Iconic US doughnut maker Krispy Kreme has fallen on hard times. Once a darling of Wall Street, the company has seen its share price and sales plummet and is facing an investigation by the US Securities and Exchange Commission. With a new management team in place, is the company set for a renaissance? Or is the worse yet to come? David Robertson reports.
Go deeper with GlobalData
Only two years ago Krispy Kreme Doughnuts had the sort of iconic brand status that saw its products featured in “hip” television programmes like Sex and the City and Friends. The company, based in Winston-Salem, North Carolina, was a darling of both fashionable urbanites and Wall Street – quite an achievement in an age when we are all supposed to be obsessed with health food. Every new store opening was greeted with queues of customers happily waiting two or three hours to be served. The Smithsonian Institute even declared Krispy Kreme a “Southern icon”.
As a result, Krispy Kreme became one of the hottest post-dot.com stocks, more than doubling its share price between 2000 and 2003, when it peaked at US$49.74. But the company’s stock has gone as stale as old doughnuts in the last 12 months and its share price has tumbled to around $6 a share. And the bad news just keeps coming: Krispy Kreme is under federal investigation, a Securities and Exchange Commission investigation and the company is skirting bankruptcy.
A new management team has been brought in to save the company but within two weeks Krispy Kreme may have to file for Chapter 11 bankruptcy protection if its bankers refuse to extend the company’s line of credit. And even if Krispy Kreme survives beyond the end of March, it will have to rethink its entire sales strategy – something analysts are uncertain the new management is capable of doing.
A presidential product
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataKrispy Kreme was founded in 1937 and it had become a southern institution long before its products were available in northern states. One of the highlights of a visit to a Krispy Kreme store was watching the automated doughnut-making process – an attraction that is as popular today as when the system was introduced four decades ago.
In 1994, Krispy Kreme opened its first “northern” store and within two years President Bill Clinton was having boxes delivered to the White House. It was that sort of publicity that helped the company achieve iconic status and made Krispy Kreme the doughnut equivalent of Prada. The company listed in 2000, at $21 a share. By 2003 its share price had more than doubled and the company was making three billion doughnuts a year – but then it went horribly wrong.
It is now widely accepted by financial analysts that the problems started when Krispy Kreme’s management tried to maintain the company’s stellar growth by opening more and more outlets. Krispy Kreme pushed its doughnuts into convenience stores, grocery stores, garages and even truck stops making the fatal mistake of assuming that more outlets would lead to higher sales.
Luxury status
They ignored, or failed to realise, that part of Krispy Kreme’s allure was its status as a luxury item. For most people, buying a Krispy Kreme wasn’t an everyday purchase. And when they did go to a Krispy Kreme store they wanted the full experience: to watch the doughnuts being made, to enjoy the smells and, at the end of the process, to get a hot, fresh pastry. Being able to buy a Krispy Kreme on a garage forecourt took away the “exclusivity” that luxury brands need to justify their premium prices.
The scale of growth was dramatic: in four years Krispy Kreme went from 144 mostly Southern US stores to 435 stores across the US, Australia, Canada, Mexico, South Korea and the UK. The company was also supplying 20,000 other retail outlets.
As sales slowed investors became aware of other problems. The Wall Street Journal discovered that Krispy Kreme had bought out a Northern Californian franchise for $16.8m and that chief executive Scott Livengood had failed to disclose that it was part-owned by his ex-wife. The Securities and Exchange Commission is now investigating this case as well as another franchise reacquisition in Michigan. The details of how a profit warning was released last year is also under investigation.
Faced with mounting problems and rock-bottom investor confidence, Krispy Kreme’s board ousted Livengood in January. They have hired (for $760 an hour) turn-around specialist Stephen F. Cooper of Kroll, Zolfo Cooper (KZC) – who is also currently chief executive of Enron.
Heading towards bankruptcy?
Cooper has announced a 25% cut in head office staff (125 jobs) and has got rid of the company jet. But there is much more that needs to be done to save Krispy Kreme. The most immediate challenge is establishing whether the company’s bankers, who are owed about $150m, will renegotiate the payment of that debt. The bankers have already given the company an extra two months but on 25 March they could force Krispy Kreme into bankruptcy. There is some speculation among analysts that this is what the new CEO, Cooper, wants to do.
Jonathan Waite and Dennis Forst, analysts at KeyBanc Capital Markets, said: “Judging by the new management team, we believe bankruptcy has to be seen as a possible scenario. Looking at KZC’s list of past retail clients… all have declared Chapter 11 in the past.”
If Krispy Kreme is given more time to recover, Cooper is expected to make more cuts, particularly with underperforming stores. David Geraty and Nicholas Pape, analysts at RBC Capital Markets, also believe that Krispy Kreme will start pulling back from convenience store/truck stop sales in an attempt to get customers back into the company’s own stores.
“We expect the crisis management team serving Krispy Kreme will slow rapidly declining per-store productivity by closing loss-producing stores in the near term and shifting the associated off-premise sales to the remaining store base and begin to reduce costs throughout the organisation,” they said.
A valuable brand
Avoiding bankruptcy and cutting costs are short and medium term problems that Krispy Kreme’s new management will be expert at resolving. Their real challenge, however, will begin six to 12 months from now when they have to start rebuilding sales by developing new strategies.
Will KZC be able to do so? Waite and Forst of KeyBanc are uncertain: “The question becomes, can management stabilise sales in remaining stores? KZC has no experience building organic sales at a retail establishment. While coffee and product line extensions remain an untapped area of opportunity, some new product plans from the old regime, such as the sugar-free doughnut, have yet to materialise.”
Cooper, the new chief executive of Krispy Kreme, believes that the fundamentals of the business are sound: the company is generating plenty of cash flow and despite the problems of the last year, the brand remains valuable. This, he believes, gives the company a good base from which to rebuild.
But the problems at Krispy Kreme remain substantial and whoever ends up owning the company (shareholders, the banks or Warren Buffet, who is rumoured to be interested) will have to wait several more years before they get to enjoy any icing on the doughnut.
