Top 50 foodservice bakeries adjust to consumer trends

Dunkin' Donuts' new beverages, such as iced lattes, account for up to 10% of store sales, double the target percentage.

What a difference a year makes. The once high-flying Krispy Kreme is now struggling with declining sales and falling stock prices. Other foodservice bakery chains, such as Bess Eaton and Winchell's, have changed ownership. Among the consistent performers remains the bakery cafè segment, with its unit leader, Panera Bread, continuing to grow at a substantial rate. This year also has seen the full effects of the low-carb craze. While the diet's popularity has passed for the most part, some foodservice bakery chains responded with new products and expanded menus.

Some of the biggest shifts among the Top 50 largest operators occured among the donut chains with several acquisitions. Tim Hortons bought Bess Eaton. Yum Yum is buying Winchell's. LaMars sold to its investors.

In April, Tim Hortons, the Canadian subsidiary of Wendy's International, Dublin, Ohio, bought 42 of Bess Eaton Coffee Shops & Bakery's 48 units located in New England for $41.6 million. The 184-unit Tim Hortons chain previously only had United States, all located in Maine. The acquired units in Rhode Island, Massachusetts and Connecticut bring the total number of Tim Hortons U.S. units up to 227. By July, all units had been converted to Tim Hortons' menu of baked-on-premise bakery products, premium blend coffee and iced coffee.

Yum Yum Donut Shops, City of Industry, Calif., announced in August that is was purchasing Santa Ana, Calif.-based Winchell's Donut House. The 75-unit Yum Yum will triple its size when it adds Winchell's 180 units. The purchase amount was not disclosed, and the deal is expected to close next month.

LaMar's Donuts, Denver, was purchased in April by two investors after a court-ordered bankruptcy sale. In the last year, LaMar's units declined from 40 to 23.

Krispy's profits plunge

Perhaps the biggest news in the donut segment is Krispy Kreme's unprecedented profit decline in the first half of this year. The Winston-Salem, N.C.-based company blamed much of the decline on consumers' low carbohydrate diets and the closure of its Montana Mills bakery cafès. In July, Krispy Kreme announced that the Securities and Exchange Commission was conducting an informal probe into the company's accounting practices. The investigation involved the company's franchise reacquisitions and its reduction in earnings guidance.

John Tate, the company's chief operating officer, announced in mid-August that he was leaving the company. Scott Livengood, Krispy's chief executive officer, took over the additional responsibility of chief operating officer. Krispy Kreme also slashed the number of new units it plans to open in the next year from 100 down to 75. However, the company continues to expand into new markets, including its first unit in Montana.

To boost sales, bakery cafè chains have found ways to bring in more customers throughout the day. Many chains, including Panera Bread, Richmond Heights, Mo. and Paradise Bakery & Cafè, Aspen, Colo., have begun offering Wi-Fi, or wireless Internet, for customers to use their laptops while in the cafès. In August, Panera announced that 325 of its units in 27 states offered Wi-Fi for customers. By the end of this year, the company plans to grow that number to 375 with a goal of 500 by next summer.

"Offering free Wi-Fi Internet access is keeping our customers in our stores longer, primarily during off-peak hours. And it brings them back more often, enhancing their experience of Panera Bread's quick casual environment," said Ron Shaich, chairman and chief executive officer.

In other Panera news, the company-is expanding its reach in the New York metro market. With 30 cafes already in the area, Panera is working with franchisees to open another 100 to 120 in the next three to five years, with the goal to be in all five of New York City's boroughs. Because open land is scarce and restaurant competition is stiff, this region is a challenge for a company that generally prefers to build locations from the ground up. According to Panera, its New York area locations do better financially than 90 percent of its other units, but it expects operating costs to run 40 percent higher than other units. Countrywide, Panera plans to open about 150 more units in the next year.

Growth is not limited to the Panera chain. La Madeleine Bakery, Cafe & Bistro, Dallas, is opening two more locations in Houston, its first new stores since 1999. The company also changed its name from La Madeleine French Bakery & Cafe, to La Madeleine Bakery, Cafe & Bistro to emphasize menu changes.

Corporate reorganization

Other bakery cafè chains, such as Paradise Bakery & Cafe and Chicago-based Cosi, have reorganized to remain competitive in the increasingly crowded bakery cafe segment. Paradise is focusing growth of its company-owned stores in the Aspen, Colo. area, where its corporate headquarters are based, and Phoenix. Other company-owned locations are being sold to franchisees. New franchise openings are still in the works, including plans for eight in Colorado.

The Cosi bakery cafè chain also made several management changes. It moved its base of operations from New York City to Chicago, and made several key appointments in its management team. The company also announced plans to open units in 10 Macy's locations, including cafes in Seattle, Atlanta, Miami and Memphis, Tenn. All units will be company-owned.

The bakery cafè concept has proven so strong that many other foodservice bakery chains are taking notice. Bagel bakery chains continue to broaden their menus beyond their namesake product. James Greco the new chief executive officer of Burlington, Vt.'s Bruegger's, initiated menu changes, a new store design and redirected the company's marketing to a more uniform approach for all units. The new menu includes salads, made-toorder sandwiches, wraps and soups.

In June, the company also introduced a line of hearthbaked breads. To reflect the new direction of the chain, Bruegger's also dropped bagel bakery from its name. The company plans to open 125 to 150 new units during the next three years.

Bagel chains expand offerings

New World Restaurant Group, Eatontown, N.J., parent company of Manhattan Bagel and Einstein Bros., has opened new formats for both chains. The first Manhattan Bakery Cafe opened in Fountainville, Pa. in May. "This concept represents the first step in our efforts to revitalize our franchise brands through appropriate re-imaging of menus and development of a new store prototype," said Paul Murphy, chief executive officer of New World. Manhattan Bakery Cafe's menu includes salads, soups and more than 24 freshly made hot or cold sandwiches. For sandwiches, customers can choose from several varieties of bread or 20 different flavors of bagels.

New World also introduced a new menu in May in its Einstein Bros. locations. Thirteen made-to-order sandwiches, featuring fresh-baked breads and upgraded ingredients are now on the menu. Menu additions also include soups and salads.

Branding consumer products

Another chain that may be suffering from the low-carb malaise is AFC's Cinnabon. Officials at the company recently announced the sale of the chain to Focus Brand Inc. for $30.25 million. The sale is expected to close in the fourth quarter of this year. Cinnabon also has entered into licensing agreements with several consumer brands, including Betty Crocker? and Redenbacher's? to build its brand.

As more time-pressed consumers are looking for one-stop, quick dining, many chains, such as Dunkin' Donuts, Randolph, Mass., and Bruegger's, are increasing coffee and other beverage offerings. The upgraded menus, with all the coffee-related beverages, are bringing foodservice bakeries in more direct competition with coffee chains, such as Seattlebased Starbucks. Dunkin's beverages, which on average cost 20 percent less than Starbucks' versions, now account for nearly 70 percent of overall sales.

And, Starbucks' own changes are making the coffee giant increasingly competitive with foodservice bakery operators. While the company is not baking on premise, more than onethird of its 4,338 stores are selling bakery products and sandwiches. Starbuck's will always be a coffee shop first, but its bakery products are located in some of the best retail sites in the world, according to retail real estate analysts.

Choosing profitable locations and keeping menus in tune with consumer trends are key advantages for most among the Top 50 chains. As many of the chains evolve into similar bakery-cafè-like formats, differentiating their brands will become increasingly important.