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Merry Go Round

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Doughnuts are back – and with good reason. There is an ever-increasing demand for this sweet offering in the Indian market, with many global entrants wooing their customer base with this sweet treat. A product that was once visible only at a few local bakeries is today considered an important and growing category in the segment in India. Recent global entrants, too, support the fact that India is an attractive investment destination. This influx of foreign investment surely spells good fortune for India’s booming food and beverage sector. With more and more people ready for experimentation with food and opting for new taste experiences, it is welcome news for foreign investors looking at the doughnuts segment as a possible business market.

(MOD), the earliest entrant in the market, began by offering doughnuts as their core product in a focused and attractive format. Initially, the brand limited its presence in the market with just a few outlets, but this was just to feel the pulse of the consumer base. Today, MOD has 38 outlets spread across the country.

The Donut Baker, a well-known name from the ensemble of Global Franchise Architects, came to India in 2009. Today, it has 21 outlets in India, all situated in Bangalore and Kolkata. Looking at the rising popularity and high demand for this food product, the US-based food chain brand Dunkin’ Donuts too followed suit and, under the franchise of Jubilant Foodworks, made its way into India. The company, headquartered at Canton in Massachusetts, currently operates eight Dunkin’ Donuts outlets in Delhi/NCR. Krispy Kreme, another US doughnut major, opened its first retail outlet in Bangalore, in January this year. The company plans to sell its doughnuts through its franchise India, a division of the Dubai-based retail giant Landmark Group.

Market Assessment

The organised doughnut chain market in India falls widely under the café segment within the food service industry, which is expected to grow at 12–13 percent CAGR for the next 5 years.

According to , Associate Director, Food Services, and Vidul Sharma, Senior Consultant, Food Services at Technopak Advisors, the doughnut market in India is growing at a rate of 20 percent per year, which is expected to double up in a few years. The organised café segment in India is estimated at `1,200 crore while the organised doughnut chain market is projected to be a miniscule part of the café segment as it presently has limited scale of business volume.

, CEO of Global Franchise Architects, which has the license for The Donut Baker in India, agrees. According to him, this delightful bakery item is all set to grab its own exclusive space in the Indian F&B sector. The entry of new doughnut players in India also reflects the opportunities available in this category. “We were early entrants, and today we can see how the landscape is changing with consistent increase in our sales year to year,” Cherian states.

“The organised segment of the entire F&B industry is only 16 percent as of now. Speaking of the doughnut market, we know it is still at a very nascent stage,” adds Vishal Sawhney, President, Citymax Hotels, which looks after the operations of Krispy Kreme in India. “Indians are known to have a sweet tooth, and this is the segment where the doughnut market will find its place. At this point in time, it is difficult to estimate the rate at which it is growing as the market is still very niche,” he continues.

Competition

, COO, Mad Over Donuts, fends off competition at this level. He argues, “Although there are many new players making an entry into this segment, competition can only take place when doughnuts become the staple diet in India.” He feels the more the number of players in the market, the more it will help establish doughnuts as a staple diet. “We are always ready to welcome international players in India,” says Bhattacharya. Sawhney, too, believes that specific to the doughnut segment, there is plenty of space for many brands to exist simultaneously in India.

“The confidence of doughnut players in the Indian market will only intensify the competition, with new players entering the segment as well as existing players enhancing their reach,” feel Shukla and Sharma of Technopak.


Challenges
The doughnut market is yet to evolve, hence leaving much scope for challenges in areas like consumer product awareness, brand loyalty, consumer buying behaviour, and developing products that tantalise the palate of the Indian consumer. According to Shukla and Sharma, the biggest challenge lies in the fact that the market is still very niche. Extensive competition will prevail not only from the key players within the doughnut business but also from existing café chains and individual F&B service players.

Streamlining the logistics of business operation and expansion to maintain and drive profitability are also big challenges that must be met. According to Cherian, the cost of logistics and the shelf life of doughnuts, which is around 24 hours, are the chief concerns. “The cost involved in setting up a doughnut production unit is very high. In addition, limitation in shelf life is also a big challenge,” explains Cherian.

Bhattacharya believes that one challenge that could really deter the growth of doughnut chains in the country is the cost of real estate, which is majorly affecting the operating costs of market players.
does not feel threatened. According to him, “It is not uncommon for brands to face multiple challenges. In India, brands face many challenges in establishing themselves, such as problems related to supply chain, leasing, permits, location, etc. Even Krispy Kreme was no exception. But having been in the market for so long, we understand how to work around these challenges and bring forth the right essence of Krispy Kreme.”

Opportunities
Only aggressive plans for expansion will create a buzz and help leverage consumer product awareness, feel Shukla and Sharma. According to them, this will also provide an opportunity to the existing players to extend their product line and leverage their capabilities in this specific offering. The possibilities of different formats and creating a differentiating experience are high. New recipes catering to the palette of the Indian consumer will also play a key role on the count of leveraging volumes and future sustenance.

Continuing along the same line of thought, Bhattacharya says, “The opportunities are vast, considering the emerging doughnut market in India. Also, with the increasing popularity and acceptance of doughnuts among various age groups, doughnut chains are left with ample opportunities to explore in India.”

Product positioning
What does the Indian consumer think of doughnuts? When is the right time to have a doughnut? Different market players position their offering in different ways. In India, doughnuts are considered as an ‘any time, on-the-go snack,’ believes Cherian. Doughnuts can be enjoyed with beverages as well as with other food items. “They are here to stay and would grow just like the coffee culture. It may take time just as it took time for coffee to be accepted in India, but it is growing at a rapid pace,” he remarks.

“We have always maintained that it is an ‘anytime’ sweet treat,” Sawhney chips in. “Categorising it as a breakfast or a mid-meal snack will not be correct. Coffee and doughnuts go well together at any time of the day. “The vision of Krispy Kreme is to give our customers an anytime sweet treat. The brand is about sharing the joy with family and friends,” he states.

According to Bhattacharya, doughnuts have a universal appeal. “Although doughnuts were a relatively unknown food item in parts of Asia earlier, it has been a staple food in many countries for decades, particularly in the West. Doughnuts have been an ideal option for breakfast, for snacks and also for a ‘meal-on-the-go.’ With the growing trend in India, where people are becoming more adventurous with their food choices, western food, too, has started to gain popularity,” he says.

However, a majority of Indian consumers still consider doughnuts to be dessert options. This can be attributed to the breakfast eating preferences of the Indian consumer where western snacks do not enjoy high popularity. The possibility of visualising coffee and doughnuts as part of the breakfast menu might be high amongst the urban population, especially in metros and mini metros, since that segment is more exposed to the international eating style.

Doughnut – A Metro Phenomena?
The doughnut chains in the country are still largely focused in metros and somewhat present in tier-II cities. Being a new product category, it will take time to develop in the other parts where Indian sweets have a larger market base. Acknowledging the potential of doughnuts in tier-II and -III towns in India, Sawhney feels, “As of now, doughnuts exist primarily in tier-I cities. Smaller towns will have to wait.” Bhattacharya shares the same opinion. “Today, it is a metro phenomenon but considering the growth rate of the market, the doughnut mania will soon reach tier-II and tier-III cities,” he concludes.

International chains like Mad Over Donuts, the first entrant in the segment, have reached the mini metro level. There are some regional players in Bangalore, Mumbai and Pune, too.

Growth Drivers
There are two forces that are working to create the buzz – expansion of the brands and their outlets, and the evolution and acceptance of doughnuts amongst consumers.

The organised market has witnessed healthy year-on-year growth in the last couple of years. The market appears to be positive about future business growth with respect to revenue and profitability, reflecting the players’ confidence in the market and consumer acceptance.
Another reason that makes the doughnut segment popular is the price factor. Doughnuts are low in price, ranging from Rs 30-50. The low pricing of the product positions it as an affordable offering, which is bound to appeal to a wider consumer segment. It will also consolidate the value-for-money perspective in relation to the price of other dessert offerings in the café segment. Additionally, the existing doughnut brands are innovating in respect of core product offerings being made to the consumer. One now has a choice of doughnuts with exotic savoury toppings like cheddar cheese, basil, nacho and cheese, olives and salsa sauce. “The popularity of doughnuts has increased manifold as compared to the last five years,” feels Bhattacharya. “Initially, it did not take off well since the Indian consumer was not well exposed to western snacks. However, considering the product’s growing popularity amongst the Indian youth, doughnuts have gained acceptance as a mid-day snack or dessert option,” he explains.

Expansion

Krispy Kreme is currently concentrating on developing its base in Bangalore. Going forward, it plans to take the brand to Mumbai and then cover the other markets in South and West India. The company is looking at investing another Rs 80–85 crores over the next 5 years in development programmes. Dunkin’ Donuts, which currently operates eight outlets in the Delhi/NCR region, has plans to open 100 stores by 2017 and also have pan India operations for the same.

“We are looking at a master franchise for all the metro cities in India so that we can expand. We plan to add another 25 stores in the next two years,” informs Cherian. The cost of setting up a flagship The Donut Baker store with a micro kitchen, which can support around 7 to 8 smaller stores, is around `70 lakhs.
Although the category is relatively new, its market growth rate has been pretty steady. Now, with global majors entering the Indian market, it only spells good news for the industry. Well, it would be interesting to see if doughnuts can replicate the success that pizzas and burgers have so far enjoyed here.