In Era of Fitness, Doughnuts Still Yield Fat Profits : Donut Inn Keeps Eye on Humanity’s Sweet Tooth, Not on Appetite for Holistic Health
Along the boulevards of the San Fernando Valley and the rest of Los Angeles, it’s hard to go very far without passing a doughnut shop.
An obvious question arises: How do all those sellers of sugary, gooey stuff stay rolling in dough in Southern California, that Mecca of health-and-fitness consciousness?
No problem, says Arthur S. Pfefferman, chairman and president of Woodland Hills-based Donut Inn, a 20-store franchise chain. “Everyone always eats doughnuts.”
Although no statistics are available on nationwide doughnut sales--they are not separated out from other snack foods--Winchell’s Donut Houses and Dunkin’ Donuts, the two biggest companies in the business, confirm Pfefferman’s appraisal. Both say they are growing rapidly.
And there’s money to be made in smaller doughnut businesses as well, which constitute the majority.
Donut Inn and its franchises had combined sales during the fiscal year ended Oct. 31 of $4.5 million, up 25% from just one year ago. During that period, three Donut Inn stores have opened for business.
“The business is recession-proof,” said Pfefferman, 39, who started Donut Inn in 1975 after a dispute with his cousin’s doughnut chain led him to turn his seven franchises into his own company.
Hyperbole aside, the doughnut business can claim very loyal customers. Donut Inn says that more than half the people who buy its products patronize one of its stores six or more times a month.
Winchell’s, with 750 outlets--307 of them in Los Angeles--claims an even better rate of repeat business. Tom Anderson, senior vice president for marketing at the La Mirada-based firm, said 42% of Winchell’s customers buy doughnuts more than four times a week.
Donut Inn is owned by Pfefferman and his father, David, 68, who serves as vice chairman, and uses the additional title of “Wizard of Ahhhs” for developing most new recipes. The father’s picture appears on every Donut Inn box. The son is the majority shareholder.
Most Are Franchises
Two of the stores are owned by the company. The rest are franchises. The initial franchise fee is $20,000, and total estimated costs for opening an outlet range from $70,000 to $105,000 extra.
Donut Inn collects 5 1/2% of gross sales as royalties, and 3% of sales go to an advertising fund, which pays for newspaper and radio promotions. In return, franchisees generally earn profits between 20% and 30% of gross revenue, according to the company.
Appreciation Voiced
“The business has been good to us,” said Va Tat Chau, 46, who came to the United States 11 years ago from Cambodia and now owns five franchises--in Canoga Park, Hawthorne, Palmdale, Simi Valley and Woodland Hills.
Of the other 15 franchises, nine are in the Valley area, and the others are scattered, from San Luis Obispo to Costa Mesa.
Chau said he doesn’t particularly like doughnuts, preferring to satisfy his sweet tooth with fresh fruit. He said he finds his stores’ products too filling. A 100-gram chocolate-covered custard-filled pastry has about 240 calories, and is nearly 14% fat in content, according to a brochure published by the U.S. Department of Agriculture.
But, Chau says of the business, “It’s much better than selling hamburgers.”
In fact, profits from selling doughnuts are generally higher than from hamburgers because ingredients are relatively inexpensive. Doughnuts are mostly flour and sugar. The main extravagance at Donut Inn is to use vegetable shortening instead of lard.
But hamburger franchises tend to have much higher gross sales--$1 million per year for an average Burger King, for instance. For one thing, although most doughnuts are sold in the morning, when people on the way to work pick up something to go with their coffee, burgers are sold over a longer period of the day.
On the other hand, points out Richard Martin, West Coast editor for Nation’s Restaurant News, labor costs for doughnut shops stay relatively low.
“A Doughnut Keeps”
“A doughnut keeps,” Martin said. “You have a guy make them at 4 a.m., maybe one or two other times, and that’s it. You have a counter person all day. Hamburgers require more sophisticated production cycles.”
Finding varieties that will be popular, and not making too few or too many can be tricky. Peanut-Butter Logs, Maple Bars and Blueberry Clusters are among Donut Inn’s big sellers.
Even giant Winchell’s doesn’t quite have it down to a science, throwing out dozens of extra doughnuts every eight hours. “We eat our losses, so to speak,” Anderson said.
Donut Inn prepares most of its products between 10 p.m. and 8 a.m., serving 70% of them between 6 a.m. and 10 a.m. Art Pfefferman said he has doughnuts destroyed after 12 hours, although there is no difference in taste between a 12-hour-old doughnut and a one-hour-old one.
He said he learned such things by baking and selling doughnuts himself after he bought a franchise in 1967 from California Donuts, based in Commerce and run by his cousin, Ronald Nissenson.
Art Pfefferman had completed a year of college in Buffalo, N.Y., where he grew up, before moving to California with his family. The Pfeffermans wanted warmer weather and sought to join the relatives’ doughnut business. David Pfefferman, who had been a chef in the Army, also bought a franchise.
By 1975, in the midst of a series of arguments and lawsuits involving suppliers, rent and leaky roofs, the Pfeffermans claimed their independence from California Donuts, incorporating Donut Inn and switching the names of the franchises.
Prominent Locally
Art Pfefferman, who contributes regularly to political candidates, gained local prominence in October, 1985, when he won the Fernando Award, given annually to a Valley individual for successful enterprise and community involvement. The group that awards the honor includes the 23 Chambers of Commerce in the Valley area.
“In his young life, he traveled the difficult road from determination to dedication to distinction to donuts,” reads a biographical account from the ceremony program, which tells of his first jobs as an adolescent, checking coats at a synagogue and caddying at a golf course.
Art Pfefferman also was in the spotlight earlier this year, when he testified before a Los Angeles County grand jury on his involvement in an alleged plot to offer state Sen. Ed Davis $100,000 to lure him out of the Republican U.S. Senate primary.
According to grand jury testimony, made public by the district attorney’s office, he was a regular contributor to Rep. Bobbi Fiedler’s campaigns and initiated contact with the state senator’s camp. Fiedler opposed Davis in the race, which was won by Rep. Ed Zschau.
Fiedler, who gave up her congressional seat for the Senate race, was indicted, but the charges were eventually dropped. Art Pfefferman was never charged in the case.
The Pfeffermans’ chain, in concessions to the health fad, offers honey, wheat and bran muffins. But that doesn’t mean Art Pfefferman thinks those customers shouldn’t buy the traditional doughnuts.
“They’re really healthy,” the chunky, bearded entrepreneur said. “We use wholesome, excellent ingredients.”
Martin of Nation’s Restaurant News suggests that the doughnut shops don’t need to worry about health fads.
“People who never jogged in their lives are getting around town in running suits and shoes, and you’ve got to believe some of them are eating doughnuts,” he said.
