The Business of Delicious

Donut Connection
Written by Robert Hoshowsky

Is there anything better than fresh doughnuts and a cup of delicious, steaming hot coffee? From the tantalizing first bite to the very last crumb, nothing beats the taste and aroma of baked goods. And for almost twenty years, James Morton has been on a mission to bring the best available donuts, bagels, muffins, sandwiches, and beverages to America though Donut Connection.
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Morton has decades of restaurant and food industry experience stretching back to cooking and baking school following five years in the Navy. He went on to learn the ins and outs of the industry, including managing a five-hundred-seat restaurant and opening three fast food restaurants in the Pittsburgh area in the late 1970s.

He grew weary of putting in long hours in the fast food business and was at home reading the local paper one Sunday when he came across an ad for a district manager for a doughnut chain. After getting the job, Morton stayed with the company for a decade until 1990, before leaving to become a consultant. Morton came on board in 2000 as chief operating officer and general manager of Donut Connection and has never looked back.

Donut Connection is a business like no other. It began with five partners in 1995. James Edwards was one of the founding members of the company and served as vice president of the corporation before becoming president five years ago.

“It’s a co-op franchise,” explains Edwards, who has been in the doughnut business for forty-three years and holds a degree in business administration. “In order to use the name and to become a doughnut shop operator of Donut Connection, you have to buy shares of stock in the corporation, and you have to buy all your inventory from authorized distributors that Donut Connection sets up.”

Starting with about forty stores at first, Donut Connection has steadily grown to 137 locations, the most recent being in New Kensington, Pennsylvania; Hollidaysburg, Pennsylvania; and Huntington, West Virginia where Jim Kelly has become the newest co-op member of a Donut Connection location. Since members are part of a co-op and not a franchise, they find their own location. Some members have more than one site.

Unlike franchise operations, Donut Connection boasts many benefits, says Morton. These advantages include a minimal start-up investment, no ongoing franchise fees, excellent quality products, promotional benefits, and purchasing power owing to volume buying. Additionally, there are no ongoing remodeling requirements, compared to other chains, which require stores to undergo costly renovations every few years. After paying an initial franchise fee of $20,000, each additional store only costs a $500 co-op fee. The co-op fee is refundable if the owner ever sells or closes their business.

Although provided with some branded advertising and promotion material, every Donut Connection location remains independent in its requirements when it comes to advertising. Owners get printed and branded point-of-sale material and premiums that can be sold in-store or given away, which would be much more costly if the store was independent. With no royalties, fees, or ongoing residuals, Donut Connection operates on a rebate schedule from its distributor, which has a list of eighty-eight proprietary products. The company charges a flat rate on each product going into stores and receives a ninety-cent rebate on every case delivered.

“The ninety-cent rebate is our sole income, and operationally we are designed to be a non-profit,” says Morton. Around April or May, Morton meets with the company’s controller, and if the two foresee profits, these are converted into the purchase of materials or marketing materials.

Donut Connection has worked with several well-known and respected distributors – many of them family-owned – for decades.

Donut Connection makes bulk purchases of quality products such as premium coffee, flour, sugar, and straws. By purchasing items in large quantities, savings are passed on to franchisees. “It’s the purchasing power of combining a number of stores and their volumes in purchasing materials that we use in our business, and paper products being printed with the name Donut Connection on them,” says Edwards. “Nobody individually would have enough of a volume to be able to pay for the cost that there is in buying printed paper goods.”

Thanks to the company’s strong purchasing power and a national brand image, customers can walk into a Donut Connection shop in Huntington or Pittsburgh and see the same sign styles, the same point of sale (POS) system, and often the same products. The company offers franchisees autonomy and independence. It does not tell co-op members what to sell, but provides them with the opportunity to carry products suited to their particular location.

As well as donuts and coffee products, they also have some co-branded soups, pizza, bread, ice cream, and more, along with quality logo-printed packaging, presentation, and marketing assistance, which all streamlines seamlessly with the Donut Connection brand identity.

Using its tremendous purchasing power and name-brand identity, Donut Connection is in the process of trying to convert independent mom-and-pop doughnut shops to its brand. Once Morton calls them to discuss the benefits of co-op membership over remaining independent, many are convinced.

While doughnut makers traditionally engage in a labor-intensive process requiring bakers, Donut Connection co-op members are embracing ready-to-finish (RTF) technology which is much faster at producing donuts and other baked goods and much more economical. With RTF, members are not required to purchase large production equipment costing thousands of dollars or more; instead, they can buy a minimum product to make donuts. Frozen products are thawed for half an hour, put in the oven for three minutes, and are then ready to sell, saving the cost of hiring a baker and expensive production equipment.

“With the RTF program, I have had stores open throughout the country in the $85,000 to $100,000 range, all-inclusive, including the franchise fee,” states Morton. While some were reluctant to use the technology, they soon realize its many benefits. “Our stores with the RTF product are designed to replenish the cases on an hourly or bi-hourly basis, not make it all at one time at night or during the day were it sits there and go stale. RTF is designed for ease of use, where they can make the product fresh every hour if they have to.” Some baked goods, such as French crullers, are hard to make by hand, as they are intricate, delicate, and sensitive to heat. With RTF, however, these can be made quickly and easily.

“I’ve been in business for forty-one years, and I feel the future of our co-op is definitely RTF stores,” says Morton, who believes that, in many ways, Donut Connections sells itself. After moving to North Carolina from Pittsburgh a year ago, Morton noticed many quality, independent doughnut shops. He has been able to convince some to come on-board after analyzing their purchasing expenditures which, as independents, are twenty to forty percent higher than if there were a Donut Connection co-op member. Incrementally, they would pay only an $8,000 franchise fee to convert, along with putting up new signs and branding to join the co-op.

“The advantage to them is if I can convince them that, over a year’s point of time, I can save them over $8,000, it’s really a no-brainer to convert to our chain,” he says. With advanced production methods and the RTF program, many aspiring owners are joining Donut Connection, running a business, and still maintaining a quality home life without having to get to work early to make donuts. “I always tell them, you not being held hostage by your baker, who notoriously hold operations hostage, because they are the ones who know how to make the donuts per se. With RTF, it’s a no-brainer. I see the future in our younger people, our younger members, and also with the RTF program.”

Donut Connection has plenty to offer its co-op members and customers. The average Donut Connection store carries about thirty-four varieties of donuts. “I constantly hear from customers, when I’m out in the field at different stores, how much they love our selection, and their gimmick goes back to allowing that member the autonomy of running that shop the way they want to, with a product availability and product selection,” says Morton.

He makes it a habit of visiting stores across America annually. During a recent road trip with his wife to Missouri, he stopped in to visit Donut Connection stores in Nashville, Jackson Tennessee, and other locations. “I make it a point to not drive by location without stopping in, if I’m in the area. I’ve been in this business so long; I make it a point to understand the shoes they are walking in. Having my own restaurants years ago, I understand the bottom line, breakeven point, and operational skills necessary, and that relates very easily to these folks.”

To complement its delicious baked goods and coffees, the company has the wildly popular salted caramel cold brew available now to all franchisees, with a dispenser free from its manufacturer. Donut Connection also sells seasonal specialty products, such as its recent Halloween donuts, pumpkin donuts, and fall apple donuts. Donut Connection provides all recipes to its stores, and owners can make about fifteen varieties of cake donuts, such as apple spice, pumpkin, peach, and walnut, from a basic cake doughnut mix.

The company embraces the latest tastes, trends, and technology and recently teamed up with a major U.S. coffee company to offer a cold brew in a bag product dispensed in front of customers. With Donut Connection marketing materials on the machine, the equipment is free from the supplier, which gives co-op members them the opportunity to sell a basic cold brew, to which flavors can be added. The company is also working with a vendor that manufactures waffle makers to develop a prototype waffle production facility within its stores, so Donut Connection locations can produce waffles on request to serve with a variety of toppings, fillings, and icings. Since chicken tenders are available from distributors, waffles can be made into sweet or savory items.

Being a co-op member and building a profitable business is important, but so is enjoying yourself, comments Morton. “When I open a store, I say, ‘I want you to come in and have a good time. I want you to enjoy what you are doing. I want you to relax.’ This is not a marathon. Take it a little bit at a time, and we’ll cross each bridge as we come to it. I help make members settle down and tell them it will work itself out.”

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