BIG BITE

Plain, glazed or dipped; twisted or flat -- doughnuts are selling hot in the in-store bakery again, and retailers are at the front of the line. The question they've had to ask themselves is: How best to order -- scratch or outsource?Retailers know there's plenty of profit potential in a well-run program. Consumers spent nearly $301.5 million on doughnuts and crullers in 2000, according to the ACNielsen

Plain, glazed or dipped; twisted or flat -- doughnuts are selling hot in the in-store bakery again, and retailers are at the front of the line. The question they've had to ask themselves is: How best to order -- scratch or outsource?

Retailers know there's plenty of profit potential in a well-run program. Consumers spent nearly $301.5 million on doughnuts and crullers in 2000, according to the ACNielsen Homescan Fresh Foods Index 2000. Close to 40% of households purchased random-weight doughnuts at least once during the year.

For some operators, sourcing from outside purveyors makes sense because it fills the case without requiring a great deal of skilled labor, retailers told SN. Under this plan, co-branding agreements are designed to benefit both the retailer and the vendor by leveraging the equity of both company names.

When Krispy Kreme opened an outlet in La Habra, Calif., Jack Brown noticed consumers were lined up for blocks. Brown, president, chairman and chief executive officer of nearby Stater Bros., soon contacted Krispy Kreme's southern California franchise holder to talk about outsourcing.

"We hit it off really well," said Brown. "We didn't try to dominate them, or force them into anything they did not feel comfortable with."

Krispy Kreme officials selected three of Stater Bros.' newer, high-volume stores for a trial run and, in February, became the first supermarkets in southern California to sell the brand-name doughnuts, Brown said. Twenty-eight more stores are now in the process of rolling out the program. Delivered daily from Krispy Kreme's regional production facilities, the doughnuts are sold in self-serve cases, where consumers can select from among several varieties and box up a dozen of their own choosing. They can also buy them individually, or pick up a prepackaged dozen of Krispy Kreme's signature glazed doughnuts.

On the East Coast, Dunkin' Donuts reached a similar agreement with Stop & Shop stores, Quincy, Mass. In February, the doughnut chain announced plans to roll out full-service Dunkin' Donuts stores in the bakeries of 70 Stop & Shops in Massachusetts, Connecticut and Rhode Island. The rollout follows a successful test at three stores the year before. Based in Randolph, Mass., Dunkin' Donuts is well-known in the region. The company's brand name and reputation were important considerations for Stop & Shop, officials told SN.

"This is a marriage of two great brands," said Marc Smith, the Ahold-owned retailer's president and CEO. "We are continuously exploring opportunities that offer our customers additional services and conveniences."

Convenience includes making the products available when they're most in demand. At Stater Bros., stores that sell Krispy Kreme doughnuts open at 6 a.m., one hour earlier than normal. And in those units, sales are exceeding projections, Brown said.

Krispy Kreme "set the [projected] volume level they'd like to see per store, per day," he said. "We did five times the level per day, per store."

The 155-store independent continues to sell its own doughnuts, though sales of Krispy Kremes are considerably stronger, Brown said. The idea here was not to set up competitive situations, nor to replace existing lines. Rather, the decision to sell Krispy Kreme products is consistent with Stater Bros.' goal to highlight lots of national-brand products. In fact, the proliferation of national brands sets the company apart from competitors, Brown said.

"We thought it would be great to put another national brand in our stores, and restate our commitment to national brands," he said. "We feature more brand names than our competition."

Co-branding with a food-service concept is a relatively new phenomenon in the retail setting, and requires some study because there are pitfalls, industry sources said. For example, the outside vendor first needs to provide a product that satisfies the retailer's specifications.

"The challenge [in the ISB] has been how to deliver on consumer expectations of taste and freshness," said Ken Robb, a principal in Technomic Inc., the Chicago-based food-service consulting and research firm. "Building equity with a partner is one way; creating your own equity is the other option."

And while an outside vendor can provide turnkey brand equity for the retailer, the deal may not include market exclusivity, he warned, noting there are freestanding Dunkin' Donut units in the same area as the Stop & Shop supermarkets carrying the brand.

Additionally, a retailer can become captive to the vendor, and there can be a divergence of business strategy prior to meeting the common goal -- a potentially sticky business with legal ramifications.

Thorough research of co-branding partners and knowledge of the retailer's customer base are usually enough to thwart potential difficulties, analysts said. And such ventures are tailor-made for the in-store bakery, "one of the key elements retailers can use to build equity, and one of the most important categories retailers can use to differentiate themselves from the other players out there," said Robb.

Some supermarkets still prefer going solo on such ventures, even if it means higher labor and product costs. These operators have successful doughnut programs that don't depend on a big brand name.

Fresh, store-made doughnuts are a signature product for the 15-store supermarket chain operated by Jerry's Enterprises, Edina, Minn. Certified master baker Darrell Mickschl sees customers at the bakery he manages at Cub Foods in Woodbury, Minn., picking up freshly made apple fritters, longjohns, twists and other varieties starting as early as 4:30 in the morning. Cub is one of the stores operating under the Jerry's banner.

Bakery employees at the 75,000-square-foot store cut 1,400 doughnuts for each of the three busiest days of the week -- Fridays, Saturdays and Sundays. "We'll sell most of them," Mickschl said. He added that the items make money, even though doughnut making takes up 10 to 12 manhours per day at his store.

Made from a mix, doughnuts represent a major portion of morning business for the store bakeries. They carry about two dozen varieties, and glazed doughnuts are by far the top sellers, Mickschl said.

Nevertheless, he is keeping an eye on Krispy Kreme, which intends to open freestanding stores in the Twin Cities this year. Mickschl said he understands the advantages of outsourcing.

"You have no labor. That's the cat's meow in the store manager's eyes," he said.