Growth | September 2012 | By Sonya Chudgar

The 75-Year Roller Coaster

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Jim Morgan, CEO of Krispy Kreme, has the brand sticking to its guns.
Jim Morgan, CEO of Krispy Kreme, has the brand sticking to its guns. Krispy Kreme
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Some Like it Hot

If anyone will be out-motoring the brand, experts say, it may be Krispy Kreme itself.

Licensing agreements are a core element of Krispy Kreme’s business model that permit its doughnuts to be sold in supermarkets, convenience stores, gas stations, and retail shops. “It allows a bit broader distribution for people to have access to Krispy Kreme,” Chambers says, as a grocery or convenience store is often more accessible for a fan than a Krispy Kreme shop.

But Courtney says that by licensing so broadly, Krispy Kreme lost sight of the principles it was based on.

“They built a brand on a core pillar of ‘hot doughnuts now’ in the magical stores that had the same kind of magical pixie dust that an In-N-Out Burger has. Sort of, ‘Wow, I wonder if there will be one in my town some day,’” Courtney says.

“But then, all of a sudden, they took that brand, and without understanding what the values are of that brand, like the hotness and freshness that built the brand, they started selling them in grocery stores, cold. And selling them in outlets where they didn’t even make the doughnut. They really just sold the doughnut out of these smaller spaces. And so they lost sight of the values that made the brand great.”

Bonnie Riggs, restaurant industry analyst for the NPD Group, says Krispy Kreme’s competition comes in part from the very convenience stores where it sells its product, especially as C-stores increase their emphasis on foodservice.

“I’m sure [Krispy Kreme] has a lot of brand loyalty, but we’re looking at an industry that’s not forecasted to grow much over the next decade,” Riggs says. “It’s really going to be a challenge and a battle for market share, especially within [quick service].”

Glazed & Confused

Of course, Krispy Kreme is well versed in battling for market share. A desire for national expansion drove Krispy Kreme management to dream big in the ’90s and hatch a plan to expand the brand beyond the Southeast. They drove it to the West Coast, where stores opened to fanfare, overnight camp-outs, and long lines, as though George Lucas had just announced a new “Star Wars” movie.

In April 2000, Krispy Kreme debuted on the New York Stock Exchange, and its stock jumped 76 percent on its first day. Early success encouraged franchisees to borrow money and open shops rapidly.

Speaking with the wisdom of hindsight, Morgan, who was not CEO but on Krispy Kreme’s board at the time, says the company expanded too rapidly. “We built enormous shops based on what the opening demand was as we spread throughout the country. I’m talking about 4,500–5,000-square-foot shops to sell nothing but doughnuts.”

Executives also yearned to conquer the Northeast, an attainable though perilous mission given Dunkin’ Donuts’ headquarters in Massachusetts. In August 2003, Krispy Kreme’s stock hit an all-time high of $49.37, and by the end of the year, the company had locations in 43 states, including its first outlets in New England.

The sugar rush came to a dramatic halt in 2004. The market, oversaturated with Krispy Kreme shops that consumers once begged for, had shown Krispy Kreme the consequences of trying to outsmart the laws of supply and demand.

Its stock fell by more than 50 percent, and as stores nationwide permanently powered down glazers and boarded up, the Securities and Exchange Commission (sec) started sniffing around the doughnut maker’s finances.

In 2009—the same year the stock hit an all-time low of $1.18 a share—the SEC would decisively conclude accountants had cooked the books.

Kreme of the Crop

While trouble brewed at home, Krispy Kreme turned its eye on the international market to much success. Today, the company has more than 450 stores internationally, compared with 250 in the U.S., and Morgan announced plans to have at least 900 shops overseas by fiscal 2017. Back on track, the company also celebrated its 14th quarter of same-store sales growth this year.

“You see our stock drop from almost $50 to $1, it’s hard to have that belief and that faith and that credibility,” Morgan says. “We had to believe in ourselves again, we had to believe in the product, we had to believe in the brand, and we had to believe in the future.”

He says the brand plans to spread more strategically across the U.S. this time around. Development will be taken on completely by franchisees, but, unlike the first expansion attempt, Krispy Kreme will support them with local-store marketing, regional operator support, and better labor management tools.

Executives contend Krispy Kreme has no direct competitor because the brand is built around emotional treats and shareable pleasures. Experts say even the logic that Dunkin’ Donuts is Krispy Kreme’s primary competitor is becoming weaker, as Dunkin’ advances menu development in sandwiches and specialty drinks and continues its strong emphasis on coffee.

“Dunkin’ Donuts has expanded,” Courtney says. “You can get a chicken salad sandwich at Dunkin’ Donuts. You can get an egg sandwich at Dunkin’ Donuts. Who knows what Dunkin’ Donuts will do next. As they diffuse what they stand for, the only doughnuts you’ll find there are the ones on the logo.”

This leaves Krispy Kreme free to reclaim its crown as emperor of the doughnut kingdom.

“Let [Dunkin’ Donuts] be coffee, let them be chicken salad sandwiches, let them be egg sandwiches,” Courtney says. “We will come in [a Krispy Kreme store] and say, ‘Thank god, someone still honors the almighty doughnut.’ And I would say that’s one way to be fully differentiated and really honor the food group that a lot of people have left behind.”

Seventy-five years is a big achievement for the brand. Its global, yearlong celebration was styled as a birthday, not an anniversary, “because birthdays are a lot more fun,” Chambers says.

To celebrate three-quarters of a century of Krispy Kreme memories, zeal, and tastes, the company threw a giant birthday bash at its headquarters in Winston-Salem in July. With the tagline “Celebrating 75 years of smiles,” the weekend bustled with live music, free glazed doughnuts, rides, games, and cheerful fans.

Outside of the birthday bash, the party involves a virtual birthday card and the Krispy Kreme Cruiser crisscrossing the nation so fans can share their memories in person.

“[Customers] will write us letters about how it made a difference,” Morgan says. “We’ll get letters from people where their loved ones were literally on their death beds and their last wish was, ‘Please go get me a Krispy Kreme doughnut.’

“My own personal belief on that is, it’s only partly that they wanted to taste it and eat a great doughnut. I think it’s much, maybe even more, that by eating that doughnut, they would be swarmed with memories, just covered with wonderful memories that brought back prior portions of their life.”

Witness the raw brand loyalty that has carried a simple doughnut shop for 75 years.

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