Fat Chance: Krispy Kreme's Unlikely Comeback

The contradictions inherent in human nature are what make us so fascinating - at least to ourselves. But they are also often the source of business opportunity.

A few years ago Krispy Kreme was another cautionary tale: a singular regional chain with one intensely popular product (essentially a ring of dough smothered in gooey, sugary caloric excess).

Overly ambitious and imprudent expansion combined with accounting irregularities and changing dietary standards by an increasingly health conscious populace reduced the company to a relatively few, beleaguered outlets.

But even as reports released just this week announce an increase in healthful school children's eating habits, so too are we greeted with the news that Krispy Kreme is back.

There are myriad elements to the tale, including wealthy Middle Eastern investors, more experienced managers and a sounder growth strategy. But convergence plays a role as it has in so many latter-day tales of redemption. In this case, aside from the human proclivity to take with one hand (as in exercise) and give with the other (as in 'small, affordable' personal rewards, like donuts, for the aforementioned effort), the addition of better-tasting coffee has helped the company reawaken its faithfuls' devotion. This does put it squarely in competition with Starbucks and Dunkin' Donuts, two notably successful enterprises, but given the choice between compensation in this life or the next, experience suggests betting on the here and now. JL

Roben Farzad reports in BusinessWeek:


           Apple. Hyundai. Neal Patrick Harris. Add Krispy Kreme Donuts (KKD) to that list of the biggest   brand comebacks of recent times. Shares of the near-broke guilty pleasure have gone from a buck and change four years ago to about $13 now

(albeit well off their all-time high of just under $50 a decade back). Its latest 12-month free cash flow of $36 million is triple what it was in 2009, according to Bloomberg data.
In the Winston-Salem, N.C., company’s rearview mirror are an accounting scandal, store closures, 14 quarters of losses, and the dreaded biz-mag cover curse. Now, with its groove and balance sheet back, you’d be hard pressed to find another U.S. junk foodie on such an offensive.

Full disclosure: I am partial to this 75-year-old chain. As with the Olive Garden (DRI), I used to take first dates there to gauge their gastronomic self-confidence. My son and I bond over their warm, fresh-off-the-belt vittles, which I once hawked for high school Spanish Honor Society at 50¢ a pop. It was all vindicated by Krispy’s monster initial public offering and newfound celebrity in the early 2000s.
But my fervor for the brand waned when it was later revealed that accounting violations were stewarded by a chief executive officer named—you can’t make this stuff up—Livengood. Plus, Dunkin’ Donuts (DNKN) was taking over whatever bits of the market were spared the wrath of the Atkins craze. And Krispy Kreme was nowhere to be found in the coffee racket, where the real profits were.
Since management narrowly avoided bankruptcy in 2009, the chain has vastly improved store productivity, cleanliness, and profitability while mending fences with franchisees (who were understandably not thrilled to see their original glazed offerings sold at just about every gas station and drugstore). It launched tastier coffee in 2011 and hopes to expand from 240 to 400 U.S. outlets in the next four years.

Having cleaned up its domestic operations, the company then focused on expanding abroad—markets such as Singapore and India, where, let’s be frank, any combination of venerable American brand equity and sugar-coated fried dough was bound to catch on. Throw in a chunky investment by a Kuwaiti billionaire holding the chain’s master franchise in the Middle East, and Krispy Kreme was suddenly flexing beaucoup buying power on all that shortening and glaze; recently, the company had to address the high-class problem of having to fend off a possible unsolicited takeout. Last year, it set a target of ramping up franchises abroad, to 900 outlets by 2017, from 506 outlets now.
“Internationally,” says Roth Capital Partners’ Anton Brenner, “they continue to expand rapidly, yet still have hardly any penetration in Latin America and virtually none in Continental Europe—places like Turkey and Russia. The brand is as iconic internationally as it is in the U.S.”
Domestically, there’s still quite a bit of krisp to this story. Compare its 2.1 percent U.S. coffee-sales market share to Starbucks’ (SBUX) 36 percent and Dunkin’s 25 percent, where orders of magnitude more cups of joe sluice down to the bottom line. While beverages now chip in 12 percent of Krispy Kreme’s sales, it is eying upward of 20 percent by pushing more of its rebranded coffee.

The Krispy love affair has come full circle for me. I was just at one on Valentine’s Day, when I had to take my place in a line snaking out the door (which literally bumped up against a drive-thru line that stretched onto the boulevard). Everyone was snapping up heart-shaped, sugar-glazed goodness for their spouses, paramours, and little protégés.