Winchell's Donut Houses Operating Company, L.P.
Winchell's Donut Houses Operating Company, L.P.
Wholly Owned Subsidiary of Shato Holdings, Ltd.
Incorporated: 1948 as Winchell Donut House
Sales: $60 million (2002 est.)
NAIC: 722211 Limited-Service Restaurants
Winchell's Donut Houses Operating Company, L.P. runs a chain of more than 200 doughnut shops that are located in 12 states in the western United States and in scattered countries abroad. The bulk of its stores are in southern California, with more than half operated by franchisees. Winchell's offers more than 30 types of doughnuts, as well as cinnamon rolls, bagels, croissants, muffins, brownies, and cookies, and also serves coffee, juice, soda, and other beverages. The firm is owned by Vancouver, B.C.-based Shato Holdings, Ltd.
The first of Winchell's Donut Houses was opened on October 8, 1948 in Temple City, California, by Verne H. Winchell, a 33-year-old jukebox salesman who had majored in business at Pasadena City College. Though he had originally planned a drive-in hamburger stand, when an identical operation appeared across the street Winchell switched gears and opened a drive-in doughnut and coffee shop instead. A cup of coffee cost a dime and a doughnut was a nickel. Customers could watch doughnuts being made through the shop's windows.
Winchell's concept proved to be a successful one, and in 1949 he opened two additional restaurants in Huntington Park and South Gate, California. Each year afterwards, two or three more outlets were added, and in 1953 the growing chain established its headquarters in the city of Alhambra, along with a facility to prepare doughnut mixes.
In 1961, Winchell's stock began trading on the over-thecounter market; at the same time, the firm was starting to expand into Arizona and Colorado. Two years later, the company moved its headquarters and mix operation to a newly constructed building in South El Monte, California. By this time, Winchell's had begun franchise sales and was opening 30 to 40 new stores per year, while taking in annual revenues of more than $3.6 million.
The year 1964 saw the chain expand into the Pacific Northwest and introduce the apple fritter, a doughnut-like treat which quickly proved popular with customers. In 1966, the United Fruit Company courted the firm and made an offering to buy it for $19 million. However, the deal fell apart at the eleventh hour. By 1967, sales stood at $7.8 million, and annual earnings were more than $1 million.
Merger with Denny's in 1968
In 1968, the company, which now boasted a total of 255 outlets, merged with Denny's Restaurants, Inc. in a stock swap deal worth nearly $30 million. Verne Winchell would continue to manage the doughnut chain, as well as serving on Denny's board of directors. In 1971, Winchell's bought out its franchisees and converted all units to company ownership; the following year, Verne Winchell was named chairman and CEO of Denny's. In 1973, the doughnut division's headquarters and production center were moved to a site near the parent firm's home base of La Mirada, California.
Under Verne Winchell's leadership, both restaurant chains expanded dramatically, and during the 1970s Winchell's Donut Houses grew to 1,000 units. Stores were opened as far away as Japan, Spain, Holland, Korea, and the Philippines, and revenues reached an estimated $200 million per year.
By the end of the decade, some of the firm's locations had become unprofitable, and in 1980 it was announced that 150 of the 968 units then in operation would be closed. That same year, Verne Winchell left Denny's, and several years later he sold his ownership stake for a reported $600 million. In his eight years of managing Denny's, its sales had more than quadrupled, to $680 million. Winchell would go on to pursue interests in real estate and horse breeding, the latter a passion he had indulged as far back as the 1960s with a horse that bore the name "Donut King."
Winchell's Donut Houses' fortunes continued to deteriorate in the 1980s, and 1985 saw another round of store closures in which 91 outlets were shuttered in Illinois, Minnesota, Ohio, and Texas. The company also reintroduced its franchise program, though most sales would consist of conversions of existing units.
The typical investment required of a Winchell's franchisee at this time was less than $100,000, which included a $30,000 fee to the corporation. Six percent of gross sales were also paid back to the company for royalties and advertising. An average outlet grossed $225,000, which yielded a profit of 12 percent. Franchisees were required to take a six-week training program and subsequent refresher courses; they could expect visits from the company's regional consultants to monitor quality. Though 70 percent of Winchell's sales took place before noon, most restaurants remained open round the clock, with business in the overnight hours usually dominated by police officers. New outlets were typically located on a busy street on the side which saw the most traffic during morning rush hour.
In 1985, Denny's returned to private ownership in a leveraged buyout by its management, and the resultant debt led to a spin-off of the Winchell's division in December 1986. Fifty-eight percent of the unit's stock was offered on the New York Stock Exchange, with Denny's keeping a 42 percent stake and majority voting power. The move to a so-called Master Limited Partnership ownership structure was due in part to the tax benefits it offered. After the stock sale, which raised $84 million, the firm became known as Winchell's Donut Houses L.P.
The chain had by now shrunk to 720 company-owned and 22 franchised units, but it remained the second-largest doughnut chain in the United States after industry leader Dunkin' Donuts. It was also the largest on the West Coast, with 466 outlets in California alone. The company had recorded profits of $6.8 million on sales of $180 million for the fiscal year ended in June 1986.
In the months following the stock offering, Winchell's financial picture began to take a sharp turn for the worse. Though the company was introducing new products such as cinnamon rolls and bear claws, and had reached a deal to sell its doughnuts at 600 7-Eleven stores in Los Angeles, per-store sales were dropping and quarterly losses started to mount. In the summer of 1987, four of the firm's board members resigned, and the end of the year saw the departures of president Carl Hass and CEO Donald L. Pierce, who also served as president of Denny's. These events were taking place as Winchell's parent firm was changing ownership yet again, having been purchased by TW Services in July.
By January 1988, Winchell's stock had dropped from its opening price of $18 to less than $4, and 45 more stores were set for closure. As the firm was preparing to report annual losses of $11.5 million on sales of $158.5 million, several groups of investors filed class-action lawsuits against both the company and Denny's and its underwriters, alleging deficiencies in the offering materials.
In the spring of 1988, company veteran James C. Verney was named to lead the ailing Winchell's. One of his first priorities was to address sagging morale among the firm's employees, and he met with workers in groups of ten to listen to their concerns. The financial reports continued to be grim, however, and $12.8 million in losses were recorded on sales of $145 million for the year. By December, the chain had shrunk to 671 outlets in 15 states, 68 of which were franchisee-owned.
Winchell's problems appeared to stem from a variety of factors. While the company blamed increased competition, much of it from small mom-and-pop operators, some of its difficulties were internally generated, according to observers. Under Denny's ownership, the firm had allocated little money to modernizing its restaurants or advertising them, and much of its profits had allegedly been pumped into keeping the parent firm afloat.
Sale to Shato Holdings in 1989
In June 1989, Denny's owner TW Services was sold to Coniston Partners, which shortly afterward sought to jettison the stake it owned in Winchell's. A buyer was found in Shato Holdings, Ltd., a Vancouver, British Columbia-based firm controlled by Canadian multi-millionaire Peter Toigo. Shato owned Coca-Cola Bottling and Kentucky Fried Chicken franchises in British Columbia, a hotel and restaurant catering company, 31 White Spot restaurants, and other hospitality industry properties. After the deal was finalized, Winchell's shareholders would receive $3.80 per Class A share of stock, with Coniston agreeing to forgo compensation for the 1.6 million Class B shares it held.
In December 1989, shortly after the sale had been completed, Shato announced it was selling 263 Donut House stores to Pizza Hut, Inc., which would convert them to drive-through restaurants. The deal was worth nearly $40 million, close to what Shato had reportedly paid for the whole chain. In early 1990, the firm appointed a number of new executives, including a new president, Robert Galastro, who set about trying to improve Winchell's financial picture. Galastro had formerly served as operational vice-president for International House of Pancakes.
The company soon announced several new initiatives to boost revenues. These included adding menu items to expand the restaurants' business beyond the morning rush hour and acquiring a plant in northern California that would ship frozen dough to the chain's outlets, which had heretofore made it from scratch. The plant had been purchased along with the nine unit Rolling Pin Donuts, Inc. chain in March.
Winchell's Mission Statement: To be the customer's first choice for high quality and great tasting donuts, coffee, and baked goods freshly made throughout the day, served by friendly and efficient people in well-maintained, convenient locations.
In October, a new prototype store was opened that offered seven types of sandwiches, four salads, and nine flavors of frozen Dannon yogurt. Dubbed Winchell's n' More, it featured a redesigned interior. Initial results were held to be promising, and more such units were announced, but the effort was later abandoned. An earlier attempt to add sandwiches in 1983 had also been dropped after initial testing.
In May 1991, Galastro left the firm, and his replacement's tenure as president was brief as well. Winchell's fortunes were again looking bad when Nancy Parker, previously the firm's director of Human Resources, was named general manager on an interim basis in early 1992. Her assurance and professionalism impressed the company's board, and a few months later she was appointed president. Once in charge, Parker wrapped up the uncompleted transfer of outlets to Pizza Hut, began giving store managers more autonomy, and created a line of frozen doughnuts for sale both in retail stores and to foodservice accounts.
Return to Profitability in 1992
These new measures helped make 1992 Winchell's first profitable year since the mid-1980s, and the company's health continued to improve over the next several years. Sales for 1994 hit approximately $82.5 million, at which time the company had a total of 240 corporate-owned and 60 franchised outlets. During the mid-1990s, sales began to slip again, however, and dipped to an estimated $71 million in 1996.
In 1997, Parker was replaced by former Baskin-Robbins vice-president Tom Dowling, reportedly because Shato executives wanted the firm to focus on retail stores rather than packaged and foodservice sales. Shortly after his appointment, he rolled out a new concept called Winchell's Express, a service counter that could be placed in convenience stores or sandwich shops to sell doughnuts that had been partially prepared off-site. Seven such outlets were initially installed in Subway restaurants in Las Vegas.
The company was also experimenting with its product mix, adding bagels and new "flavored-dough" doughnuts which had fruit and other ingredients added before baking. Another addition took the form of shaped doughnuts that were prepared for certain holidays, including heart-shaped donuts for Valentine's Day and Mother's Day. The company had for years logged its annual sales peak on Halloween, when specially decorated doughnuts were featured.
In 1998, Michell's introduced a new, higher-quality blend of coffee called "Legendary Gold." Ads for the drink targeted the ubiquitous Starbucks chain, using copy that described it as a premium quality, cheaper alternative to "Big Bucks" coffee. The firm also abandoned its traditional Styrofoam cups for the more expensive, environmentally friendly "Perfect Touch" variety seen in gourmet coffee shops.
These moves all came as Winchell's was celebrating its 50th anniversary and declaring a renewed commitment to the firm's core product line of doughnuts and coffee. The company had simultaneously redesigned its stores and updated its logo. It was also making plans to expand to 500 locations by 2000. Moreover, the firm was addressing a chronic shortage of doughnut bakers by converting some underperforming outlets to "mother stores" where two bakers could supply four locations with doughnuts. During 1998, Winchell's spent $9 million on new stores and $4 million on renovations to others. Despite these efforts, sales continued to drop, sliding to an estimated $60 million.
One of the firm's biggest problems continued to be the influx of new competitors. In addition to sales that were being taken by an onslaught of gourmet coffee shops and grocery store bakeries, Winchell's turf was now being targeted by Krispy Kreme, the North Carolina-based doughnut chain that was on an aggressive campaign of expansion and from whom Winchell's had recently recruited its new vice-president of development. The eastern firm's stores showcased the process of making doughnuts, and in January 1999 Winchell's opened the prototype of a similar store in Pomona, California, called "Winchell's World," where customers could watch an automated doughnut production line through large windows. The initial store was co-branded with Blimpie Subs and Salads and offered that firm's sandwiches at a separate counter area.
By this time, the Winchell's food products division, which had grown under Nancy Parker, had been abandoned, a decision that was attributed to the public's preference for fresh, rather than frozen doughnuts. The firm had also scuttled a line of chicken dishes that had been offered under the Pollo Especial brand.
"Warm 'N' Fresh" Guarantee Announced in 1999
In June 1999, Winchell's took another major step back to basics, instituting a guarantee that all of its doughnuts would be "Warm 'N' Fresh" or free between 6 and 9 am. In a move taken from Krispy Kreme's book, a red flashing light would signal the emergence of a new batch of doughnuts, which would stay warm for 15 minutes.
- Verne Winchell opens his first doughnut shop in Temple City, California.
- A new headquarters/production facility is opened in Alhambra, California.
- The company goes public on the over-the-counter market and expands eastward.
- Winchell's Donut Houses is acquired by Denny's Restaurants, Inc.
- The chain expands to more than 1,000 stores, including some abroad.
- 150 stores are closed; Verne Winchell retires.
- Master Limited Partnership is formed, with 58 percent of its stock sold on the New York Stock Exchange.
- Shato Holdings, Ltd. buys Winchell's Donut Houses; 263 stores are sold to Pizza Hut.
- Nancy Parker takes over the firm and begins to focus on foodservice and retail sales.
- Tom Dowling replaces Parker and returns the company's focus to doughnuts and coffee.
- "Warm 'N' Fresh" guarantee is introduced.
The year 1999 also saw new partnerships formed to open more Winchell's Express outlets in 7-Eleven stores and at Lucy's Laundry Marts, a laundromat chain which offered food from the likes of Subway and Burger King. Sales were now rebounding and increased by nearly 18 percent for the year to an estimated $70 million.
In 2000, the firm announced it was abandoning the Winchell's World concept but would add 16 new stores in Los Angeles and was considering expansion to the Midwest and East. The company was also now working on increasing bulk sales to schools and businesses. In early 2002, a new television ad campaign was launched in Los Angeles, and in November of that year company founder Verne Winchell passed away at the age of 87. By this time, the firm was being led by a new president, Bob Zanolli.
After 55 years, Winchell's Donut Houses had come full circle back to its original concept of offering fresh doughnuts and hot coffee with personalized service. The firm's "Warm 'N' Fresh" program, launched in 1999, was helping it reclaim lost ground as it battled new competitors such as supermarket bakeries and gourmet coffee shops.
Allied Domecq Quick Service Restaurants; Krispy Kreme Doughnuts, Inc.; Starbucks Corporation; Panera Bread Company.
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