Krispy Kreme is dead in the water. Two years ago a friend of mine was looking at the stock price chart for Krispy Kreme Donuts (KKD) and asked me if it was still a good investment. The stock had gone from it’s IPO of around $10 in early 2000 to $45 by end of 2001. Was the 2002 pullback a good buying opportunity? Not likely, I commented.
Krispy Kreme has been a “one-trick pony.” The company had a simple Success Formula: open more stores. A good product, a good concept, and they were using investor dollars to geographically expand as fast as possible. I asked my friend, “what will this company do when we have enough donut shops? What will happen when tastes change; and it won’t take much of a change when you live on one product sold 24 hours a day?” Krispy Kreme was putting no energy into understanding how locked-in they were to a fragile Success Formula built upon great promotion for their one product. They were projecting all the future by merely extrapolating the past.
Surely, the challenges came. Atkins diets became a challenge to a carb-laden product. As good as Krispy Kreme’s were, their expansion was taking them head-on into markets already laden with donut shops (including Dunkin’ Donuts) and grocers capable of “jumping on the bandwagon” in their local markets. Now, KKD execs are saying they have too many U.S. shops. Growth has disappeared as they are trying to find “profits” rather than “growth.”
Their one-product, simple success formula was too fragile for a dynamic marketplace, and too easily targeted by other competitors. What profits were to be made in their shops needed to be made during the rapid growth. Finding more profits now will be very, very difficult. They have gone from a growth company, to a retrenchment company. Krispy Kreme missed their golden opportunity to make the company into a great long-term brand. They should have found new avenues to build and grow. But, instead they locked-in and now they are struggling to compete.
For those who bought on the IPO, the stock is within a hair of the offering price. If you bought it then, and held it, you would have made a little capital gain (provided the price slide stops), but no dividends. If you bought anytime after the IPO – you’ve lost money and received no dividends. The lesson learned is to not invest in small companies with narrowly defined success formulas that are tightly locked-in to their competitive model. The risks are too great for any long-term investor.
