Krispy Kreme crisis prompts redundancies

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Related tags: Krispy kreme

The cash-stricken Krispy Kreme doughnut company is to shed a
quarter of its workforce in an attempt to overhaul losses as
over-expansion and a lack of new products to appease
health-conscious consumers threaten to send the firm under,
reports Chris Mercer.

US-based Krispy Kreme said it expected to make $7.4 million by cutting jobs across the board, including corporate, manufacturing and distribution sectors, as the company tries to claw its way back from a $21.7 million loss for the first nine months of 2004.

A corporate airplane will also be ditched, resulting in another $3 million saving. Both measures combined will incur around $900,000 in costs, yet the firm said it needed additional credit just to fund operations and loan repayments.

Krispy Kreme is currently unable to borrow funds under its Credit Facility and said it planned to discuss amendments to this with its lending banks. But, it warned: "There can be no assurance that the company will be able to reach any agreement with the banks or that funding will be available when and in the amounts needed."

Lenders have given Krispy Kreme till 25 March to deliver financial statements for the quarter ended 31 October 2004.

The 67-year-old doughnut veteran has already revealed that average weekly sales at individual stores dropped by almost 20 per cent up to November last year. And after the company then withdrew is 2004 sales forecast, JP Morgan analyst John Ivankoe said he saw nothing but negatives in Krispy Kreme.

The company has spoken little about its decline, yet it did admit that a number of consumers had abandoned its doughnuts because of dietary concerns.

Krispy Kreme has not broken into American healthy eating trends like some other well-known companies with potentially burdensome product portfolios, such as PepsiCo with Frito-Lay salty snacks. Back in May 2004, Krispy Kreme said it was aiming to launch a low-calorie, sugar-free doughnut by the end of the year, though this has not materialised.

Some analysts also cited over-expansion as a major problem. The company pursued a rigorous expansion programme in 2004, opening 32 stores in the first half, at a time when a number of US retailers began cutting down on the number of doughnuts in their stores to accommodate more foods making healthy diet claims, including low-carb products.

To make things worse, the Securities and Exchange Commission has also been conducting a formal investigation into the way Krispy Kreme accounted for the repurchase of some of its franchises from individual franchisees.

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