50 per cent.)

An oft-cited piece of trivia is that Canadians are the world's biggest doughnut eaters. "In reality," Mr. Moir says, "we don't know that. It's just this urban myth."

York University marketing professor Alan Middleton is even more adamant. "The evidence isn't that Canadians love doughnuts," he says, having worked on Tim Hortons' advertising campaigns in the late 1980s, when the menu-diversification strategy was getting started. "The evidence is that Canadians love relatively low-cost places to stop off and relax, or collect something and bring it into the office."

One reason Tim Hortons has been able to reposition itself in consumers' minds as a seller of healthy food — something most burger chains have tried, and failed, to do — has been its remarkable consistency in marketing.

The company still uses the same Toronto advertising agency, Enterprise Creating Selling, that it did in the 1980s. The ads change every four weeks, but the tone is always the same, and themes are recycled over and over — kids playing hockey, for example.

"They've never tried to be flashy. They've kept very faithful to the Tim Hortons persona, which is a sense of humour, not too serious but very warm, human, very boy-girl-next door," Prof. Middleton says. The subtle message is that Tim Hortons is still the same Canadian restaurant you grew up with, and carries on the same philosophy of cheap, decent-tasting food, even if the menu has changed.

The company also does copious experimenting and testing to see what new concepts will work — chili and soup, not fries and gravy. At Krispy Kreme, however, everything still hangs on the doughnut. It has ignored the lunch market, and its coffee is unremarkable.

As well as overestimating Canadians' appetite for their fat-filled snacks, Krispy Kreme executives employed a marketing strategy that made little sense.

The appeal of a Krispy Kreme doughnut is its freshness. Its so-called factory stores are designed so that customers can watch them being made behind glass. The signature design element, of course, is a circular red neon sign that reads, "Hot Doughnuts Now" and lights up when a new batch is ready.

But KremeKo began to sell its products in boxes to Wal-Mart and Loblaws stores, even Petro-Canada and Shell gas stations.

That was a fatal blunder, Mr. Talbot says. (Officials at KremeKo and parent Krispy Kreme would not comment.)

"The Krispy Kreme concept was a fad kind of thing. It was an exciting experience and they were hot and all that kind of stuff. But they were infrequent visits," he says.

"But when you could find it at every Petrocan store, you start thinking, 'Well, you know, the magic's gone out of it. And can it really be that hot doughnut that they keep telling us about if it's been sitting in a Petrocan station for three days?' "

It's possible, too, that Krispy Kreme has flopped in Canada because its franchisees didn't appreciate how unshakeable the Tim Hortons brand was.

"I always ask my classes, without prompting, 'Name three products that define Canada to you,' " Prof. Middleton says. "Some of the time you'll get Molson Canadian; some of the time, you won't. Some of the time, you'll get Canadian Tire; some of the time, you won't. Some of the time, you'll get one of the banks; some of the time, you won't.

"All of the time, you'll get Tim Hortons."

Derek DeCloet writes the Vox column for The Globe and Mail's Report on Business.

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