Spotting a hole in the national doughnut market, Houston-based Shipley Do-Nuts has launched an ambitious franchising spree to expand its brand beyond the Lone Star State. Over 85 years since its founding in 1936, the family-owned company had grown to roughly 300 franchise stores, about 90% of those in Texas. But since selling to private equity investor Peak Rock Capital in early 2021, the doughnut maker has added some 40 franchise locations and has commitments to add more than 230 more across the Southeast and in Maryland and Colorado over the next five years.

“When the family decided it was time to exit, the focus was on finding a group that would keep the original recipes that had been used since the 1930s and maintain the foundation of the business,” said Shipley senior director of franchise development, sales, real estate and construction Mike Stout. “They also wanted to find someone who would commit the resources to grow the brand more aggressively and take it to a bigger scale.”

The time to execute such a strategy couldn’t be better. Breakfast restaurants continue to perform well, Stout pointed out, but the doughnut segment is dominated by small independent companies. What’s more, of the big national brands, Krispy Kreme has pulled back from franchising in favor of expanding a hub-and-spoke model, with kitchen hubs serving its shops, grocery and convenience stores, and other potential outlets. Before taking the company public in 2021, Krispy Kreme’s ownership paid $465.6 million to buy out 469 franchise locations worldwide, according to the company’s registration statement. Meanwhile, Dunkin’ offers an expansive menu that includes a variety of beverages, as well as breakfast sandwiches, bagels, doughnuts and other baked goods.

Conversely, Shipley keeps it offerings concentrated: doughnuts; pastries, of which there are more than 60 varieties; and meat-and-cheese filled kolaches. Only recently did the stores begin selling a uniform, Shipley-branded coffee, said chief marketing officer Donna Josephson. The strategy is paying off. In 2022, same-store sales increased 17.5%, Stout said. “We’ve seen significant growth in our business,” he added, “and we’ve got a wide space to grow in.”

The fuel behind the nearly nine decades of success, as well as Shipley’s future growth, is the yeast dough recipe that company founder Lawrence Shipley crafted, Josephson said. For doughnuts, the alternative to a yeast dough is a cake dough, which is leavened with the help of baking powder. Shipley’s yeast dough is “the heart of the business” and “jumping off point” for most of its goods, including the kolaches, which were added in the 1990s, she reported. What’s more, store operators show up each day at 3 a.m. to start cooking. “We have a high-quality product that’s made fresh daily, not the day before, and we make it the same way we always have,” Josephson declared. “That has really set the course for success. It’s why people keep coming to our shops.”

Updated Strategies and Operations

Historically, mom and pop franchisees fueled much of the doughnut maker’s growth, but the current expansion strategy emphasizes partnerships with established franchisees of quick-service restaurants and other food service brands in the Southeast. Shipley also is making opportunistic moves in Colorado and Maryland, working with franchisees of Five Guys, Saxbys coffee and Panera restaurants. Additionally, the company continues to move into new markets and infill locations in Texas. Notably, HPL Capital, a platform of restaurant investment firm MACC Investment Group, is opening 25 locations in the Dallas-Fort Worth area.

To support such ambitious expansion plans, Shipley’s new owners first sought to strengthen its executive team, enhance efficiency and modernize the business. In May, the company appointed Flynn Dekker as CEO. Formerly CEO of Korean barbecue restaurant chain Bonchon, he replaced Clifton Rutledge, a veteran restaurant executive who had taken the helm midway through 2021 and now has returned to Shipley’s board. In 2021, the company also brought in former Panera executive Hank Simpson as COO.

Early maneuvers included hiring a third party to distribute the company’s yeast dough mix, icing and other products to its stores. “That is allowing us to reach greater distances because the third party has multiple distribution centers across the U.S.,” Stout said. “Previously, the Shipley family had a distribution center here in Houston and were delivering clear over to Alabama. That just wasn’t efficient.”

The new owners and management team also have updated the company’s technology, which had been stuck in the 1970s, Stout remarked. Among other changes, Shipley has rolled out a point-of-sale system across the chain that gives it more accurate visibility into sales and other operating metrics. The doughnut maker also has modernized its training regimen. In addition to hands-on sessions, Shipley is rolling out an automated learning management system that franchisees can access on their phones when they have questions, Josephson said.

Shipley also implemented online ordering this year, which has made it more flexible in site selection. It typically looks for end-cap sites from 1,800 to 2,100 square feet with drive-thru capability and, to a lesser extent, second-generation locations. But online ordering opens inline opportunities in strip centers where customers can park in dedicated spaces to retrieve their orders, Stout said.

Thinking Smaller

The next Shipley innovation: creating a small, express format. It has designed a free-standing Shipley lite concept of 1,200 to 1,500 square feet that will eliminate the lobby in favor of walk-up and drive-thru windows, Stout said. Smaller footprints follow the tack of coffee purveyors like Dutch Bros Coffee, and it’ll provide Shipley with additional expansion opportunities at a time when finding end-cap locations has become more challenging. The company intends to build a corporate-owned express location in the near-term, and franchisees have shown interest in it, as well. “We’ll be able to shrink down the footprint and use different types of equipment to generate efficiencies,” Stout explained. “lt’s a model that we think will require less real estate and reduce the overall investment while allowing us to gain market presence.”

Based on the increasing sales and growing number of Shipley franchises, the modernization and expansion strategy launched by the company’s new owners appears to have succeeded so far. Nevertheless, the company realizes it must control its growth to maintain quality while building brand recognition in new states, Stout reported.

“Right now, we’re trying to keep our expansion concentrated in the Southeast,” he said. “We’ve got a great story to tell based on the success of the brand and the following here in Texas, and we’re certainly seeing a lot of interest in our franchising program, but we don’t want to expand too fast, and we don’t want to expand too far away.”