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Hole-Hearted

The country’s appetite for coffee and donuts is hearty as ever. Americans’ love for their morning coffee and donut shows no sign of waning. In Technomic’s June report on the 500 largest restaurant chains, sales in the donut business were up 9.2% in 2004. Sales in the “beverage” restaurant category were up even more—over 10%—and most in that category are coffee shops. Part of the boost in donut sales, Technomic VP Joe Pawlak points out, may have come from the decline of the low-carb fad. But coffee and donut restaurants also offer “simple pleasures that are relatively inexpensive,” he adds.

Technomic projects that growth in the donut business will moderate in 2005, to about 5%, but that the beverage category will again be up 10%.

Much of that growth is driven by Starbucks and Dunkin’ Donuts. But Pawlak cautions that these two and other specialty chains will feel increased pressure as McDonald’s and Burger King, already big breakfast players, add premium coffees to their menu.

Starbucks is up to more than 6,750 U.S. locations (4,593 of them company operated), with another 2,730 overseas. The Seattle company expects to open 1,500 stores in its 2005 fiscal year, with 1,075 in the U.S. This spring, the coffee giant predicted its comparable-store sales will remain “at or above the high end” of its projected 3-7% comp-store increases for the rest of the fiscal year. This spring, the coffee giant predicted its comparable-store sales will remain “at or above the high end” of its projected 3-7% comp-store increases for the rest of the fiscal year. locations (4,593 of them company operated), with another 2,730 overseas. The company expects to open 1,500 stores in its 2005 fiscal year, with 1,075 in the This spring, the coffee giant predicted its comparable-store sales will remain “at or above the high end” of its projected 3-7% comp-store increases for the rest of the fiscal year.

Dunkin’ Donuts, which does about half of its sales in coffee, is up to 6,100 units worldwide—4,400 of those spread among 30 U.S. states. At press time, its parent company, Allied Domecq, was scheduled to be acquired by Pernod Ricard, and it is widely assumed that the resulting spirits powerhouse will sell Dunkin’ and its sister brands. states. At press time, its parent company, Allied Domecq, was scheduled to be acquired by Pernod Ricard, and it is widely assumed that the resulting spirits powerhouse will sell Dunkin’ and its sister brands.

Another potentially big player is the Tim Hortons chain, owned by Wendy’s. There are nearly 2,500 Tim Hortons units in Canada, and another 260 in the U.S. Earlier this year, Wendy’s said it would open 50 Hortons in the U.S. and 165-180 in Canada in 2005, projecting comp-store-sales increases at 8-9%. in 2005, projecting comp-store-sales increases at 8-9%.

Krispy Kreme stumbled this year with accounting problems, clouding its growth picture for the near future.

While Starbucks and Dunkin’ Donuts are getting bigger, the category still has room for regional players. Often these companies develop a location niche—shopping malls or airports, for example. They may focus on regional flavors, or, like Winchell’s, draw on a half-century’s worth of customer loyalty.

Yet the privately-held Honey Dew continues to grow, increasing its store count about 10% each year, and ringing up nearly $100 million from its 150 stores.

Honey Dew competes by playing up its New England identity. Advertising carries the tag line “Enjoy the local flavor,” and that includes seasonal offerings like New England blueberries—found in blueberry-cinnamon iced coffee and a blueberry cobbler-filled pretzel, the latest  flavor in the line of filled pretzels.

“Competition is good for everyone. It increases awareness of the product,” says director of marketing Amy Levenson. Honey Dew’s stores are all franchised, typically operated by people who live in the community and who develop personal relationships with their customers.

Currently, 65% of the stores are in Massachusetts, 25% in Rhode Island, and 10% in New Hampshire, while the company recently opened in Connecticut. “We plan to saturate the New England market,” Levenson says.

Honey Dew recently completed a new store design and will introduce it as units are remodeled. “The design features warmer colors such as yellow and red, more wood, and new lighting,” she says. “It’s a more welcoming feel.”

The dozen stores scheduled to open this year will have the new look, and over 90 Honey Dews are slated to be remodeled in the next three years.

Along with the new look is a new logo that is larger and more prominent, so drivers can easily spot stores from the highway. “We do a heavy drive-through business, and have designed new menu boards outside and inside,” she says.

About two-thirds of the Honey Dew stores have seating; the other locations are inside convenience stores and gas stations. Honey Dew has a partnership with McDonald’s for locations in rest stops along interstate highways in Massachusetts, and there are a couple of locations within Shaw’s supermarkets., and there are a couple of locations within Shaw’s supermarkets.

The “local flavor” advertising and marketing campaign was launched earlier this year, Levenson notes. And while the chain sells iced coffees, Honey Dew has not yet ventured into lattes and the like. “We’re everybody’s everyday cup of coffee,” says Levenson.

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