Krispy Kreme

INTRODUCTION

Krispy Kreme is an unfortunate case of a well-run, decades-old company going public and then rapidly losing its mind. In its quest for rapid growth as a public company Krispy Kreme lost its way. By expanding too rapidly, making puzzling acquisitions and franchise choices, and using strange accounting in the process, things went very wrong. This memo will focus on the underlying cause of Krispy Kreme's troubles and provide some recommendations on a possible turnaround.

TROUBLES

Once Krispy Kreme went public there was enormous pressure to grow very quickly and sustain growth quarter after quarter. Krispy Kreme concentrated on growing revenues and profits at the parent-company level, while its outlets struggled. While the franchisor aims to maximize sales, and thus boost royalty payments, the franchisee needs to maximize profits. If a franchisor packs a market with outlets to boost its own growth, it hurts the system in the long run by forcing units to compete with one another.

Having to share markets with other outlets isn't the only handicap for franchisees. In addition to the standard franchise fee and royalty payments, Krispy Kreme requires franchisees to buy equipment and ingredients from headquarters at marked-up prices. This strategy can hurt franchisees in the long run and does not keep company and franchisee interests aligned.

In its pursuit for growth, Krispy Kreme also became ever-present. Not just in numbers of restaurant units, but also half of their sales started going to grocery stores, gas stations, and kiosks. Anywhere that consumers could be found, you could find a Krispy Kreme. Straying further from the appeal of its key product, in May 2004 the company announced that it was developing a sugar-free doughnut, in response to the popularity of low-carb diets.

In December 2004, Krispy Kreme announced that it had identified accounting errors and a lack of disclosures related to the acquisition