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December 13, 2004
What's up with Krispy Kreme?
Reader Barry Zweibel and others have asked us, "What's going on with Krispy Kreme?" (The company is one of seven case studies in "Creating Customer Evangelists.")
The news trickling out of Winston-Salem the past few months has been unfortunate, and there are two types of bad news: Revenues are declining, and there are questions about the company's financial management.
1. Financial management
Krispy Kreme is under investigation by the SEC about franchised stores it purchased. Some think the company paid too much for the franchises, especially for one that was owned by the CEO's ex-wife. There are questions about how revenue from the acquisitions was booked.
Then there was the decision to buy, and later shut down, Montana Mills Bread Company. That was a $40 million mistake. Few people understood the strategy for buying a bread company.
2. Declining sales
It's Krispy Kreme's other big challenge. Systemwide, average sales per week are down 16.7% compared to last year. Why? We would argue that from our outsider vantage point, Krispy Kreme expanded too quickly. Their doughnuts were suddenly everywhere, including gas stations and grocery stores. Tiffany watches aren't sold in Walgreens, so why should Krispy Kremes be sold in a Chevron?
Of course, Wall Street demanded fast growth and the company complied. The young guns at Google are teaching the world of publicly held companies to ignore Wall Street's quarterly demands and do what's right for customers, the business and shareholders, in that order.
For awhile, the Atkins diet swooped across the country. Conceivably, that may have caused some customers to ease back on their Krispy Kreme addiction. But the no-carb diet fad seems to have dissipated. Krispy Kreme probably should refrain from using that rationale for declining sales. (However, hefty Americans may finally be wising up to the dangers of obesity, and there's not much Krispy Kreme can do about that except expand its offerings of healthier food.)
We believe that the company's customer evangelism strategies outlined in the book are still relevant, but Krispy Kreme should pour the sugar on three key areas:
1. They're not marketing to the choir. They aren't giving existing customers new reasons to visit stores, unless you love doughnut holes.
2. They're silent about their bad news. They don't blog, and they haven't mentioned any of these issues in their monthly email newsletter. Silence leads to suspicion.
3. They aren't asking for the support of their vocal loyalists. True-believer customers will stick by you even in bad times, but they need candid information. It takes courage to acknowledge problems and have a conversation you may consider uncomfortable, but silence is a detriment, not an advantage.
Krispy Kreme is a good company, run by thoughtful and smart people. The company touted not long ago as "the hottest brand in America" (subscription required) would do well to embrace the Doughnut Theater metaphor it created: provide more operational transparency to a greater number of people.
During an exploratory conversation a year ago about expanding our case study of Krispy Kreme into a longer-form piece, a company executive politely dismissed the idea, saying, "We're a fairly private company." The growing trend for companies in hyper-competitive markets is to open up, not keep the blinds closed.
Krispy Kreme, it's time to open up.
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I think that Krispy Kreme lost sight of their identity. A 12-hour old Krispy Kreme is just another 12-hour old doughnut. But a fresh doughnut just out of the fryer is a treat that few people have the opportunity to enjoy.
Any sales channel that cannot deliver a fresh Krispy Kreme is an advertisement for the competition. There is nothing special about it and anyone who tries one will wonder what the fuss is all about.
Krispy Kreme has lost sight of their identity and their customer base altogether. They are headquartered here in NC, but they closed almost all of their NC stores. Krispy Kreme's are now mostly only available here in the grocery store, 12 hours old. Krispy Kremes are just no good cold . . . In the meantime Dunkin Donuts have expanded in NC along with other competition like Panera and McCafe that sell bakery treats. They seemed to have a good strategy to go after new customers - but no strategy to keep them or keep their old evangelists. Consequently, they have none. IMHO.
I think it's even simpler than "12 =hour old donuts suck".
Even fresh out of the fryer, Krispy Kreme donuts aren't that great. When the company was new, they were the latest "fad" product; everyone had to try one, and they were the new treat that you brought to share (with family, cow-orkers, etc.)
Now that they're old, _those_ sales have dropped off. They're just another doughnut now.
As a Winston-Salem resident with many friends who work at KK, the financial thing is totally distracting the company. As a result, I feel they have stopped innovating and have lost sight of what they are selling.
I live less than a mile from the corporate flagship store where they try out everything new first. Honestly, I haven't seen anything new in awhile. The pumpkin spice donuts are good, but no new shirts or other merchandise, no new tie-ins, etc.
As for what they are selling, the KK store experience is a different sale than the grocery store sale. I wonder which has had the largest decline.
For the KK store, you are selling the social experience and the entertainment for the kids. Who knew industrial engineering could be entertaining? People come to the store with their friends to socialize. People pick up multi dozens for office social activities. It's the social aspect backed by a decent product which makes it different from a Dunkin Donuts or Horton's. With those, it's all about the donut. Since the financial woes, the show has stagnated and the company has appeared to withdraw into itself. This lack of umph shows in the attitudes of the people that work there and in the maintenance of the outlets.
As for innovations, I think they need to make changes to encourage people to socialize there, especially parents. Kids love the conveyor belt. I think a kid cleanup station would also be a welcome change. I would also like to see them do something with Starbucks and get rid of that horrid coffee they insist on selling. But until the financial stuff goes away, I'm not hopeful for a lot of change.
As a followup to my previous comment, some news that's not bad via the Winston-Salem Journal.
http://www.journalnow.com/servlet/Satellite?pagename=WSJ%2FMGArticle%2FWSJ_BasicArticle&c=MGArticle&cid=1031779727215&path=!business&s=1037645507703
Also, it is interesting to note that the CFO, COO, and the Head of HR have all left the company this year.
Treb, you're right about upgrading the coffee to Starbucks. Speaking of which, I heard not long ago that Starbucks almost bought Krispy Kreme before it went public. Just think what might have been had the deal gone through...
And in the mid-90s, when bagels were 'the new donuts,' Starbucks owned a large equity stake in Noah's Bagels. Starbucks sold its $10M Noah's investment to Einstein's for $20M in 1995.
Mmmmm !! Do-nuts . . . .
;->
Several points are worth noting here:
KKs are franchises, which is great for sense of ownership and quality customer service.
However, building a nationwide network of franchises can stretch your resources, create unforseen issues in your supply chain, and dilute what made your brand so special. If you're not good at empire-building, then don't go that route.
I've had a few Krispy Kreme's, and when fresh they taste terrific. Unfortunately, when you get right down to it, I can live without them, and that's not good for brand-building.
One thing a quality business cannot live without is a quality staff putting out a top-notch product. The food service industry is generally a low-paying one, with high employee turnover and lots of regulation.
No matter how wonderful Krispy Kremes are, the company and its franchisees cannot dodge this problem - employee retention - that vexes all levels of the food service industry. And I think this is one area where KK missed the boat.
The theme we have here is customer service: if you don't have quality employees or the means to maintain an experienced staff, then you will lose the service aspect, and your product will go downhill.
As well, KKs were known as a niche product, a regional delicacy much like sour dough bread in San Francisco. Once Krispy Kreme franchised the whole works, that specialty went away.
No doubt the folks at KK meant well when they went public and sold franchises, but they are no longer a much-loved brand. They are now a cautionary tale.
Mary,
I agree wholeheartedly with your staff comment. As having worked a counter or two in my long career, I was never motivated or even asked to sell the product. It just happened as a by product of my personality.
I have seen the staff issue do more damage to food establishments than anything else. Managers have a tendency to cut hours when it is slow to reduce expenses. The side effect is that employees stop doing more than absolutely necessary since the company doesn't care about them.
Wrong attitude for customer facing employees. Instead, they should incent employees to make changes to improve business or even small changes, like how many smiles got spotted on customer faces while leaving.
When I lived in Baton Rouge, there was a McDonald's that had a dedicated crew for the lunch drivethrough. You could literally drive (slowly) through and never stop while getting a hot and correct order. Talk about getting your lunch in gear! Had they priced the menu to reduce penny change, it could have been improved even more.
They were able to boost business since their cycle time was low and they never had a big line. Only a stable team working together for a while and who cared about the service experience could do this. Once the group broke up, McD's went back to a 3 min per car cycle time and business dropped off.
I don't get Krispy Kreme's marketing department. In Toronto, in the beginning when this product was on everyone's lips "got to try it, hear the donuts are fantastic". Do you think a store could be found? Oh yes, 30 miles from the heart of downtown Toronto. So we drove for miles and lined up for hours and loved the product. No more stores appeared!! Ever. This was such an opportunity to be incredible! Add amazing coffee and this had the potential to be a billion dollar business opportunity. But no. Nothing. Next thing you know the donuts appeared on trucks at plazas, next thing after that at Walmart sitting on the shelves. They were simply professionally unprepared to be great. Very sad actually.
In addition to some poor management decisions, I feel that the absence of innovation played a big part in KK's demise. One only has to look at Tim Horton's, Canada's coffee shop king. Tim's market share is growing at an alarming rate, due in part to constant introduction of new, delicious products, ie., sandwiches, soups, frozen coffee beverages etc..
No matter how tasty your 0ne product is, the customers wants new and exciting items.
I remember when you first opened inCT how courteous and polite your staff was. I had a disappointing visit to one of your stores at the Mohegan Sun Casino in Montville, CT. The server in the store was very abrupt and nasty when I approached her about using the Mohegan Sun card when we were 20 minutes late. I said we were late because of getting out of church late. She responded with. "Blame your church", when al she had to say was, "I'm sorry I can't accept your card because it past the time when I can accept it. A little courtesy can go a long way. I know you're closing stores, but help like that doesn't make people want to buy coffee and doughnuts there. Needless to say, we left the store without buying anything.
KK gone just like all the other American Dreamers that believe in the American Greed. Grown to big to soon with products that Americans get tired of, stockholders that want to make a fast buck and sell when times get bad. R.I.P. KK
