Krispy’s Kremed!

By William Kenny
Times Staff Writer

Had the Philadelphia area’s flagship Krispy Kreme doughnut shop at Roosevelt Mall sustained its impressive November 2002 debut, there’s still no guarantee that it would be serving its singular signature brand of warm, sweet pastries.
Yet the fact that local sales likely swooned swifter than a seasick sailor certainly didn’t help the store’s cause in light of the supernova-like implosion of its parent company.
The abrupt Dec. 26 closure of the Cottman Avenue shop, along with three other Krispy Kreme locations in the tri-state area, was merely the latest in a series of recent setbacks for the Winston-Salem, N.C., company.
A few short years ago, Krispy Kreme Doughnuts — trading under the symbol KKD on the New York Stock Exchange — appeared on the cusp of becoming America’s next great international franchiser, right alongside big hitters like McDonald’s, Subway and Starbucks.
But a federal accounting investigation and accusations of mismanagement have wreaked havoc within the company, leading to investor fear, plummeting stock prices, failing franchises, declining sales, further loss of stock value and, ultimately, a clean sweep of the executive suite.
Since last January, the company has been in the hands of chief executive Stephen Cooper, who heads the corporate restructuring firm Kroll Zolfo Cooper LLC. That’s the same Cooper whom the board at Enron Corp. hired in January 2002 to make lemonade from the bushel of rotten financial lemons allegedly squeezed dry by indicted former Enron boss Kenneth Lay and his colleagues.
Lay’s trial on federal accounting fraud and conspiracy charges is scheduled to begin on Jan. 30.
In the Enron case, Cooper’s mission has been to maximize the company’s value for creditors through the bankruptcy process. In contrast, Krispy Kreme is not an autopsy procedure, but rather emergency surgery.
The amputations already have begun at the expense of local glazed-doughnut loyalists.

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Delaware County-based Freedom Rings LLC, the Krispy Kreme franchisee with development rights throughout the region, and operator of the defunct Cottman Avenue location, was one of the expendable limbs.
The wholly owned subsidiary of the corporation closed the doors to its final four locations — Cottman Avenue, another at Philadelphia International Airport and two in Delaware — shortly after noon on Dec. 26. Freedom Rings had been operating for more than two months under bankruptcy.
On the eve of the Chapter 11 filing in Delaware on Oct. 17, private interests still owned 30 percent of the franchisee, but were bought out by the parent company.
"Freedom Rings has been closely analyzing the performance of its stores in (the) Philadelphia (area) over the last couple of months, and in consultation with creditors it was determined that closing the remaining four stores was the best way to maximize (their) value," said Laura Smith, a corporate spokeswoman.
Freedom Rings reportedly was $24.1 million in debt, although Smith referred all specific inquiries about the financial performance of its shops to the mass of public bankruptcy documents.
Clearly, however, interest in the local shops cooled from their impressive initial splash.
Freedom Rings first set up a temporary retail trailer in the Roosevelt Mall parking lot in July 2002. By November of that year, and with much fanfare, a new 4,600-square-foot bakery/shop was in place there.
Some folks waited outside the store overnight to be first in line for the 5:30 a.m. opening on Nov. 7. Store management supplied a heated tent for the diehards and gave the first customer free doughnuts for a year.
Hundreds waited in line at the walk-in counter and drive-through that day. According to Freedom Rings’ president at the time, Rocco Fiorentino, the location sold more than 64,000 doughnuts that day and about 250,000 through the first four days.
The Krispy Kreme fever at that time was evident in a Fox Chase mother’s recollection of how her young son had become an instant fan during a recent family vacation to Florida.
"It was his first experience with Krispy Kreme," she told a Times reporter. "Once he had a bite he didn’t care about going to Disney. He just wanted to watch the doughnuts come off the belt."

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Fiorentino, whom the Times was unable to locate for comment last week, had planned to open an additional 15 stores in the tri-state area over the ensuing five years. At the time of the 2002 opening, there were just 122 Krispy Kreme stores in 34 states and Ontario, Canada.
Freedom Rings operated eight different locations at one time or another. Montgomeryville and Springfield closed last July, while stores in Langhorne and Brick, N.J., shut down in October.
A reported 228 people lost their jobs as a result of the closures.
The local franchisee’s rise and fall mirrors that of the 69-year-old parent company. After decades featuring periods of slow growth, mostly in the American South, and other periods of relative dormancy, a small group of early franchisees bought the parent company in the 1980s and undertook an ambitious plan for national expansion.
A significant step occurred when the corporation opened its first store in New York City in 1996, followed by a California location in 1999.
The expansion continued into Canada in December 2001. By last January, the company reported 440 retail outlets, encompassing 402 stores and 38 satellites — such as supermarkets — where Krispy Kreme doughnuts were available.
As of last week, the number had dropped to about 330 stores and 80 satellite locations, according to Smith.
Krispy Kreme’s future seemed sweet when the long-private corporation made its initial offering of public stock on the NASDAQ exchange at $21 a share in April 2000. The value soon rocketed to $105 a share. After two stock splits and a transfer to the New York Stock Exchange in May 2001, the share price settled in at close to $50.
The arrival of tough times, however, has wilted Krispy Kreme’s stock. Last week, it was trading between $5.50 and $6 a share.
During the big 2004 decline, former chairman, president and CEO Scott Livengood, in a company news release, tried to soften the blow by blaming low-carbohydrate diet trends for the company’s poor sales performance.
Later that year, the company acknowledged a federal Securities and Exchange Commission investigation into its financial reporting practices.

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Stephen Cooper, during a Feb. 11 conference on corporate restructuring at Penn’s Wharton Business School, outlined his views on why companies generally fail. The new Krispy Kreme chief, a Wharton alumnus, listed some adverse circumstances that market analysts have been saying about the aspiring doughnut empire for months.
According to an article on the business school’s official online newsletter, Cooper cited unplanned growth as one common failure.
"Particularly in the heady days of just going public, companies allow Wall Street to create unreasonable expectations of their performance," the newsletter stated, paraphrasing Cooper. "Most get into trouble by attempting explosive growth with little operational or balance-sheet support."
Another common problem identified by the restructuring expert is "companies that tried to deliver short-term returns instead of focusing on their long-term health. It’s another problem created by Wall Street, he says. Chief executives of these companies ‘take their organizations and jam steroids down their throats every 90 days. Ultimately, you begin to do dumb, crazy things to please a fickle investment community.’"
It also doesn’t help when a company’s executives still cling to a rosy view of a dire situation.
"Managements in denial are another critical factor in leading their companies down the slippery slope to failure," the Wharton newsletter stated.
Some management organizations tend "to be surprised or to be random-excuse generators when the proverbial you-know-what hits the fan," Cooper told the conference.
The restructuring expert reportedly described Krispy Kreme as a brand with long-term potential, but which has suffered from undisciplined growth.
Fiorentino, the local franchise operator, had big dreams four years ago while surveying the crowd at the Roosevelt Mall opening. "Philadelphia has been sitting on the back burner for a while," he said that day, "and I think people are excited to have Krispy Kreme here."
As it turned out, the doughnut saga was bittersweet. According to Laura Smith, the corporate spokeswoman, there are no plans for new Krispy Kreme shops in the Philadelphia region. ••
Reporter William Kenny can be reached at 215-354-3031 or bkenny@phillynews.com