Krispy Kreme - A Great Brand Going Stale

The good ol’ days for Krispy Kreme seem a long way off right now. Not so long ago, the Krispy Kreme brand had the same type of cachet and consumer loyalty which Starbucks continues to exhibit. It was “everyone’s” favorite donut. For many that may still be the story, but the icing sure looks pretty tacky on the famous brand these days. Today’s share price of $7.99 is a long way from its peak in the high $40’s during the glory days of 2003.

So what went wrong with one of the most touted brands of recent years? Great brands need great, or at least good management. Starbucks, Harley-Davidson, Apple, McDonald’s in recent years have benefited from quality execution of a relevant strategy.

Krispy Kreme does not seem to have been as fortunate. To some extent, the company founded in 1937, underwent a mid-life crisis in recent years. Former CEO, Scott Livengood drove the brand’s expansion from 27 to 43 states between 2000 – 2004. It is easy to say the business expanded too fast, but who questions the speed of expansion of Starbucks for instance?

The difference seems to be that Starbucks has strong financial leadership, a truely visionary Chairman,does not franchise and at least to date has not been impacted by macro-trends such as the short but impactful Atkins craze.

To some extent the financial, if not the consumer success of Krispy Kreme was smoke and mirrors. A special internal committee investigation following Livengood’s departure presented a damning report in August 2005.
"In our view, Scott A. Livengood, former Chairman of the Board and Chief Executive Officer, and John W. Tate, former Chief Operating Officer, bear primary responsibility for the failure to establish the management tone, environment and controls essential for meeting the Company's responsibilities as a public company. Krispy Kreme and its shareholders have paid dearly for those failures, as measured by the loss in market value of the Company's shares, a loss in confidence in the credibility and integrity of the Company's management and the considerable costs required to address those failures.”

Even more damning the report went on to suggest that the “number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings.”

Since these apparent financial shenanigans became obvious to management, all hands have been on the tiller attempting to steady the ship. Sales continue to plummet. Numbers announced for the quarter ending January (only released yesterday, April 17th!) show system-wide and company average weekly sales per factory store decreased approximately 9% and 10%, respectively, compared to the fourth quarter of fiscal 2005. By any standards that is a huge decline for a once shooting star.

It will be interesting to see if new President and CEO Daryl Brewster – a Kraft veteran, will be able to steady the ship. Despite all of its problems, most of them self-incurred, Krispy Kreme still has a brand cachet and equity to be envied. Assuming quality management is in place, this brand equity will provide the corner stone for a smaller but more profitable donut chain. Don’t be surprised if Krispy Kreme becomes a takeover target once all those little financial issues have been sorted. I’m sure Starbucks has never gazed covetously at the struggling donut chain!