Krispy Kreme downfall has lessons for start-ups

The Australian division of Krispy Kreme Doughnuts has been forced into voluntary administration due to poor sales, providing start-ups with some valuable lessons.

Late last week, the directors of Krispy Kreme Australia appointed Mike Smith and Peter Hillig as joint voluntary administrators of the US-based company.

According to company directors, the downfall can be attributed to a number of underperforming stores.

Krispy Kreme Australia director John McGuigan says despite the news, the underlying business remains strong.

“Krispy Kreme has excellent brand recognition and good turnover and profitability in its better stores,” McGuigan says.

“However several factors, including location, sales declines, high rents and high distribution costs, have meant that a number of stores are losing money.”

McGuigan says the appointment of two voluntary administrators – from accountancy firm Smith Hancock – has the support of the company’s secured lender and franchisor, Krispy Kreme Doughnut Corporation.

“It is anticipated that all Krispy Kreme stores will continue trading while the process gets underway,” he says.

“All suppliers and other creditors will be kept fully informed by the voluntary administrator throughout the process.”

“In the event that there are redundancies arising out of the voluntary administration process, all employee entitlements have been protected and will be met in full.”

Colin McLeod, executive director of the Australian Centre for Retail Studies at Monash University, says Krispy Kreme failed to establish a solid customer base beyond the novelty of its product.

“When they first came out, it wasn’t unusual to see people on a Sydney to Melbourne flight with a couple of bags of Krispy Kreme doughnuts,” McLeod says.

“People wanted to try them. People wanted to be seen eating them. People wanted to bring them home for a treat for the family, friends or neighbours – whatever it might be.”

“But I think people eventually realised, what do you do with two dozen Krispy Kreme doughnuts when you get home?”

“Unless there’s a sustainable marketing model behind [the brand], the power of the name and the novelty and the press coverage [is not enough].”

McLeod says start-ups can avoid the same outcome by following these tips:

Avoid novelty, one-off products.

Avoid high rents and overheads, particularly in the early days.

If you operate a franchise, don’t rely on the brand name to retain customers.

Set effective KPIs from the start.

Identify who your customers are and what ongoing value you can provide to those customers.