Krispy Kreme Plan Filled With Holes
By George Anderson
It was a scene that played out over and over again at different locations throughout the country.
A new Krispy Kreme would open to great fanfare and big crowds. But, what happened after the television cameras were gone and consumers made their initial purchase?
Krispy Kreme says it got waylaid by Dr. Atkins.
The truth, say some Krispy Kreme franchisees, was that consumers didn’t come back after their first taste and their businesses were saddled with an operating plan and expenses
that made it virtually impossible to make a profit.
According to a report on the MarketWatch Web site, “The details of just how bad it really was can be found in recently filed court papers related to the restructuring
of KremeKo, Krispy Kreme’s struggling Canadian operation.”
KremeKo, reports MarketWatch, “never made money” and according to Krispy Kreme’s chief financial officer Michael Phelan, “KremeKo’s management concluded that its revenues could
not support the existing structure.”
Moderator’s Comment: What went wrong at Krispy Kreme? What if anything, can fix it? –
George Anderson – Moderator
Krispy Kreme has had a great ride in the Dallas/Ft. Worth area, which is home to some of the most overweight people in America according to a recent news story. I am of the opinion that the Dr. Atkins diet had a huge impact on Krispy Kreme due to the focus it placed on a very unhealthy product. I do agree with some of the other commentators that with increased market saturation, the mystique diminished much like a Coors beer in the 70’s. Also, a lot of attention has been placed on obesity in America at the same time that the boomers are very focused on health. As we know from reading various articles on the boomers, they are fighting the aging process more than any generation of people in history. In fact, they are fighting it with a vengeance, thus making obsolete many fattening products like bakery goods in general, ice cream, and yes, doughnuts.
I believe for Krispy Kreme to survive it will have to lower its retail prices and with respect to commercial customers like me, they will have to begin providing real service and get off their pompous high horse.
KK compromised their brand and their experience – end of story.
All very good views on the issue. In addition, sufficient paid media to accompany the expansion seems to be a missing ingredient. As you live by free press/PR, you must weather the negative press, which unscientifically I’d say runs about 2-3 times the positive spin from grand openings. Local Franchisee advertising in Val Pak and other vehicles with low visibility at POSTC (Point of Sweet Tooth Craving) certainly isn’t the wisest use of scarce resources (funding accrual as a % of sales). Sustainable levels of drive time and snack time messaging would have held top of mind awareness and perhaps smoothed out demand curve at the window. Add in overexposure at retail grocers carrying the brand (the Wal-Mart Fresh In -Store factory Test excluded) could have reduced the impulse/novelty factor of the shops. Other limited product (not so healthy) QSRs SEEM to be faring well – In-N-Out, WingStop, Wings ‘n Things, have more balanced availability/support models.
I have no opinion on their franchise business, but it seems like there is a slim chance that their off-premise business could have been profitable. For almost a year they had a display at the entrance of every Target and Cub Foods store in the Minneapolis Metro area. There was also a sign up at almost every C-Store advertising for Krispy Kreme with an in store display. I can’t speak for Target, but we all know that at Cub and C-Stores it is pay-to-play for that prime real-estate. It is hard to believe there would be a positive ROI for a promotion running that long selling $4 boxes of doughnuts.
This probably further served to saturate the brand and give up the exclusive demand driven status that has been mentioned in previous posts.
I don’t think anyone has looked at KK closely enough to diagnose the problem — at least no one willing to state the problems publicly. The product remains excellent. And people still DO eat doughnuts, though KK was fighting uphill against consumption trends.
The situation reminds me of Boston Chicken. They kept expanding rapidly even though the economics of each unit were negative. Somehow management deluded themselves into believing that covering poor performance with new store openings would never catch up with them. Inevitably, it was unavoidable that they could no longer outrun the fact that individual stores weren’t cutting it.
An environment of irrational exuberance is necessary for such delusions to take hold. Management kept looking at their market cap instead of the economics of their stores.
Someone will buy KK at a big discount and find a way to run a trimmed down number of stores profitably.
One question I’ve always had about KK is their unusual site selection. They have often chosen locations in less than desirable areas. Their first store in the Chicago area was on Pulaski near Midway airport. Their first LA store was on Crenshaw in South Central. Their Alexandria VA location wasn’t the best. The list could go on and on.
I also wonder whether using retail locations to produce and distribute to food stores makes economic sense.
At any rate, I think there are still more questions than answers.
Krispy Kreme was a tough sell for certain areas – especially with marginal coffee. How can we expect a donut maker with less than coffee to go up against Dunkin Donuts who rules the Boston area with stores on every corner – or even Honeydew for that matter?
And what’s left to flavor after your hot Krispy Kreme cools down and the charm slips away?
As I’ve said in this space before – KK can’t blame the late Dr. Atkins. They are a one-product company that has nothing to do with being krispy and nothing to do with kreme. Within almost any one mile strip in Canada you can stop at any of a dozen doughnut shops – all of which are making money. You have your choice of dozens of varieties, you can get good coffee, a nice lunch, a bran muffin for regularity. At KK? A one-size-fits-all overly sweet nothing that once you’ve tried it, you’re done. One more time — It’s the product, stupid!
Edible hula hoops. Next.
I believe that recent publications indicate that America is NOT actually getting leaner, nor is it actually shifting it’s consumption patterns toward the diet segment. Haven’t we seen major fast food companies announce larger or higher calorie new products?
Most QSR franchise operational failures are due to flaws in the business model. Some of those flaws case studies reveal to be based on unrealistic sales forecasts, higher than necessary food costs, and heavy franchise related fees. Which one or group of these is attributable to Krispy Kreme is difficult to say without access to internal documents.
Just as with the dotcom busts of the 90’s, is it possible that infatuation with a concept is the crux here? Was Krispy Kreme’s business model realistic? Where are the success stories in this segment to have used as benchmarks? I don’t have access to the information to know the answers to these questions. One wonders if the analysts on the Street objectively evaluated the business model distinct from falling in love with the concept?
Krispy Kreme had a Hollywood-type dream that busted open at its sugary seam. When the hoopla is over and the stars go out, how many such daydreams darken into nightmares when there is never any danger of their ever becoming a reality?
What should Krispy Kreme do now? Accept that they are in the high-calorie doughnut business, which isn’t universally appealing at 75 cents for a fat-rich dunker.
Krispy Kreme does a very good job of making great tasting food that is very bad for you. In many ways it is surprising that they have done as well as they have considering how unhealthful they are. In the past I couldn’t drive past a “hot donuts now” sign without stopping, but now my motivation to to try to eat right is stronger than my craving for a hot KK.
There is a lot of drama and excitement surrounding a new Krispy Kreme location. They have a done a really good job of managing that in my opinion. But it is unrealistic to expect to be able to maintain that for any length of time. Even though I continue to be amazed at how much unhealthy food is still consumed in this country, It is hard for me to envision a very bright future for this product. Especially considering that their product line is made up of entirely high-fat and high-carbs products. A little diversity would make me feel better about their long-range viability.
Sure Atkins hurt. I’m personally a transplanted Southerner with a great memory of Krispy Kreme and nights at the minor league ballpark with my dad. And when the new KK store opened in my suburb of Chicago I was there in a flash — about twice. Then the allure of the memory disappeared in the supersweet carbohydrates of reality and that was that.
Krispy Kreme is a superb example of outrunning the mystique of a brand franchise. The best analogy is probably Coors beer. Remember when it was only available “West of the Mississippi” due to the need for refrigerated shipping? And we gladly paid $6 or more for a sixpack on springbreak at the Carolina beaches because it was “imported illegally through Mexico”? (We later learned that it was profitable to drive a U-Haul trailer from Kansas to Carolina when college was in session.)
The magic of the Krispy Kreme brand in the Southeast is heritage. The magic of the brand everywhere else was that it was not available. Availability killed the mystique. End of story.
I used to stop by my local Krispy Kreme on the way to work three times a week, and pick up three dozen glazed for my employees. But, unfortunately, as gas prices have increased, those items deemed as luxuries had to be axed. My choice had nothing to do with Atkins; simply an economic one.