Friday, December 09, 2005

Yesterday, Krispy Kreme closed three New England stores, including the company's first Massachusetts store in Medford. When I bought Krispy Kreme stock in 2001, I paid $30 per share. I sold when it hit $50. Today, each share is worth about $6.

In simple terms, greed made Krispy Kreme sloppy. A series of mistakes led to its fall, but the common theme was inconsistency and the root cause was greed. The bottom line is that its executives caught the scent of the leading edge of a fad, and they thought to ride the wave into uberwealth. The problem was, they had never been that far away from shore; they didn't know the currents, and they drowned.

Their first mistake was aiming for the Northeastern market. Krispy Kreme was built in North Carolina; those doughnuts are a Southern treat tailored for Southern folks. You can't hold the attention of Yankee cynics with a HOT DOUGHNUTS NOW sign; they might buy its initial charm, but ultimately Yankees are skeptical of anything that smells like a marketing gimmick. Besides which, fresh doughnuts are warm and tasty, but they're not convenient -- and city folks live and die on convenience.

The company's second mistake was trying to fight an elephant on its home ground. Rather than build a solid foundation, rather than placing satellites to establish credibility and explore the market, they just charged in and aimed to drop the bull (Dunkin Donuts) with a single shot. Ambitious, maybe -- but stupid.

That said: The truth is, they conceived an interesting plan. When Krispy Kreme first announced its plan to expand into New England several years ago, its executives detailed a specific plan of attack. Instead of opening in urban locations and challenging Dunkin Donuts head on, they would begin by opening a few stores near suburban office parks. They would focus on their coffee, thinking that those specific commuters would favor quality doughnuts over familiar coffee; and if they could serve decent brew, they reasoned, they would certainly capture a respectable share.

That was a clever plan, and it was just narrow enough that it might have worked, if they had stuck with it. Abandoning it was their final mistake. I don't know what made them second-guess themselves; but someone decided to cover the bases, and in addition to locations in Cranston, Rhode Island and Newington, Connecticut, they also opened in Medford and Dedham, Massachusetts, and even smack in the middle of Prudential Center in downtown Boston. Now, not only had they broken the consistency of their 60-year-old corporate vision; they had deviated from their own 5-year strategy. They were skipping all over the map, with their eyes locked on stock dividends rather than stability or success. It's a workable plan if you're looking to go supernova, I suppose; but you can't achieve longevity with an open throttle.

Hopefully, Krispy Kreme's new executives (the old ones have all been fired) will realize that only the strategy was flawed; the business model has served them well for 60 years, and one slipped grasp off the brass ring doesn't mean they need to reinvent the entire company. They make a good product; they just couldn't hang with major league ball. I hope they'll go back to the minors to lick their wounds and learn their lessons. And someday, I sincerely hope they'll try again.


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