Krispy Kreme running out of ideas?

Krispy Kreme is fast becoming the lame duck of the New York Stock
Exchange as investors desert the US maker of doughnuts amid
concerns over the rising levels of obesity, writes Sibonelo
Radebe. And the company appears to have little in the way of a
response to changing diet trends.

Krispy Kreme's figures for the first half of 2004 confirm investors' wariness. Having touched levels above the $40 mark in 2003, Krispy Kreme's share price dropped 10 per cent to reach a record low level of $13.77 on the day the group announced its 2004 first half results last week.

The results showed operating profit tumbling 39.5 per cent to $16.1 million, despite a 17.5 per cent rise in revenue to $361.8 million. Sales rose mainly as a result of an expanded portfolio of stores and franchises across North America, Australia, UK and Mexico.

At the heart of the problem are dwindling doughnut sales caused by the changing appetite of increasingly health-conscious consumers. North American consumers in particular are turning away from fatty foods in their droves amid fears of obesity rising to epidemic levels.

The disproportionate growth trends between revenue and profits highlights the company's focus on sales growth above all else. Krispy Kreme CEO and president Scott Livengood admitted that the focus had been "on sales and growth, and less on the day-to-day profits".

But despite the failure of this policy in the first half - in turn prompting Livengood to downgrade the company's profit forecast for the year - it looks likely to be maintained into the second half. Indeed, Livengood confirmed that the company would open 75 new outlets in 2005, down from original estimates of 100 but nonetheless a step up on the current year, when 32 outlets were opened in the first half.

"Although we are disappointed with the second quarter financial results, we are optimistic about the long-term growth potential of the business,"​ said Livengood. "We are focusing our efforts and resources on initiatives that improve long-term business prospects,"​ he added, without going into any detail.

Having sold doughnuts for 67 years, Krispy Kreme debuted the New York Stock Exchange amid fanfare in 2000. Like American consumers who had lined up for a doughnut treat in Krispy Kreme's outlets, investors lined up to pick up the stock, pushing it to levels above $40.00.

But those heady days seem long gone. Traditional food manufacturers have come under severe pressure from new diet regimes like the low-carb schemes promoted by Atkins and others. Retailers have reorganised their shelving to accommodate the rising popularity of new and healthier diets, and some have dropped doughnuts altogether.

As their market shrinks, many traditional food makers have waged a price war in a bid to keep sales growing, but this, plus the rising costs of raw materials, particularly for bakers, has squeezed operating margins. Some firms have responded by launching new products, playing on consumer demand for health, convenience and indulgence. Krispy Kreme might want to explore this market - but then how much innovation can a doughnut accommodate?

Certainly, the company's latest attempt to stimulate sales has been less than successful - and indeed smacks of desperation. The group devised a scheme to offer American school children a free doughnut for every 'A' on their report cards - a promotion which was received with little or no enthusiasm by health conscious parents and school authorities.

A reaction which underlines the fundamental problem facing Krispy Kreme: if it cannot even give its doughnuts away for free, how is it ever going to persuade health-aware consumers to pay for them?

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