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A Hole in Their Dreams

TIMES STAFF WRITER

The doughnut business, once a well-traveled route to the American dream, has become a dead-end for many immigrants as major doughnut and coffee chains have blanketed the country with stores, taking a bite out of the profits of countless mom-and-pop entrepreneurs.

For more than two decades, Cambodian immigrants, in particular, have made a mark in the doughnut business, which requires few English-language and technical skills. Drawing on the money and support of family and friends who paved the way, many ascended to the middle class by cultivating this particular retailing niche in their adopted homeland, just as thousands of Vietnamese newcomers gravitated to the nail salon business and many Thai immigrants opened neighborhood restaurants.

Now, Cambodian immigrants, who operate an estimated 75% of California’s nearly 2,500 doughnut shops, are struggling, especially in Southern California, the epicenter of the nation’s most intense doughnut wars. They and other independent operators must grapple with a resurgent Winchell’s Donut House, which is renovating stores and has boosted its advertising budget, and the exploding popularity of Krispy Kreme Doughnuts, which has attracted a cult-like following and has grand expansion plans for the Southland.

Growing competition from bagel shops and national coffee chains such as Starbucks Corp. and Diedrich Coffee Inc. also are hurting sales.

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Amid this cutthroat environment, some independent doughnut shops have expanded their offerings to include muffins, croissants and premium coffee drinks. Others have laid off staff, slashed expenses and, in some cases, closed their doors.

In a reflection of the difficulties faced by mom-and-pop businesses, the number of U.S. doughnut shops dropped to 10,470 in 2001 from 10,646 the year before, a 1.7% dip, according to NPDFoodservice, a research firm in Port Washington, N.Y.

That decline comes as the $3.5-billion doughnut market is posting sales growth in the high single digits as consumers increasingly indulge in Krispy Kreme Doughnuts Inc.'s glazed doughnuts and other treats sold by major chains, said Technomic Inc., a Chicago restaurant research and consulting firm.

Thousands of independent doughnut shops across the United States that inhabit aging stores in poor locations and that are saddled with tiny marketing budgets “are going out of style,” said Hal Sieling, a Carlsbad, Calif.-based restaurant consultant. “Their days could be numbered.”

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Nobody knows that better than Ning Yen, who supplies 1,600 doughnut shops in Southern California, the nation’s most crowded market. Just a few years ago, Cambodians and other immigrants called on him for advice on how to operate and get financing for doughnut shops. The “godfather” of Cambodian doughnut makers would freely dispense words of wisdom to fledgling entrepreneurs, who in turn would buy sugar, dough and icing from his company, B&H; Distributors.

His telephone isn’t ringing as much now, except for queries from financially strapped customers who are seeking more time to pay him.

With immigrants’ children heading to college and pursuing professional careers, Yen worries that nobody will be left to run the doughnut shops when their parents retire in a few years. The independent shops, under increasing pressure from the chains, could go the way of scores of small businesses that have disappeared in the growing wake of Wal-Mart Stores Inc. and other retail-chain behemoths.

Krispy Kreme Changed the Doughnut Market

Sales at Yen’s La Mirada company have fallen 20% over the last three years to $12 million in 2001. This year, he laid off five of B&H;'s 40 workers, the first layoffs in the firm’s history. Business has been so sluggish that he recently sublet a 30,000-square-foot space, at a small loss, to a salvage company.

“I’m waiting for better days,” said Yen, flashing a weary smile, amid the whir of forklifts at his warehouse. “I hope they will come.”

Yen, like many of the Cambodian immigrants he has mentored, has experienced far worse times. The 46-year-old doughnut mogul lived on a 20-acre farm with his parents and seven siblings until the Khmer Rouge seized their land in 1975. Under that harsh regime, Yen spent the next 4 1/2 years harvesting rice and clearing jungles, sometimes subsisting on snakes and rats he caught in the fields.

In 1979, Yen escaped from Cambodia and made his way to the United States, where he crammed into a three-room apartment with 11 family members. Within six months, he had landed a job as a Winchell’s doughnut baker in Santa Ana, a career step taken by thousands of Cambodian immigrants as the first rung on the ladder to middle-class success.

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Yen worked long hours and saved almost everything he earned. In 1984, he struck out on his own, buying Mag’s Donut Bakery in Irvine, with a $20,000 loan from family and friends. By using higher-quality ingredients and scouring equipment until it sparkled, he made tastier doughnuts. Soon, lines snaked out the doors.

His success led him to join B&H; in 1986, and he became president in 1994. By then, he also owned a mini-chain of seven doughnut shops. Business flourished.

Then Krispy Kreme entered the Southern California market and Winchell’s took steps to reverse its slide. That, coupled with the expansion of coffee and bagel chains, darkened the outlook for Yen and his mostly Cambodian immigrant customers.

Krispy Kreme, which makes fresh doughnuts throughout the day and flashes “Hot Doughnuts Now” signs in stores when they’re ready, opened its first Southland store in January 1999 in La Habra. In its first year, the shop had 2.5million visitors, more people than attended Anaheim Angels’ baseball games that season, said Richard Reinis, chief executive of Great Circle Family Foods, the exclusive Krispy Kreme franchisee in Southern California. There now are 18 Krispy Kremes dotting the region, with plans to add at least 60 in the next 4 1/2 years.

The typical Krispy Kreme shop in Southern California generates sales of more than $3 million a year, according to company regulatory filings. That’s more than 10 times the revenue of the average mom-and-pop store, analysts said.

And Winston-Salem, N.C.-based Krispy Kreme, which last year had systemwide revenue of more than $622 million, could be getting stronger. The company expects to roll out flavored coffees and espresso at all locations by the end of the year, which could boost same-store sales, said Andrew Wolf, an analyst with BB&T; Capital Markets. The 217-unit chain also recently introduced smaller stores that use a new doughnut machine, a development expected to significantly fuel expansion.

“Krispy Kreme’s sort of like In-N-Out Burger,” Villa Park-based restaurant consultant Bob Sandelman said. “It has loyal customers who will go out of their way to find it.”

Winchell’s, the Southland’s biggest doughnut maker with 95 of its 202 stores here, also is on the move. The Santa Ana-based firm now features freshly made doughnuts throughout the morning. Its Winchell’s Dozen--14 doughnuts sold for $5.99--has struck a chord with customers, Chief Executive Bob Zanolli said. The closely held chain, which has begun renovating stores with brighter paint and more contemporary signs, posted a 5% rise in same-store sales in 2001, its first increase in seven years. It also has benefited from Krispy Kreme’s popularity and the resurgence of comfort foods, experts said.

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“We fell off the map for a few years, but we’re back,” Zanolli said.

And now Dunkin’ Donuts is coming to California. The nation’s biggest doughnut store chain, which last year registered U.S. sales of $2.5 billion, plans to open its first store in the state by the end of the summer, spokeswoman Cindy Gordon said. Because of the Golden State’s large population of doughnut-and-coffee aficionados, Dunkin’ “wants to storm California,” she said.

Dunkin’, a subsidiary of Allied Domecq, the British owner of the Baskin Robbins and Togo’s chains, has 3,900 stores in the U.S.

Karen Jung, like other independent doughnut makers, said the doughnut business has lost some of its glaze in recent years. The 50-year-old owner of Big Dan’s Donuts in Irvine said her annual sales have stalled at about $216,000 in the last five years, down about 10% since the mid-1990s. With five Starbucks, one Diedrich Coffee shop, two bagel stores and five doughnut outlets within a two-mile radius of Big Dan’s, the South Korean immigrant said she has been unable to raise prices since 1997, even as rent, utility and electricity costs have increased. To compound the problem, a nearby supermarket has begun selling store-baked doughnuts.

Despite the pressures, Jung said she has enjoyed her 22 years in the business, especially the smiles on children’s faces as she hands them fluffy doughnuts. She earns enough to afford a small condominium and to help her daughter and son, both in college, with their car payments. However, she is considering retiring in two years to move back to South Korea to do missionary work.

“There’s too much competition,” Jung said.

It’s not just immigrant doughnut makers experiencing tougher times.

In 1964, Stan Berman opened Stan’s Donuts in Westwood Village, a tiny 475-square-foot shop that soon became a destination for Hollywood royalty. Ali McGraw and Steve McQueen used to drop by to people-watch. Goldie Hawn was a regular. Elizabeth Taylor showed up one night.

Stars weren’t the only people willing to brave the Westwood traffic and crowds to gobble up Stan’s peanut butter-filled doughnuts and other unique treats.

With its following growing through word-of-mouth, the doughnut shop posted annual sales of more than $450,000 by the late 1980s, allowing Berman to buy a home in Encino and to travel the world.

Doughnut Business Has ‘Gotten a Lot Harder’

But as Westwood’s popularity declined because of competition from new malls in Century City and Santa Monica, business at Stan’s fell too. The opening nearby of several coffee shops, cookie stores and bakeries exacerbated the situation.

To compensate for declining sales, Berman, now 72, began selling doughnuts at wholesale to nearby UCLA.

Today, Stan’s takes in about $360,000 a year, 20% off its peak. Berman, who works the morning shift seven days a week, said he makes a nice living but has cut back on clothing purchases and international travel. He hasn’t bought a new car since 1986.

If Krispy Kreme opens a shop in the area, Berman said, it could cause him some headaches.

He said he has no regrets. “My house has been built by doughnuts. My travels have been funded by doughnuts. And a lot of my friendships have been made at the doughnut shop. But the business has gotten a lot harder.”


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