The rise and fall of Krispy Kreme in New England

After a period of aggressive expansion, the Krispy Kreme doughnut chain falls on hard ti...
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THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING
The rise and fall of Krispy Kreme in New England
A hot doughnut chain. A doughnut-loving region. It seemed like a perfect
match. But financial missteps and tough competition have sent the company
retreating
By Chris Reidy, Globe Staff | July 23, 2006
When it invaded Dunkin' Donuts' home turf of Massachusetts three years ago, there were sweet predictions
for Krispy Kreme Doughnuts Inc.
TV news cameras recorded the frenzy as its first store in the state opened in Medford in 2003, drawing hordes
of devotees who say the doughnuts melt in your mouth.
``People were waiting in line for three hours," Mayor Michael J. McGlynn recalled.
Today that store is closed, the hype and hoopla are history, and Krispy Kreme's bottom line is glazed with red
ink.
In fiscal 2005 , the company lost $198 million . Last year, several executives left the company after an internal
inquiry found they might have inflated previous earnings. And the company acknowledges an investigation is
underway by the Securities and Exchange Commission .
Company shares that once sold in the $40s closed at $8.07 in Friday trading. By one estimate, 80 stores have
closed in the last two years. In Massachusetts, only the Dedham store remains. Krispy Kreme operates about
400 stores, including 316 in the United States.
What went wrong?
``Maybe everyone started watching their weight at the same time," Mayor McGlynn joked.
Industry observers offered other theories. The North Carolina company lost its cachet by expanding too fast. It
was too dependent on a single product. Its coffee left many locals unimpressed, a mortal sin in the joe-loving
Hub. And, perhaps smitten by low-carb diets, New Englanders don't love doughnuts the way they used to.
While Krispy Kreme struggled in many parts of the country, it faced additional challenges in New England,
where it once had stores in eight communities but now is in only four, observers said. Good retail locations are
hard to find in the tight real estate market, and Krispy Kreme was playing in the backyard of Dunkin' Donuts of
Canton .
Jan Cos. president Nicholas Janikies acquired franchising rights in southern New England when Krispy Kreme
was still a media darling. Janikies has owned restaurants for many years -- his Rhode Island company
operates more than 100, including 82 Burger Kings -- but he'd never seen anything like the Krispy Kreme
phenomenon.
Yet even after opening the first New England Krispy Kreme in 2002 , Janikies had misgivings. He recalled
thinking, ``I hope this isn't the next Hula-Hoop or mood ring."
To be sure, Krispy Kreme could rebound. Many of the executives who got the company into difficulty are gone.
Krispy Kreme has just disclosed expansion plans for Japan, China, and the Philippines, and it recently hired a
new chief executive, Daryl Brewster , who promises a turnaround. In a June statement, he indicated that he's
seeing ``growth in our international markets" and ``signs of stability in the United States."

After a period of aggressive expansion, the Krispy Kreme doughnut chain falls on hard ti...
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Krispy Kreme executives declined interview requests, issuing a statement saying, ``We believe the New
England region has significant growth potential, and we will look for additional opportunities to serve this
important market."
Krispy Kreme, which was founded in 1937, grew slowly for much of its history, said John S. Glass , an analyst
for CIBC World Markets . Then, in the late 1990s, the company started expanding aggressively.
``Overbuilding," Glass wrote in a recent report, is one reason Krispy Kreme is ``digging out of a deep hole."
As with many fads, scarcity makes a product more desirable. Perhaps as a doughnut once largely confined to
the South became more widely available, some of its novelty wore off.
Krispy Kreme's preference for big stores may have further diminished the doughnut's exotic cachet. Many
stores are veritable doughnut factories that sell not just to store customers but also to other retail chains.
When Krispy Kreme doughnuts ``turn up in supermarkets and convenience stores, people say, `Why wait in
line for this?' " said Ron Paul , president of Technomic Inc. , a restaurant consulting firm in Chicago. Krispy
Kreme executives ``fell into the trap of making their product unspecial," he said.
Big doughnut stores are expensive.
Minus land costs, it's a $2 million investment to open a Krispy Kreme locally, compared with about $500,000
for a Dunkin' Donuts, noted Janikies, New England's first Krispy Kreme franchisee.
A Dunkin' Donuts can be ``very profitable" on $1 million in annual sales, Janikies said, but the Krispy Kreme in
Medford needed $1.7 million to break even. In that store's first week, sales exceeded $500,000 , but just
before closing last year, sales were projecting to about $1 million to $1.3 million a year. The business, he said,
was ``bleeding money." In December, an agreement was disclosed under which a Jan Cos. subsidiary would
cede development rights for its New England territory to Krispy Kreme.
In addition to the Medford site, stores have been closed in Saugus and Boston.
According to industry executives, it's hard for a restaurant to thrive on a single product, especially if that
product is a doughnut, something most people treat themselves to only occasionally and many healthconscious
consumers avoid entirely.
Consumers want variety, prompting some local chains to offer bagels and health-conscious options.
Customer tastes have changed, said Honey Dew Donuts founder Dick Bowen. When he opened the first
Honey Dew 33 years ago, 70 percent of sales came from doughnuts. Today coffee accounts for more than 60
percent of sales for the 150-store chain and doughnuts for 12 percent.
Bowen can't see how Krispy Kreme, which is estimated to get at least 60 percent of sales from doughnuts, can
thrive here in its present form. ``New Englanders want great coffee, along with delicious food products, not just
doughnuts," he said.
With 63 percent of its sales coming from beverages, Dunkin' Donuts has repositioned itself as a coffee
company. In contrast to doughnuts, coffee is something many people consume daily .
Dunkin' officials, who declined to be interviewed, said in a statement: ``Rather than commenting on the way
another company does its business, especially companies that we don't regard as our direct competitors, we
choose to focus on our core competencies, and that's providing an excellent cup of coffee and high-quality
menu items."
Despite Krispy Kreme's ups and downs, many customers stand solidly behind the company's doughnuts.
``They blow everything else away," said Lowell Thomas of Bellingham during a recent visit to the Dedham

After a period of aggressive expansion, the Krispy Kreme doughnut chain falls on hard ti...
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store. ``Dunkin' should dump its doughnuts and just be bagels and coffee."
Janet Queen of Quincy hopes Krispy Kreme will bring more of its doughnuts here, not retreat.
``A lot of people say they're too sweet," said Queen, another customer at the store. ``I don't think so. I think
they're just right. I wish they'd open more stores on the South Shore.
Chris Reidy can be reached at reidy@globe.com.
© Copyright 2006 The New York Times Company