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Full of Holes? Some Doubt Krispy Kreme's Growth Prospects

As the doughnut chain pushes into more U.S. cities and foreign markets, skeptics question whether it can maintain double-digit revenue gains.

June 08, 2003|James F. Peltz | Times Staff Writer

The American doughnut was born in 1847, so the lore goes, when a Maine seaman urged his mother to shove a fork through the center of her "fried cakes." That solved the problem of the cakes' soggy middle and created the doughnut's trademark hole.

Today, perhaps the most celebrated of the sweet treats are those fried up by Krispy Kreme Doughnuts Inc., whose hot "original glazed" doughnuts have earned a cult-like following. With virtually no advertising, but an uncanny knack for creating free publicity through the media, the company keeps racking up double-digit gains in sales and profit.

Skeptics keep trying to poke holes in the Krispy Kreme mystique -- questioning whether the company can maintain its remarkable growth. Some analysts believe its growth rates already are beginning to ease. They also contend that the company's stock remains too rich for most tastes.

Their argument appears to hold some water. Krispy Kreme's stock, after skyrocketing at first, trades for less than it did two years ago despite the company's consistent growth record.

But the company is unmoved by the pessimists and has no intention of scaling back its aggressive expansion plans, which include Southern California.

"We may be in the first or second inning of our market penetration opportunities around the world, including the United States," said Scott Livengood, Krispy Kreme's chairman and chief executive.

With 288 stores in 38 states and Canada, Krispy Kreme is starting to expand into smaller U.S. cities and other foreign markets. It sees potential for hundreds of additional stores worldwide.

In Southern California, where the company started with its La Habra store in 1999, it now has 22 locations employing 1,300 people. And more are on the horizon.

"We'd expect to build as many as 50 stores over the next five years" in Southern California, said Richard Reinis, chief executive of Great Circle Family Foods, a Los Angeles company formed to be Krispy Kreme's Southern California franchisee.

Among the target locations: Santa Monica, Newport Beach, Laguna Beach and La Jolla. The company also is thinking of building a West Coast distribution plant, possibly in California, within three years.

Krispy Kreme is a story some have found too good to be true ever since the company went public three years ago. Yet the stalwart reputation of the doughnuts -- abetted by media that pump up every new store opening as a local sensation -- helps maintain the company's prosperity.

As Starbucks Corp. did with coffee shops, Krispy Kreme has transformed a commodity product into a branded specialty with devoted fans.

And despite the hand-wringing about its outlook, the company's total stock market value is $2 billion. That means each of its stores, which range in size from 800 to 5,000 square feet, is worth nearly $7 million.

Krispy Kreme was started 66 years ago in Winston-Salem, N.C., where it still has its headquarters. Its doughnuts were mainly a Southern treat until the 1990s, when the company began expanding north and west.

The chain's reputation preceded it everywhere. People would camp out for hours, even days, to be first in line to taste a Krispy Kreme at a new location and watch the doughnuts being made.

The media loved "the hubbub," as one Krispy Kreme executive calls it, and they helped the company burst onto the national stage. It was advertising that money couldn't buy, not that Krispy Kreme would anyway. The company doesn't spend a dime on advertising.

Instead, everyone at Krispy Kreme from Livengood on down deftly encourages its loyalists to keep the buzz alive.

Sharing the 'Experience'

Making a 50-cent Krispy Kreme doughnut is "almost hypnotic," Livengood (rhymes with "drive-in-good") rhapsodized in his deep, steady voice. There's "the animation and the giving birth," he said, "the theater aspect of it" and the way it forms "a relationship that is emotional."

What some might think of as a mere tasty mixture of dough and sugar, Livengood considers "almost as a member of the family." To him and his customers, a Krispy Kreme isn't just something to chow down with coffee, it's an "experience."

Investors had quite the experience in mid-2000, when the company first sold its stock to the public. Wall Street was left slack-jawed as the shares soared like those of the dot-com companies of the time -- before the crash. Its stock rose more than sevenfold after going public at $5.25 a share (adjusting for splits since then).

Livengood & Co. were under pressure to keep delivering big gains in sales and profit, and they didn't disappoint. Quarter after quarter, Krispy Kreme has posted double-digit growth.

It's not just expansion that's pushing the growth, either. The chain's same-store sales -- those of stores open at least a year, and a key measure of customer loyalty -- also have climbed by double digits for 13 straight quarters.

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