Filling a Hole In the Market.

KRISPY KREME AREA FRANCHISEES PROFIT AS DOUGHNUT CHAIN GROWS AMID OTHERWISE STALE INDUSTRY SEGMENT

WITH more than 1,600 doughnut shops, Southern California ranks as the doughnut capital of the country. So it takes a fair amount of chutzpah for an entrepreneur to embark on an aggressive campaign to open six doughnut shops a year over the course of the next four years.

But when you are marketing one of the hottest doughnuts in town, it makes the struggle that much sweeter.

"We have one of the most unique brands in the world," said Richard G. Reinis, chairman of Great Circle Family Foods LLC, the Los Angeles-based franchisee of Krispy Kreme Doughnut Corp. "We are not just another doughnut shop. We're a destination that has made eating doughnuts acceptable."

Reinis, along with his son-in-law Roger Glickman, helped bring the Southern delicacy to Southern California more than two years ago. Their first franchise store opened in La Habra in January 1999, and sold more than 12 million doughnuts in its first nine months.

Glickman's love affair with Krispy Kreme began in 1996 on a business trip to North Carolina. The former real estate agent was asked by a business associate to meet him at Krispy Kreme.

He ordered a couple of original glazed doughnuts, then a couple more and had devoured a dozen by the end of the day. "It was like eating cotton candy, they just melted in your mouth," said Glickman, president of Great Circle Family Foods.

Glickman spent the next two years convincing the Winston Salem, N.C.-based company to sell him the exclusive franchise rights for Southern California. Reinis declined to disclose the terms of his company's franchise deal, other than to point out that the parent company requires each of its franchisees to build a minimum of 10 stores in their licensed market.

Substantial investment

As for the parent, Krispy Kreme has become a Wall Street darling, with its stock last week bouncing between $65 and $70 per share, more than double its split-adjusted price of $30 a year ago.

The minimum net worth requirement for a franchisee is $5 million, or $750,000 per store to be developed, whichever is greater. For instance, a 15-store market would require a minimum net worth of $11.25 million.

"We plan on building 42 Krispy Kreme stores by 2005," said Reinis, whose territory runs from Bakersfield south to the Mexican border. "We are building an infrastructure, including an operations and management team that we can eventually leverage into other franchise opportunities."

Besides outlets in Riverside, La Habra and Huntington Park, Great Circle Family Foods operates stores in Van Nuys, Orange, Ontario, Long Beach, Gardena, Los Angeles, Bakersfield, San Diego, City of Industry and Canoga Park.

The company plans to continue its Southern California expansion with store openings in Palmdale and Oxnard later this year.

But there will never be a Krispy Kreme store on every corner, according to Glickman. The company looks for locations with high-population density, various income levels and high traffic.

"We are not interested in being a fad," he said. "We want our company to establish deep roots in each community."

Reinis said that Great Circle doesn't have any plans to advertise the Krispy Kreme brand in Southern California.

"You won't find us advertising doughnuts on the radio, because we can get our name out through the newspapers every time we open a store, and by selling Krispy Kreme doughnuts at Dodger Stadium and other outlets," he said.

By moving into Southern California, Krispy Kreme has revived an industry that analysts said had become stale. "They are the darlings of the industry right now," agreed Janet Lowder, a restaurant industry consultant with Restaurant Management Services in Palos Verdes. "However, nothing is sacred forever in the restaurant industry."

The whole doughnut segment had been declining in sales and popularity for sometime, according to Lowder.

Volume, variety

Though Krispy Kreme sells 15 different types of doughnuts, the Original Glazed generate 70 percent of sales, said Glickman. Doughnut cravers can pay 70 cents for a single tasty treat or $5.29 for a dozen of the sugary concoctions.

If the product seems pricey, it's in part because Krispy Kreme stores cost more to construct than the typical doughnut shop or coffee shop.

Glickman said it costs about $2 million to build the typical store, which is about triple the amount needed to build the average doughnut store and well above the estimated $350,000 it costs to build a typical Coffee Bean & Tea Leaf outlet. Glickman declined to say how quickly the stores are expected to become profitable.

"Each store takes between nine months and one year to build," he said. "Our plan is to build (each) store to serve an area of 500,000 people. Once they are built, each store is also a factory that can produce north of 50,000 dozen doughnuts a day."

Spotlight

Great Circle Family Foods LLC

Year Founded: 1998

Core Business: Franchisee for Krispy Kreme Doughnut Corp.

Revenues in 1999: $12 milli

Revenues in 2000: $33 million

Revenues in 2001: $50 million (projected)

Employees in 1998: 2

Employees in 2001: 1,000

Goal: To have 42 Krispy Kreme stores operating in Southern California by 2005

Driving Force: Southern Californias' growing appetite for Krispy Kreme doughnuts