Since its founding in 2011, Federal Donuts has fortified its presence in Philadelphia.
The concept now stands at 11 locations throughout the city—three of which opened since 2020—including two in Whole Foods, one in Citizens Bank Park (home of the Philadelphia Phillies) and another in the Wells Fargo Center (arena of the Philadelphia 76ers and Flyers). Whitespace remains in the city, CEO Tom Henneman says, but Federal Donuts also has its eyes on the bigger picture.
In 2018, the chain began exploring growth opportunities and recognized it required the right growth partner to do so. After searching for a year and a half, Federal Donuts was connected to NewSpring Capital, headquartered just outside of Philadelphia. The private equity firm has invested in more than 180 companies and manages roughly $2.5 billion.
After promising conversations, negotiations were put on hold as Federal Donuts pivoted to COVID's changed landscape. Once the brand reestablished momentum, discussions resumed and a deal was struck. NewSpring Franchise, the firm's arm focused on franchises and multi-unit concepts, completed a growth equity investment in the fast casual to fuel growth in the Mid-Atlantic and beyond.
It's the same group that invested in Duck Donuts, a growing chain looking to reach 300 units in the next few years, and Turning Point Restaurants, a casual-dining brand that's starting to franchise after never closing a store in 24 years of business.
"We knew that we were going to need a growth partner that shares our vision, that understood who we are and the value of the quality of the products," Henneman says. "The integrity of the product is first and foremost—if it's not good, it doesn't matter. We knew we were lucky when we found a partner who would share that vision."
Philadelphians know Federal Donuts for its Fancy (glazed and decorated each morning) and Hot Fresh (fried to order and tossed in flavored sugars) lineups, and its twice-fried, crispy chicken. In addition to Henneman, the fast casual was founded by Felicia D'Ambrosio, Bob Logue, and James Beard Award-winning restaurateurs Steven Cook and Mike Solomonov.
QSR recently chatted with Henneman to gain more insight about Federal Donuts' upcoming growth and how NewSpring will help the brand achieve its goals.
With the new investment, does it change the roles of your executive team at all?
I will be staying on as CEO. Nobody’s roles are changing. Nobody from our existing executive team. I'll be staying on as CEO and then in the next few months we’ll be looking to round out our team as we look to grow.
When you say round out your team, can you provide any specifics about what kind of roles or team members you might add on to help you guys grow?
The path to expansion here for us is going to be company-owned stores, licensing, franchising. I think the next few months are going to be rounding out the team to fill those holes.
What will this investment give you the capability to do that you wouldn't have been able to do without it?
The thing that we did not have is the capital that they have. We had a good model. We felt confident about the economics of our existing locations. It was important to just find the right partners that can help us best step on the gas.
Could you lay out the growth strategy for me? What markets are you targeting? What pace are you aiming for?
We're going to go from the inside out. We have the inside out in Philadelphia for our company-owned stores, and then we're still developing our expansion strategy.
What’s the timeline of you entering a new market or a new state?
The new states will be sooner than later. Cherry Hill, New Jersey, is right across the street, and Cherry Hill is on our short list. We really like it. But the next step for us will be the suburbs around Philadelphia.
How far down the line will franchising be?
We’re looking to launch the franchise within a year. We’ll continue to develop our company-owned stores while we develop the franchise, and then roll that out hopefully within the year.
What will be the key to building brand awareness and brand equity in these new markets?
The product has to be good, it has to be fast, and it has to make you feel good. If we do those three things, then business will be good anywhere. The product has to be good, we have to deliver quick, we deliver with a smile. Customer remember how we make them feel.
What are the typical characteristics of Federal Donuts’ footprint?
That’s the beauty for us is that we are flexible. We were born in a 590-square-foot shop down in a residential neighborhood in South Philadelphia, and our most recent store is located within the center city district and it’s 1,600 square feet, with big shiny glass. It’s a stark contrast from our original location, however, what it does for us, it really highlights the beauty of the flexibility. We can take 600 square feet in any city center and then we can take 1,500 square feet. Now as we continue to grow in the suburbs, we won’t be looking for the 600 square feet; that’s where the 1,500 square feet will come in.
Of your future growth, how much of it will be nontraditional?
I don't know that I have a percentage necessarily. That's the joy of this, is that we do feel that we have the opportunity being that we have relationships with Aramark and Whole Foods. It helps us expand a little bit quicker and easier than had we not.
Do you feel drive-thru would be a realistic addition to your brand sometime in the future?
Yes. I don't know how anybody looks to build in the suburbs without thinking about a drive-thru. It's absolutely on our radar and a part of our plan.