Krispy Kreme Doughnut Franchise—Is the Hot Original Kooling Off?

Krispy Kreme is a leading branded retailer and wholesaler of high-quality doughnuts. The Company produces over 20 different varieties of premium doughnuts that include the Company's signature “Hot Original Glazed” doughnut. As of November 2008, there were 509 Krispy Kreme stores operating in 15 countries system wide including the United States, Australia, Bahrain, Canada, Indonesia, Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar, Saudi Arabia, South Korea, the United Arab Emirates and the United Kingdom. Of these, the Company owns 97. Half of these are factory stores where patrons can find the “Now” lighted sign that means hot doughnuts are being created and are available for immediate purchase.

Although the sign falls into the category of direct marketing genius for this quintessential impulse item, tough times have befallen the company and stores are closing. Off-premises sales remain strong, but the company reports that increases in production costs have resulted in losses with 9 stores closing in Hong Kong. The loss of royalty fees from the franchise closings both in the Unites States and abroad is gouging revenues to the extent that Krispy Kreme reports there will be no further franchises offered in the United States at this point in time.

Today, due to the financial pressures on franchisees, the company has had to take responsibility for “certain obligations of franchisees in which it has an equity interest” as outlined in the financial statements. In addition to China store closing, two US franchisees recently filed for Chapter 11 protection.