The Washington Post, Wonkblog

People tried to eat healthier. Instead, doughnut sales went up.

A customer buys Krispy Kreme doughnuts at a Walmart to Go convenience store in Bentonville, Ark. (Rick Wilking/Reuters)

A customer buys Krispy Kreme doughnuts at a Walmart to Go convenience store in Bentonville, Ark. (Rick Wilking/Reuters)

It’s been a tough time for the humble doughnut. Breakfast sales are way down at some chains, and consumers are generally moving toward healthier, more natural alternatives for their morning meal.

But it turns out humans can’t resist a sugary hunk of fried dough — they just want it later in the day.

Doughnut sales from quick service restaurants, like Krispy Kreme and Dunkin’ Donuts, are up for the third straight year, after several years in decline, according to data from NDP CREST, a New York-based market research firm.

And on Wednesday, doughnut giant Krispy Kreme reported a 9 percent increase in earnings in its first-quarter earnings report, beating its own internal estimates. Revenue was up more than 37 percent from the first quarter a year ago.

Kripsy Kreme’s shares jumped 12 percent Thursday morning, erasing all of its losses for the year.

While the rest of the food industry is racing to appear more healthy — Subway, McDonald’s, Taco Bell and Pizza Hut have all said they would eliminate man-made additives in some of their popular food — doughnut makers have found renewed success with more decadent flavors. One shop in St. Louis (aptly named “Strange Donuts”) serves one covered in caviar.

Of course, Americans’ relationship with doughnuts has changed, industry observers say, primarily because doughnuts are no longer seen as a breakfast food.

“This is not a breakfast business,” said Will Slabaugh, managing director at financial services firm Stephens. “This is much more of treat business than a breakfast business.”

Even more, they’re cheap treats. Taking your kids for a doughnut on a Saturday morning or bringing in a dozen for work pals won’t break the bank. So no matter what goes on in the economy, as long as you have a decent (read: delicious) doughnut, people tend to buy them.

But the generic “treat” isn’t enough anymore to win in today’s doughnut shop. Try coating a doughnut in maple syrup and bacon. Astro Doughnuts and Fried Chicken in the District has grown famous for its fried chicken, you guessed it, inside a doughnut.

Dunkin’ Donuts, which includes Dunkin’ Donuts and Baskin-Robbins, has transitioned its profits away from doughnuts themselves. It makes 57 percent of its profits off coffee sales and another sizable chunk off breakfast sandwiches.

Krispy Kreme, which makes 88 percent of its money off doughnuts, this quarter launched a line of three frozen lattes because they help profit margins and ease the company into more regular coffee sales. If you think margins on doughnuts are good, you should see them on coffee grounds and K cups. 

For Krispy Kreme, the initial attempts to change with the times weren’t pretty. Around the time the recession hit, it disastrously rolled out a whole wheat doughnut, one example of management dysfunction at the worst possible time, Slabaugh said.

That hurt the business — its stocks were trading at $1.15 a share (even less than the cost of one original glazed doughnut plus tax in the District) in 2009.

But that hasn’t kept sweet-eaters away. Even though Wall Street investors may have spurned Krispy Kreme, it still had a loyal clientele.

“You had some company specific issues, but not sales issues; not brand issues,” Slabaugh said. “The customer base didn’t go away even though they were going through some internal turmoil.”

The company used discounts to boost sales numbers even more and woo investors back. Last quarter, the company opened eight new stores and bought back 2.2 million shares of stock in the last fiscal year, signs of regrowth and stability, said Slagbaugh, whose favorite doughnut is a chocolate frosted.

And the potential, he said, for Krispy Kreme and doughnut shops in general to keep growing is promising.

“Doughnuts have been around for a long time and it’s interesting that they’ve been reinvented and lifted into a higher status,” said Astro Doughnuts co-owner Elliot Spaisman.

Now, the company is getting ready to roll back those promotions, executives said on an earnings conference call Wednesday.

“We’re going to continue on scaling back the number the depth of our discounts,” said Tony Thompson, the company’s president and chief executive.

Even in the doughnut industry, there’s no free lunch — not even a doughnut-chicken sandwich.

http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/11/people-tried-to-eat-healthier-instead-doughnut-sales-went-up/

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