By John Kell, DOW JONES NEWSWIRES
NEW YORK (DOW JONES)--Krispy Kreme Doughnuts Inc. (KKD) is launching a marketing push Labor Day Weekend to promote the company's three new signature coffees, as the doughnut chain seeks to increase sales of the high-margin beverage.
The company, which has more than 660 outlets worldwide, began selling the new house blend, dark roast and house decaf coffees at most U.S. stores this week in an effort to focus on the beverage after sales have lagged its competition.
President and Chief Executive James H. Morgan late last month said coffee contributed roughly 4% of in-store sales, while all beverages made up 12%. For larger rival Dunkin' Brands Group Inc. (DNKN), about 60% of U.S. systemwide sales in fiscal 2010 were generated by coffee and other drinks.
Tony Brenner, an analyst at Roth Capital Partners, said Krispy Kreme's coffee sales are underwhelming for a doughnut store.
"The coffee was never merchandised, never marketed and might not have been as good as they wanted it to be," Brenner said. "It's never been pushed as part of the experience."
Dunkin' Donuts' success can be attributed to the company's legacy of focusing on both coffee and baked goods. Dunkin' Donuts also sells bagged coffee in grocery stores and last month began to sell K-Cup portion packs, which can be used in Green Mountain Coffee Roasters Inc.'s (GMCR) Keurig single-cup brewing units.
Krispy Kreme's Morgan last month conceded the high-margin beverage products "can and should be a much larger percentage of our sales mix over time," saying coffee alone should ultimately represent a double-digit percentage of sales.
And Chief Marketing Officer Dwayne Chambers told Dow Jones Newswires the company is aiming to make coffee "a part of our brand, a part of our business and part of our experience."
Chambers said Krispy Kreme worked on the blends for about a year and a half to come up with the right taste. It is important that the blends are received well, as Chambers said customer satisfaction is higher across the food industry when orders include a food item and a drink.
Roth's Brenner said no one expects Krispy Kreme to boost coffee sales to the double-digit level in the first year after the marketing push, but it is a feasible goal.
He added customers don't typically view Krispy Kreme as a coffee shop. The most popular purchase is an order of a dozen doughnuts, which is often related to an office or house party, events that aren't tied to coffee consumption.
Chambers said the company's international presence allows it to test out menu options that can be introduced to the U.S. later. He said within the next six months or so, Kripsy Kreme will have some sweet and savory menu items to test in the U.S. to try to drive traffic.
B. Riley & Co. analyst Conrad Lyon believes if Krispy Kreme doesn't see much improvement with beverage sales over the next 18 to 24 months in association with its new coffee blends, the company might move toward a well-known coffee brand to drive beverage sales. Lyon said there have been examples in the past of franchisees having success utilizing a popular coffee label if the in-house brand fails to resonate with customers.
Krispy Kreme shares were recently down 4.6% at $8.67.
-By John Kell, Dow Jones Newswires; 212-416-2480; .(JavaScript must be enabled to view this email address)