Burnt to a crisp

"The Krispy Kreme brand had a cult following in the U.S." Swayed by that, Richardson says KremeKo locked itself into an onerous contract with no back door…Due diligence or not, signing such a contract left KremeKo weak. "If you voice your concerns…it really comes down to the franchisor blinking at you and saying, 'Yeah? Well, sue me.'"

Report on [Small] Business magazine
September 22, 2006

Burnt to a crisp
How a small Canadian company got fried by Krispy Kreme
Nick Rockel

The rollout: In December, 2000, Roly Morris, who had previously overseen Starbucks's expansion into Canada, signed an area-development agreement with Krispy Kreme Doughnuts, the wildly popular North Carolina-based chain. As CEO of KremeKo in Canada, Morris began acquiring the Krispy Kreme rights for every province but B.C. Krispy Kreme took a 39% interest in the private venture, and gave KremeKo seven years to open 40 Canadian stores and a wholesale business. In December, 2001, Morris launched the first international Krispy Kreme franchise in Mississauga; it set an opening-week sales record of $465,000. At its height, in 2003, KremeKo had 18 stores and around 1,000 employees. Krispy Kreme stock peaked at $49.74 (U.S.) in August, 2003.

How things got stale: KremeKo opened too many locations too quickly, and its wholesale division ate into retail profits. It failed to see the flaws in the parent company's expansionist business model, which called for the addition of 4,500-square-foot stores at a cost of $2.5 million apiece, no matter how the business was faring. (Any breach of contract could result in Krispy Kreme seizing the assets.) The Canadian investors underfunded the company, so Morris ended up chasing capital at the expense of day-to-day operations. Then, the low-carb craze hit and, in mid-2004, Krispy Kreme itself began suffering losses.

Fallout: By April, 2005, KremeKo had closed 10 of its 18 stores and was more than $3 million in the red. Krispy Kreme forced the Canadian operation into creditor protection and, in June, 2005, put KremeKo's assets up for sale. That same month, Krispy Kreme fired six of its own top managers.

Official line: Judi Richardson, KremeKo's former VP of marketing and business development, says, "The Krispy Kreme brand had a cult following in the U.S." Swayed by that, Richardson says KremeKo locked itself into an onerous contract with no back door. She adds that management in Canada should have made a bigger fuss when it saw the expansion plan unravelling. "We had fundamental issues with the business [including store size and pace of expansion] that we needed Krispy Kreme to address, and I think we were just a bit too respectful or too frightened of this big gorilla." Krispy Kreme had no comment.

Expert line: Partnerships like this one suffer from a power imbalance that's typical of a franchisor-franchisee relationship, which Midhurst, Ontario—based franchise-industry analyst Les Stewart compares to a medieval marriage. "From Krispy Kreme's perspective, they write the licensing agreements, and they're presented as pretty much non-negotiable," he says. Due diligence or not, signing such a contract left KremeKo weak. "If you voice your concerns…it really comes down to the franchisor blinking at you and saying, 'Yeah? Well, sue me.'"

Outlook: Not so sweet. Krispy Kreme acquired KremeKo's assets last December, and now it runs what's left of the Canadian operations. There are just seven Canadian Krispy Kreme locations in four provinces. The company's stock is trading in the $8.50 (U.S.) range.


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