The Rise and Fall of Krispy Kreme in New England

When it invaded Dunkin' Donuts' home turf of Massachusetts three years ago, there were hordes of devotees. "People were waiting in line for three hours," Mayor Michael J. McGlynn recalled. Today that store is closed, the hype and hoopla are history, and Krispy Kreme's bottom line is glazed with red ink.

Analysts struggle to explain the pop of the Krispy Kreme bubble, theorizing that it was exposed to the risk of a single product model. Translation? No cup-of-joe in New England is the kiss of death. And yet it seemed fine for a time.

[Krispy Kreme] was too dependent on a single product. Its coffee left many locals unimpressed, a mortal sin in the joe-loving Hub. And, perhaps smitten by low-carb diets, New Englanders don't love doughnuts the way they used to.

Others say it grew too quickly.

Krispy Kreme, which was founded in 1937, grew slowly for much of its history, said John S. Glass, an analyst for CIBC World Markets. Then, in the late 1990s, the company started expanding aggressively. "Overbuilding," Glass wrote in a recent report, is one reason Krispy Kreme is "digging out of a deep hole."

In New England, it faced additional challenges because "good retail locations are hard to find and was playing in the backyard of Dunkin' Donuts of Canton" -- who, to be fair, hadn't changed much in years. That particular New England chain seems to be now awakening from its long slumber.

The theories go on and on, but in this writer's opinion one of the best explanations has been offered by Motley Fool's (registration needed) investment journalists.

Krispy Kreme's developments quickly changed as the initial hype and excitement turned out to be a mirage: buzz-building new store openings, unethical and self-dealing repurchases of its own franchisees at inflated prices, and a crippling debt load. Soon thereafter, sales began to plummet and an avalanche of problems fell on the company, followed by the need to close stores, bankrupt and furious franchisees, shareholder lawsuits, and Securities and Exchange Commission investigations. It's no surprise that Krispy Kreme did not release first-quarter earnings. It's hard to trust any fiscal 2007 results when fiscal 2006 numbers are missing.

With so many problems at home and franchise buyers wary, Krispy Kreme has started selling major master franchises in Japan and the Phillipines, where their image isn't as tarnished, to help raise cash during troubled times.