CEO Is Following Recipe to Remake Krispy Kreme

Back in his college days, Stephen Cooper and his buddies would trek 1,000 miles to restock their coolers with Coors.

Decades later, Coors doesn’t need a cult following to sell its six-packs, available at every corner store. That’s a lesson Cooper thinks about often as the corporate turnaround specialist seeks to save troubled Krispy Kreme Doughnuts Inc.

Cooper, whose clients have included Enron Corp., believes that the Winston-Salem, N.C.-based purveyor of “Hot Now” treats counted on little more than its cult-like popularity to drive its success as it quickly expanded beyond its regional roots.

“You can’t rely on word of mouth to keep expanding the circuit of very loyal customers,” Cooper said.

But not long ago, it seemed like that’s all it would take.

Krispy Kreme began opening stores outside the South in the mid-1990s, and consumers lined up for a taste of the company’s signature doughnuts.

Investors were no different. From its 2000 initial offering price of $21 a share, Krispy Kreme’s stock jumped to $105 in a matter of months before a pair of 2-for-1 stock splits. The company opened nearly 400 stores across the U.S. and as far away as England and Australia.

The ease of that success, Cooper believes, was the problem. Instead of focusing on running an efficient operation in an industry with razor-thin margins, he said, Krispy Kreme executives were enjoying the glow of their rapid expansion and rising stock price.

“You have to be able to make the transition from being a word-of-mouth, kind of myth-driven marketing company into one that has a much more structured, objective-driven sales marketing program,” Cooper said.

That didn’t happen, and today the number of Krispy Kreme stores stands at fewer than 350, with plans to close even more. The company’s stock is down nearly 90% from its split-adjusted 2003 peak of $49.37, closing at $5.66 on Friday.

Cooper arrived in January, taking over for ousted Chief Executive Scott Livengood, a 28-year veteran of the company who drew criticism for blaming Krispy Kreme’s decline on the low-carbohydrate diet craze. Krispy Kreme hasn’t filed a quarterly financial report since November 2004, and a federal investigation into the company’s books is still pending, as are several lawsuits filed by franchisees and workers who claim to have lost everything in the collapse.

Cooper has three decades of experience in restructuring and rehabilitating troubled businesses, including stints at Trans World Airlines Inc. and Enron. Instead of taking its “success fee” in cash, his company, Kroll Zolfo Cooper, is being paid with 1.2 million options for Krispy Kreme stock. Priced at $7.75 apiece, they are worthless unless Cooper can boost the share price from its current level.

He has succeeded before in the same situation. He led the recovery of Boston Chicken, which filed for bankruptcy protection in 1998 after a similar experience with a highflying stock price and rapid expansion. That restaurant wound up as part of McDonald’s Corp., which changed the name to Boston Market.

But despite its legal and regulatory problems, Cooper believes Krispy Kreme will avoid a bankruptcy filing. He envisions a leaner company with fewer and smaller stores. And like market leader Dunkin’ Donuts, which has stayed on top by pushing its coffee and other offerings, Cooper said, Krispy Kreme will put as much emphasis on what comes with the doughnut as the doughnut itself.

“We have a great product with our doughnuts, and we want the public to know we also have a great selection of coffee and other beverages,” Cooper said.

Becoming a place that’s about more than doughnuts might be just what Krispy Kreme needs.

St. Joseph’s University food marketing professor John Stanton said a better model might be Seattle’s Starbucks Corp., which has retained the mystique of its brand, without a big, national ad budget, even as it has expanded to the point where comedians joke about the ubiquitous nature of the company’s nearly 7,000 stores.

“I think the key with them is their cafes,” Stanton said. “It’s little to do about the coffee. It’s the ambience.”

To get there, Cooper and Krispy Kreme must first finish fixing the problems left behind. Last week, the company revised its pretax earnings from 2001 to 2004 for the second time, reducing reported income by an additional $10 million.

Sales are also down. The company said it expected sales of $130 million in the third quarter, down from $170 million in the same period last year. The company’s lenders have agreed, however, to wait until April 30 for the overdue financial statements.

The recovery also will require some resuscitation of the Krispy Kreme brand. It’s almost impossible for companies such as Krispy Kreme to regain their luster after falling out of favor with consumers and investors, said Harlan Platt, a professor at Northeastern University who follows corporate turnarounds.

He compared Krispy Kreme’s fate to that of Hard Rock Cafe, another highflier that no longer has them lining up out the door.

“The chances of them coming back are slim,” Platt said. “They are not going to be a national chain, but they can take advantage of their strong appeal in the South.”

Perhaps with that in mind, along with expectations tempered by Krispy Kreme’s experience with success, Cooper believes that he’ll leave Krispy Kreme as a smaller regional company with a plan for more manageable growth.

“I don’t see in the foreseeable future any compelling reason why we should not be able to have a good amount of future growth,” he said.

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A risk taker

Name: Stephen Cooper

Age: 59. Born Oct. 23, 1946, in Gary, Ind.

Home: New York

Education: Bachelor of arts, Occidental College; master of business administration, Wharton School, University of Pennsylvania

Title: Chairman of Kroll Zolfo Cooper, which is part of the Kroll risk consulting division of New York-based Marsh & McLennan Cos.; chief executive of Krispy Kreme

Experience: Cooper has nearly 30 years of experience in restructuring and rehabilitating troubled businesses, including companies such as Polaroid Corp., Trans World Airlines Inc., Boston Chicken Inc. and Pegasus Gold Corp. He worked for Touche-Ross in New York from 1970 to 1986. He became Frank Zolfo’s partner in April 1986, when they formed Zolfo Cooper. Kroll purchased the firm in September 2002.

Source: Associated Press