Friday, August 18, 2006

Nothing Left but the Hole in the Middle

Krispy Kreme's first West Coast outlet sparked fanfare and big sales. Patrons moved on, and now so has the store.

By Jerry Hirsch
Times Staff Writer

August 18, 2006

Fans and employees of Krispy Kreme went from glazed to confused Thursday morning as the chain's La Habra store — the first on the West Coast — pulled down its signs, packed up its doughnut mix and shut its doors for good.

From opening day in January 1999, the workers toiling inside the tidy white, green and red building fueled a feeding frenzy to the tune of 20 million doughnuts and $9 million in sales in the first year.

Customers swarmed the store on West Imperial Highway day and night, waiting for the Hot Doughnuts Now sign to light up and jostling to purchase dozens of the Hot Original Glazed treats.

"This is completely sad for me," said Yvonne Ayala, the general manager. She is one of the 12 remaining employees from the 14-person morning shift of that first year. "I went from a teenager to a young lady to an adult at that store."

Southern California franchisee Great Circle Family Foods blamed the closing on carb-conscious customers and changing tastes. It also cited turmoil at Krispy Kreme Doughnuts Inc.'s North Carolina corporate headquarters, where former executives were accused of cooking the books to inflate profit and boost the sagging stock price.

Whatever the reasons, James Glass, an analyst with CIBC World Markets in Boston, put it bluntly: "People just won't line up for doughnuts forever and ever."

The store that started the local craze gradually became unprofitable, with sales falling to about a third of their original level, one employee said.

Krispy Kreme was in some sense a victim of its own success. The quick proliferation of stores — seemingly opening by the dozen — made it harder for individual locations to get by. The La Habra store closed as part of a retrenchment in the last year that has left Great Circle with 17 Krispy Kremes, down from a peak of 31.

Krispy Kreme, a Southern tradition since 1937, didn't open a store north of the Mason-Dixon Line until the mid-1990s. The company eventually expanded to New York, Chicago, Houston, Omaha and the West Coast.

Everywhere it went, Krispy Kreme opened to fanfare, crowds and big sales. Indeed, when the company went public in April 2000, the stock soared 76% on the first day of trading. It reached a split-adjusted high of $49.37 in August 2003.

The initial success of those doughnut shops prompted franchisees to borrow money and expand rapidly, "but the model wasn't sustainable and the brand became overexposed," Glass said.

As sales fell, franchisees had to retrench, closing stores and in several cases filing for bankruptcy protection. The company's shares suffered, falling to $4.05 in October.

"This story has played out coast to coast in city after city," Glass said.

Rigel Corp., the franchisee for Arizona and New Mexico, filed Chapter 11 last week, closing all 10 Krispy Kremes in those states. Franchisees in Pennsylvania and Texas have done the same.

With the closures, Krispy Kreme's first-quarter sales fell 17% from a year earlier. Although it is a publicly traded company, it has not released more detailed financial information.

Richard G. Reinis, chief executive of Los Angeles-based Great Circle, lamented closing what he called a historic store, which no longer produced enough in sales to pay "the debt on the building."

He noted that most of the original morning-shift employees were still there, an unusual record for the fast-food industry, in which annual employee turnover for many companies reaches 100%.

Ayala remembers arriving at her Krispy Kreme job interview straight from La Habra High School, all of 17 years old and clad in her cheerleader uniform.

The job paid for her college education — she has a bachelor's degree in psychology from Cal State Long Beach — and a down payment on a Lake Elsinore house, said the 25-year-old Ayala.

Reinis said he was trying to find the employees work at his other stores. Ayala has been offered a position at the City of Industry location.

Krispy Kreme, once a darling of Wall Street, ran into trouble in May 2004, blaming its problems on the popularity of low-carbohydrate diets. The stock plunged, and Chief Executive Scott Livengood was fired.

A report by a special committee of independent directors issued in August 2005 pinned responsibility for the problems on Livengood and former Chief Operating Officer John Tate, saying that the nature and timing of a variety of accounting errors "strongly suggest that they resulted from an intent to manage earnings" to meet Wall Street expectations.

Krispy Kreme has struggled to develop and execute a turnaround plan. In April, the company named Daryl G. Brewster chief executive, its second since the ouster of Livengood. In May, Krispy Kreme reached a $4.7-million settlement with workers who claimed that they lost millions of dollars in retirement savings because executives hid evidence of declining sales and profit.

Jeff Jervik, Krispy Kreme's executive vice president for operations, said the new leadership team was working to turn the company around.

He said current management was working more closely with store operators through an advisory council of elected franchisees to improve customer service as well as the product.

Reinis of Great Circle said the previous corporate turmoil had damaged the brand and prevented the company from developing strong wholesale initiatives that would have helped franchisees squeeze more value from their investments through higher sales in supermarkets and other outlets.

Reinis, however, might not be in the doughnut business much longer.

In July, a subsidiary of Krispy Kreme agreed to pay Great Circle $2.9 million for stores in Burbank, Ontario and Orange. Under the deal, the parties will drop legal claims against each other when the transaction closes this month.

Additionally, they are negotiating a deal to offer Krispy Kreme the option to acquire Great Circle "for nominal consideration."

Though doughnut fans may miss the aroma of fresh-from-the-fryer Krispy Kremes, they soon will be able to get a new fast-food fix. A Chick-fil-A outlet will take over the site.