During the depression, a company was started in Winston-Salem, North Carolina (center of the Tobacco Universe) called Krispy Kreme. They made donuts that are pretty much devoid of any nutritional value other than lots of sugar and fat – but CHEAP. The company was very popular and quickly grew.
The basic business model as they grew was – they developed a machine that did almost all of the work of making the donuts, and the machine in operation was an attraction within the store to take the kids to and show the machine making donuts.
Stores had a counter with places to sit and hot coffee. Stores were open 24 hours a day and are a social gathering place for the community, especially at night when nothing else is open in small Southern towns. People would go there and light up a cigarette, buy a few donuts and a cup of coffee and talk to their friends for an hour or two. It was a favorite place for college kids to go when pulling an all nighter studying for a test, with the easy availability of lots of sugar and caffeine. Invariably, the people working behind the counter were Social Security age women with gray hair and hair nets, and being smart wasn’t a job requirement.
The donuts made in the store were also packaged and sold at local grocery stores with trucks delivering them fresh each day. The company also engaged in aggressive fundraising – if your boy scout troop or high school band wanted to make money, Krispy Kreme would send a truck loaded with 1000s of boxes of donuts hundreds of miles away and the kids would spread out ringing doorbells selling donuts for $1 a dozen… (1960s). That’s probably how most people became aware of Krispy Kreme if you didn’t live in the South. Krispy Kreme is as much a fixture of the Southern culture as Hardee’s, Morrison’s Cafeteria and Waffle House.
Enter the Nasdaq bubble of the late 1990s – Krispy Kreme was one of the last companies to “go public” before the Nasdaq Bubble burst. In June 2000, Krispy Kreme was talked into launching an IPO to raise about $60m organized by Germany’s Deutsche Bank, with loan participation from Wachovia and Branch bank – two banks located in North Carolina. The idea was that the infusion of cash would speed up the expansion of the company into new territory. People who had ever lived near a Krispy Kreme store would flock to one and stand in line for hours to get their Krispy Kreme fix. (the company immediately fled to the NYSE)
Now being burdened with a large amount of debt (Yes, I am drawing a parallel to the radio business), the “New” Krispy Kreme became “modern” to increase their free cash flow – modeling themselves after Starbucks. Instead of a counter with crowded seating and strangers talking to each other, you walk though a line in single file and sit at a table so far away from every other table you can totally avoid any human contact. The coffee was replaced by bottled water, mocha, and fresh fruit juices. Little old ladies with hairnets were replaced with young gay men and other appropriately “diverse” people. And No Smoking. [I’m describing the store here in Connecticut that opened around 2003]. Sounds like a European or Californian concept of Krispy Kreme – in fact the company expanded into Europe, and most of the United States.
But most importantly, the donuts were EXPENSIVE. They were the same old cheap ingredients made by the same machines, but were even more expensive than Dunkin Donuts or the donuts already for sale in grocery stores or old fashioned bakeries. It seemed to me they “dialed back” the machine to have it make the smallest possible donut it could make and still be cooked.
The “big excitement” of opening day lasted about a week. Those who knew Krispy Kreme and were counting the days (me!) were stunned how the new management totally missed the point of what they were selling. The “New” Krispy Kreme thought the essense of KK was the red sign in the window that says “Hot Donuts” when the machine is running. Those who had never experienced Krispy Kreme reacted with “I don’t get it – these are total junk and priced higher that what my local bakery charges”. Without a positive impression, local grocery stores were not interested in carrying them. If they tried, they didn’t sell at $6/dozen and would just go stale.
By 2005, the company was in serious financial trouble (surprised?). In 2007, with their bank loans coming due, they decided to come out with the Whole Wheat doughnut, for the health conscious. How clueless can one company be?
Franchises were folding (one of the major franchisees declared bankruptcy in 2006), stores were closed, donut production was moved to fewer stores, and the finished donuts shipped to the stores that didn’t have enough volume to justify running a machine.
For the first time in probably three years, I decided to pay a visit to the local Krispy Kreme to see how things are working out. The store was empty. There was nobody in line at the drivethru. The person on the other end of the drivethru speaker was a timid young women of Asian background who spoke in a whisper. The donuts were okay (now up to $7/dozen). I’ve learned by reading Wikipedia that this store in Milford, CT is the last Krispy Kreme still in operation in New England – all the rest have been shut down.
In 2008, the company reduced the transfat content of its donuts. (did I mention the point of their doughuts is that they are anti-health food?). The company stock peaked near $55 in 2002, and is now down to $2.57. They’ve accumulated losses since going public of about $300 million. They’re making a small profit still, but all of the cash is going to try to pay down their huge debts. They breached their loan agreement in 2007, and were granted a reprieve in 2009 by ponying up $20 million in cash.
Donuts are very cheap to make, especially with an automated machine. The “light bulb” hasn’t gone on yet that if you have no sales volume, employees standing around with nothing to do – but a product with a very high markup, the way out of your problems is to compete on price to get back the efficiencies of scale of running that donut machine 24 hrs a day and rebuilding the brand. And tell the European managers to go back home. I don’t think any of that is going to happen and they will soon be a memory.