If it smells too good to be true, then it probably is. That's true even for the sweet aromas of Krispy Kreme Doughnuts. The Winston-Salem, N.C.-based donut chain this month announced that the U.S. Securities and Exchange Commission is investigating it further.
Krispy Kreme, once a Wall Street darling, has generated little more than bad news lately. Suffering from dismal earnings, the company reported a net income loss of 56 percent since last year. Krispy's Chief Operating Officer John Tate left the company "to pursue another opportunity" shortly after the SEC opened its initial inquiry this summer. The most recent SEC probe is questioning how the company is buying back its franchises from individual franchisees.
The bad news could be seen long before the latest headlines. It does not take a stock analyst to look at what made Krispy Kreme great initially and how far it has strayed from its core business success. Customers loved the action of the "Hot Donuts Now" concept. They loved the flavor of Krispy Kreme's signature glazed donuts. And, they loved the nostalgic, down-home roots of the Krispy Kreme story.
By expanding its brand through cold-spot merchandisers, customers no longer could watch the donuts being made. The quality and freshness of the donuts also clearly suffered. And, finding Krispy Kreme Doughnut merchandisers in seemingly every gas station, supermarket and convenience store across the country dampened any nostalgia customers might've felt for the brand.
Even as the company opened store after store, drawing lines of cars in each new city on the hunt for the ultimate donut, you had to wonder how long the stores could sustain the excitement. Consumers are fickle by nature, especially when it comes to trendy foods. Krispy Kreme seemed really good at opening stores, but not so hot at the hard part of any businessñmaintenance and profitability of each individual store.
Company officials blame a lot of things, including low-carb diets for its lackluster donut sales. The diets may have had a bit of an affect, but they were hardly catastrophic. Supermarket donut sales nationally are actually up compared to this time a year ago. Dollar sales are up 6 percent, and unit sales are up 1.5 percent, according Information Resources' most recent results of scanner data from more than 11,300 stores.
Krispy's C.E.O. now admits the company lost focus. "It has become increasingly clear that our focus as a company has been on sales and growth and less on the day-to-day fundamentals of translating sales in our stores to profits," said Scott Livengood during an investor conference call.
It remains to be seen whether Krispy Kreme can turn itself around. Losing focus is an all-too-common pitfall to business growth. We get wrapped up in the thrill of new endeavors, too often ignoring our senses. But, if it smells too good to be true, then it probably is.