Winchell’s Looks to Double Its Recipe for Growth

As Winchell’s Donut House heads toward its 50th anniversary on Oct. 8, the Santa Ana-based chain is split between remembering the past and trying to reinvent itself.

Many of the chain’s 250 locations are almost as old as the company, a cardinal sin in an industry where fast-food customers expect the wallpaper and interior decoration to change on a regular basis.

“Our challenge is to rejuvenate the brand,” said Lou Franson, a veteran fast-food industry executive who last year joined Winchell’s as the company’s first brand manager.

“And that’s not just at the marketing level,” he added. “Most of Winchell’s stores are 35 to 40 years old, and they need new lighting, seating, signage . . . a completely new interior and exterior look.”

Winchell’s expansion plan calls for 500 locations nationwide by 2000, a heady schedule for a chain that has 250 stores in 13 states, including California.

The chain also hopes to lure new customers with a premium coffee that will be priced below what market leaders such as Starbucks Corp. charge. And it’s working to let more potential customers know that it offers bagels, fritters, muffins and croissants along with its better-known doughnuts.

Two new radio ads playing in California, Denver and Oklahoma City take a tongue-in-cheek shot at the increasingly complex and costly world of coffee drinks.

To lure newcomers, Winchell’s is offering 50-cent refills for customers who lug in mugs from chains such as 7-Eleven convenience stores as well as higher-priced coffee shops such as Irvine-based Diedrich Coffee Inc.

“Winchell’s can’t just go after Starbucks, because hip people probably aren’t going to switch,” said Carlsbad-based restaurant consultant Hal Seiling. “But there are probably lots of people who . . . have made a conscious decision not to spend $4 or whatever it costs now for a latte.”

Coffee is a huge business. The Long Beach-based Specialty Coffee Assn. of America estimates the worldwide coffee trade at $14 billion. Flavorful Arabica beans such as those used in Winchell’s new Legendary Gold Coffee line account for $6.7 billion of that total.

But with just $70 million in estimated revenue, privately held Winchell’s is just a drop in the percolator compared with giants such as Dunkin’ Donuts and Starbucks, which expects to top $1 billion in sales this year.

And there are signs that trouble is brewing in latte land. Starbucks’ shares tumbled 14% in July when the company said its quarterly earnings would be lower than analysts expected.

Aware that it is battling marketing giants with deep pockets, Winchell’s is testing co-branding by opening small units inside Circle K convenience stores and smaller fast-food chains such as Blimpie International Inc., a submarine sandwich chain that has little in the way of breakfast and snack food on its menus. And it’s scouting locations on college campuses and in airports.

As the chain approaches its 50th anniversary, Winchell’s marketing department is trying to hustle media interest by assembling what’s billed as the world’s largest apple fritter. But Franson said the chain’s post-celebration success will depend upon getting the basics right.

“For instance, if you don’t have good water for the new coffee line, you’re behind the eight ball to begin with,” Franson said. “That means replacing machines, making sure filters work and getting rid of the Styrofoam cups.”

He added, “We have to concentrate on our core business, on what we do best.”

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While the leading coffee-shop chains saw their revenue grow in 1997 over 1996, only half of them, including Winchell’s, are in expansion mode.

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Company Revenue % increase Locations % increase Dunkin’ Donuts $1.8 billion 13.3% 3,436 5.8% Starbucks 859 million 28.0 1,327 35.5 Bruegger’s Bagel Bakery 280 million 23.9 423 0.0 Cinnabon 132 million 0.8 350 -3.8 Winchell’s 70 million 5.3 250 0.0 Diedrich 23 million 16.0 36 -22.0

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Source: Companies, Technomic estimates