Krispy Kreme must supply all stores, even troubled ones

He blamed Krispy Kreme for pressuring the franchise to expand too quickly, for overcharging it on supplies and equipment and for failing to promote the brand, even though Sweet Traditions has paid $2.5 million into a "brand fund."

www.usatoday.com
July 26, 2005

Krispy Kreme must supply all stores, even troubled ones

CHARLOTTE (AP) — Krispy Kreme Doughnuts (KKD) is appealing an Illinois judge's ruling that the doughnut maker must continue supplying stores in Chicago and St. Louis despite the franchisee's inability to pay.

In the second legal victory this month for a disgruntled franchisee, Sweet Traditions last week received a temporary retraining order barring Krispy Kreme from cutting off its supply of doughnut mix and other ingredients. Circuit Court Judge Richard Aguirre said Krispy Kreme's "severe mismanagement" contributed to the "perilous financial condition" of the franchisee, according to court documents.

Sweet Traditions, an area developer since 1997, operates about 25 stores in Illinois, Indiana and Missouri and employs 750 people. Managed by Eric Sigurdson, whose background includes real estate and development, Sweet Traditions owes Krispy Kreme more than $2.4 million and has begun making interest-only payments to its lenders, according to court documents.

Sweet Traditions is trying to restructure its balance sheet to cut some of its $58 million debt and increase equity and had sought Krispy Kreme's approval to defer certain payments until the recapitalization is completed in September, according to its lawsuit.

But Krispy Kreme's board in June rejected most of the request, allowing only certain payments to be deferred. Sweet Traditions, however, stopped paying Krispy Kreme in mid-July, at which point Krispy Kreme said it would stop shipping supplies. Krispy Kreme stores are required to buy their doughnut mix, coffee and other supplies from the Winston-Salem, N.C., company. The franchisee had argued it would be forced to close all of its stores unless shipments resumed.

Court documents filed in the case paint a cloudy financial picture for Sweet Traditions. In an affidavit, Sigurdson said a "continued catastrophic decline" in sales contributed to net losses of $1.2 million in 2003 and $3.2 million in 2004 and an operating loss of $2.2 million so far this year for Sweet Traditions.

He blamed Krispy Kreme for pressuring the franchise to expand too quickly, for overcharging it on supplies and equipment and for failing to promote the brand, even though Sweet Traditions has paid $2.5 million into a "brand fund."

Sigurdson said product sales began declining in 2003 and continued through 2004, hurt by a lack of product development and advertising. Same-store sales in Chicago declined 36% in 2003, 29% in 2004 and have continued to decline amid negative publicity surrounding investigations into the company's accounting and franchise repurchases, the franchisee said.

"We are 'getting killed' out here, especially in Chicago where … we have a very powerful competitor in Dunkin Donuts with over 400 stores," Sigurdson wrote to Krispy Kreme executives as recently as April, according to court filings.

Sigurdson and attorneys for both sides didn't return several messages. An outside spokeswoman for Krispy Kreme didn't have an immediate comment on the lawsuit's allegations. The case was moved to federal court in East St. Louis, Ill., on Monday at Krispy Kreme's request.

Steve Brunner, Krispy Kreme's senior vice president for supply chain operations, said in court documents the company has tried to accommodate Sweet Traditions. He said the temporary restraining order would cause "an undue hardship" on the company.

Earlier this month, the Houston area franchisee won a local ruling requiring Krispy Kreme to continue shipping doughnut mix and supplies while the two sides undergo mediation on more than $1 million in disputed royalties and charges for supplies. Krispy Kreme's legal brief in its appeal of that decision is due to a Texas court of appeals on Aug. 15.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


Brought to you by WikidFranchise.org

Risks: When the franchisor tanks, so does the franchisee, Must buy only through franchisor (tied buying), Expands too quickly, Can't buy lower priced products, Franchisor overcharges for required products, Ineffective marketing, Advertising fund use disagreement, Controlling, trapping or defeating the franchisee, Costs of scandals, Catastrophic sales decline, Dispute resolution means franchisee goes broke, Incompetence, Investor confidence crushed, no trust or buying, Same-store sales drop, Saturates markets through multiple distribution channels, Stock price plummets, United States, 20050726 Krispy Kreme

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License