Blue Star Donuts, an eight-unit chain based in Portland, Oregon, filed for bankruptcy August 26 due to the effects of the COVID-19 pandemic.
CEO Katie Poppe said in a court filing that Oregon’s stay-at-home order on March 17 forced the brand to shut down operations at all locations. On the same day, the company laid off 80 of its 100 employees. She described the pandemic as “immediate and devastating to the company’s financial condition.”
The restaurant ended July with $1.7 million in assets and $1.1 million in liabilities. There are three licensed Blue Star locations in Los Angeles that aren’t part of the bankruptcy.
From Blue Star’s founding in 2012 until March 17, the brand used a “hub-and-spoke” model in which doughnuts were prepared in a central location and transported to each unit across Portland. During that time, 100 percent of sales were from inside the four walls.
However, once COVID hit, production halted, inventory became exhausted, and revenue “completely disappeared overnight.”
“Ultimately, I determined that the company had a stark choice: either make a sharp pivot of its business model from exclusively retail-driven sales to incorporate wholesale and e-commerce delivery or face a paralyzing future,” Poppe said in the filing. “Paralysis was not a viable option for the company. And closure would have been catastrophic not only for the company’s employees and members, but also for the company’s financial and trade creditors.”
Poppe described the new effort as “Blue Star 2.0.” The plan not only includes e-commerce delivery and wholesale, but also a scaled-down retail footprint.
The first step was establishing the wholesale business. In April, Blue Star beta-launched new wholesale products—doughnut holes and mini vegan cake doughnuts—in select local grocery stores. In the same month, Blue Star received a Paycheck Protection Program loan valued at $545,900.
A key part of Blue Star 2.0 was continuing operations at its production kitchen, but the brand ran into tough negotiations with its landlord. According to Poppe, the landlord continued to ask for payment despite the company bringing in no revenue due to the crisis. The relationship deteriorated so much that the landlord changed the locks and refused to turn over kitchen equipment as the brand attempted to move to a different location, according to court documents.
As a result, the restaurant filed a complaint. The two sides have since gone back and forth in court. Poppe then determined the company cannot survive a protracted legal battle and also implement Blue Star 2.0.
“Prior to March 17, 2020, I never imagined having to appear in a Bankruptcy Court on behalf of the company,” Poppe said. “And yet, as the economic effects of the public health crisis continue to reverberate throughout our economy with no end in sight, and as the company has been unable to consensually resolve its disputes with the SW 12th/Morrison Landlord, it has become clear to me that the only way the company can survive and possibly thrive in the post-COVID-19 world is by seeking chapter 11 protection to reorganize its business operations and restructure its existing liabilities.”
Three locations have reopened since the start of the pandemic with limited operations. Blue Star is still operating out of its temporary kitchen, but Poppe said the chain’s survival requires a new production kitchen that can protect employees’ health, increase production and satisfy customer demand.
“Notwithstanding what we have gone through over the past months, I am confident that if this Court authorizes the company to continue operating as a debtor and debtor-in-possession for the next three months, the company will be able to propose a confirmable plan of reorganization that leverages all of the work already invested by the company in Blue Star 2.0, maximizes the recoveries to all of the company’s stakeholders on account of their claims, preserves the company’s critical commercial relationships, and enables the company to realize on its mission: to continue delivering the best doughnuts possibly ever made to our loyal customers,” Poppe said.