Friday, September 07, 2007

Losing Dough From Low-Carb Diet, Krispy Kreme Franchise Files For Bankruptcy And Closing Stores

Livin' la vida low-carb is STILL haunting Krispy Kreme doughnuts

One of the most difficult guessing games that happens behind the scenes of the American economy is figuring out how to create a product that people will want often enough to turn a consistent profit. It is this decision-making process that will either make or break a company.

You hate to gloat when a company has to file for bankruptcy (although the media certainly didn't mind doing it when Atkins Nutritionals did in 2005 but then they completely ignored it when they emerged from bankruptcy stronger in January 2006). But when that company is Krispy Kreme doughnuts and they continue to struggle to remain viable promoting high-sugar, high-carb products as their mainstay, it's hard to feel sorry for them.

I first blogged about Krispy Kreme closings in June 2005 and then again in July 2006 when it placed the onus on "the low-carb Atkins diet fad for its troubles." Hmm, it seems that darn low-carb "fad" is still haunting them in September 2007 according to this Chicago Tribune story.

The Illinois franchise called Sweet Traditions LLC of St. Louis who owns the Krispy Kreme doughnut stores in the Chicago, Illinois area is in such dire straits financially that they have been forced to close half of the stores in that area and file for Chapter 11. Not surprisingly, the owner blames high rent and a declining customer base for the closings and economic losses, but does that REALLY explain it?

I'm willing to give them the benefit of the doubt regarding the idiocy of the corporate headquarters requiring gargantuan stores costing $3 million a piece, but what explains the loss of people coming into the Krispy Kreme stores? This is a trend that's happening nationwide as this once-mighty company is crumbling.

Again I must ask--WHY?! It's not difficult to figure out.

As I shared in this recent podcast, doughnuts are about the worst possible food you could eat if you are trying to lose weight and get healthy. With half of Americans on a controlled-carbohydrate nutritional approach, the frequency of doughnut consumption has become less and less.

Although Vegas Krispy Kreme franchisee Lincoln Spoor arrogantly declared last Fall that "everybody cheats" and his doughnuts are the best food to eat on a cheat (I'm not kidding, he REALLY said that!), the fact of the matter is livin' la vida low-carb is putting a serious hurtin' on this chain of stores whose stock dropped nearly 40 percent on Friday after poor second quarter sales reports. Krispy Kreme is expected to close SEVERAL more stores in the rest of this fiscal year. YIKES!

They've tried gimmicks like making "healthy" (translated LOW-FAT!) doughnuts and they announced late last month they were removing trans fats from their menu. While that's a nice PR move and all, it just further proves they don't get it. The business dynamic has RADICALLY changed over the past three years and Krispy Kreme hasn't adjusted to it.

If they want to survive and thrive again, then they will need to seriously consider trying to reach the low-carb market rather than shunning it and thumbing their nose at us. I'm not saying I would necessarily eat there because even a sugar-free, low-carb doughnut would likely be made with inferior sweeteners like the sugar alcohol maltitol, it would at the very least be a "if you can't beat 'em, join 'em" strategy for survival. Maybe.

It may be their only hope.

9-8-07 UPDATE: You get all kinds of people writing to you when you start talking about business failures like Krispy Kreme. Here's what one egocentric gentleman penned in an e-mail responding to my post:

Are you kidding me? You’re still spouting that low-carb crap. What are you, a shill for Krispy Kreme?

Take a look at Dunkin Donuts and Tim Horton’s. Why wasn’t their business adversely affected by the low carb craze?

Krispy Kreme went down because of bad management, not because of carb counting.

FYI The low carb craze has been dead for some time. Perhaps Krispy Kreme should look for a way to blame the weather for their poor performance.

Um, yes, that "low-carb crap" has helped me lose 200 pounds and keep it off for the past four years. I have no dog in this hunt with Krispy Kreme, but I'm simply calling it as I see it. Sure, they've made some management blunders, but they are the #1 doughnut company in the United States.

It shouldn't be lost on anyone that low-carb has made an impact on their business and they've even said as much as I noted in my column. Face it, people are eating healthier nowadays and Krispy Kreme has failed to change with the times. That's it, pure and simple.

As for the "low-carb craze" being "dead for some time," perhaps you should come visit my blog more often. Since April 2005 when I created this blog and when low-carb was supposed to be dead then, I have a blog that's about to hit 2 million pageviews since then, a successful podcast show, an independent book release, a fantastic new discussion forum, engaging and fun videos on YouTube, and even my own low-carb, sugar-free chocolate bar coming out later this month.

Does this sound like low-carb is dead? Me thinks not, my friend. Nice try, though.

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Blogger melodiegale said...

I don't eat donuts anymore, but when I take my mother-in-law to pick up donuts for her card party, I just stand in the doorway and breath in the coffee and donut smell. I sure will miss that!

9/08/2007 12:55 AM  
Blogger mrfritznyc said...

I for one would be sad if Krispy Kreme went under. I do cheat every now and then, and I love their insane donuts. If you're gonna cheat, you might as well go full throtle.. you know, a bacon cheddar cheese burger served between two Krispy Kreme donuts, yum yum!

oh well, there'll always be Dunkin Donuts...

9/08/2007 8:45 AM  
Blogger jpatti said...

Dunkin Donuts and Tim Hortons both offer really, really good coffee so they're worth patronizing whether you're low-carbing or not.

As for the "fad" of low-carb dieting, it hasn't affected me at all. When it began, I'd been low-carbing for years, when it ended, I kept low-carbing. It's been over a decade I've been eating low-carb.

The thing is... I'm diabetic even when it's not popular to low-carb. Weight loss is kewl and all, but avoiding heart attacks, kidney disease, blindness, amputation and death is not about following a fad.

9/08/2007 9:59 AM  
Blogger renegadediabetic said...

I think of Krispy Kreme as "Krippy Kreme" to make it less appealing. The Krispy Kreme store near us closed down a couple of years ago. Another doughnut shop opened at the same location and soon shut down. I say good riddance.

There are a couple of local dought shops I visit. I get a croisant or kolache and don't eat the bread. One place has big, made-to-order breakfast tacos. Just don't eat the tortilla and it's low carb heaven.

jpatti, I'm doing low carb to avoid complications of diabetes as well. I just haven't been at it as long.

9/10/2007 10:55 AM  
Blogger Pot Kettle Black said...

Jimmy, I'm gonna weigh in with my MBA here and restate what I've said in other places about the demise of KK.

First: There are fundamental flaws in their business model, including generally massive stores (there's a small one in Clayton in St. Louis that seems to do okay) that induce crippling rent on the franchisees. Additionally, in the most densely populated portion of the country, the Boston-Atlanta Metro Access, they are competing with an entrenched competitor, Dunkin Donuts. And let's talk about that competitor and some basic strategy.

You pay lease 24/7/365. If you cost account it to hours of operation, your rent goes up, per hour, the fewer hours you operate. What does this have to do with KK vs DD? Well, KK really offers one product, plus coffee and coke. It's generally a morning product. DD offers better coffee, a debatably better donut (more to my taste when I'm in the market), and sandwiches. And Bagels. And things that will sell from 6AM to 4:30PM. KK's main business should run 6A to 12N, maybe a little later, but most people get their donut on in the AM. And what that means is that their bigger stores don't work as busily for as many hours, and have fewer hours to spread the fixed costs (like lease) over.

The pace of expansion: The folks in North Carolina at KK headquarters bought their own hype. They didn't look at things properly. You open a big shiny new store in a big shiny market like Los Angeles, and you have lines around the block. All these refugee Southrons driving around LA, talking up their doughnuts and NASCAR. So, lines around the block. For the first six months. Then, people go back to what they were doing. It's not like the doughnut is new to LA (plenty of good, small business doughnut shops there in the healthy diet capital of the universe). It's not even like Starbucks was, something that changed how you look at coffee. It's a warm glazed donut. Things were bound to come back down to earth. And, they did. Only the folks at KK bought their hype and opened another megastore or two in LA, and hundreds across the country before things reverted to a new normal. Put a lot of stress on the corporation (as seen in their 5 year decline from a peak stock price of 49 in the week of August 11th 2003, to their current place at $3.24/share. It's a 5 year decline of nearly 90% (higher if you go from August 11th), vs an S&P 500 growth over the same period of over 60%.

I'm not saying Carb Watching isn't part of their demise. But McDonald's (a generally non-growth company, and no friend to LC) has grown over 150% in the same period. Yum! Brands (KFC, Pizza Hut, Taco Bell), has more than doubled it's stock value over the same time and they're not exactly carb friendly, either. Sure, some options, and bunless burgers, but that can't be everything.

9/11/2007 10:40 AM  
Blogger Jimmy Moore said...

THANKS Pot! I agree the execs at Krispy Kreme have made some rather boneheaded business decisions based on a lot of assumptions. But it certainly didn't help that livin' la vida low-carb has become more mainstream, too.

9/11/2007 11:19 AM  

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