When it comes to sweet and creamy doughnuts, one of the newer successful doughnut store chains in Australia (until recently) would be ‘Doughnut Time’. Well, that used to be the case. On the 8th March 2018 Doughnut Time announced a series of store closures, downsizing its chain business in Australia from 27 stores to seven. The news came as a shock to not only its employees (many of whom have lost their jobs), but also to its customers who have previously witnessed Doughnut Time’s rapid rise in 2016 and now its decline in early 2018, all within a short span of three years.
So what went wrong with the Doughnut Time chain empire? What lessons can we take home?
1. Overexpansion & Diseconomies of Scale
Lesson: Ensure you have a sustainable cash flow before you consider expanding your business; otherwise you will reap diseconomies of scale.
Doughnut Time’s setback is an instructive example of the ‘diseconomies of scale’ concept (here, more technically known as ‘internal diseconomies of scale’), which refers to the cost disadvantages incurred by the firm as it expands its scale of operations, with average cost per unit of output increasing with scale.
It was likely that Doughnut Time had a fundamental sustainability problem. As a dominant source of revenue seemed to derive from the sale of fad dessert products, this meant that its business model would likely have a limited life cycle. In fact, despite the long queues in the beginning, not many customers returned for a second helping. Accordingly, this probably made it difficult to establish brand loyalty for the purposes of securing sustainable sales and cash flow. In addition, competition from other doughnut outlets such as Krispy Kreme and Donut King would have placed downward pressure on prices, further undermining Doughnut Time’s profit margins.
The sustainability problem then probably deepened when the business expanded. Since 2016, Doughtnut Time had embarked on a national expansion rollout, expanding from a single outlet at the Gold Coast to 27 stores and over 400 employees across Australia. However, as the business grew, so did its operational and rent costs. In fact, in his announcement email to employees, Doughnut Time CEO Dan Strachotta admitted that the store closures were “due to high rents and generally high operational costs for such a simple and small business.”
Therefore, putting this altogether, Doughnut Time likely experienced a diseconomies of scale for it incurred more costs rather than profit as its business (or ‘scale of operations’) expanded. To put in Mr Strachotta’s words, Doughnut Time “grew too quickly”.
2. Go Online
Lesson: Carefully consider cost-saving online distribution and marketing methods before you commit.
In the same email to his employees, Mr Strachotta outlined a new strategy for Doughnut Time, revolving around online sales and being less reliant on physical retail stores.
This poses an interesting question: what if Doughnut Time had relied more on online sales and less on physical retail stores in the very first place? Would they have continued to thrive today rather than halving their store footprint?
Generally, running a physical retail store will incur higher operational costs and rent compared to an online business. Online businesses may also likely require less need for present workers, thus reducing labour costs. Due to the accessibility of the internet, online marketing may also be more effective and cost-efficient compared to physical modes of advertising. So it’s highly suggested that you consider integrating online methods into your business model in order to save costs and thus avoid any potential diseconomies of scale.
3. Please pay your workers
Lesson: Paying your employees’ wages will not only discharge your legal obligation but it will also ensure a healthy brand image.
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Thus far, Doughnut Time’s setback does not seem to be too out of the ordinary from a business perspective. Yet the store chain has nonetheless gathered lots of negative attention due to its alleged withholding of employees’ wages. Apparently, as of February 2018, 35 workers across 15 stores in Australia claimed that they were owed a combined total of $70,000. In fact, Doughnut Time has been taken to Fair Work on this matter.
In addition to the Fair Work complaint, ex-employers have also taken their complaints to social media and even to the streets, with the most recent events being the protest by ex-employees outside the Newtown and QVB stores in Sydney.
Clearly, the non-payment of wages had not only inflicted legal problems to Doughnut Time, but also significant damage to its brand.
Conclusion
From a rising star in the doughnut industry to a shattered business with disgruntled workers beneath it, Doughnut Time’s case presents some valuable lesson points for those who are considering to start or expand a business. The present case also further highlights the legal and brand importance of paying your employees’ wages. Hopefully, under its new 2018 strategy, Doughnut Time will recover and find its ‘sweet spot’ with respects to its costs in the near future.
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