Krispy Kreme back in Philly with new business recipe

Let the comfort eating begin - anew.

After a five-year, sugar-shock absence, Krispy Kreme made an enthusiastically received (though not from dieters and organized labor) return to Philadelphia last week.

Hours before the doors to the new doughnut shop in Fox Chase were unlocked Tuesday morning, carb-craving customers were lined up outside - one since 3:30 the previous afternoon.

For such devotees of the chain's signature hot Original Glazed and other caloric confections, Krispy Kreme's abrupt departure from the region in December 2005 meant some mighty rough years of withdrawal.

They have been even harsher for the North Carolina-based chain.

It devolved from a company with a piping-hot stock that increased in value more than 700 percent the first two years of its public offering - 2000 to 2002 - to one embarrassed by revelations of falsified financial reports, sued by shareholders and franchisees, and unable to turn a profit.

So, it was a humbled Jim Morgan, Krispy Kreme Doughnuts Inc.'s chief executive officer, who spoke of the 73-year-old company's tortured recent past and its turnaround ambitions during a visit to the new franchise store in Philadelphia.

Amid the grand-opening hoopla of employee-led chants and cheers, the soft-spoken Southerner with a near-daily Krispy Kreme habit from his childhood in South Carolina candidly reflected on how the onetime rave of Wall Street and Main Street had seriously screwed up. Uneconomically sized factory stores, overstated sales and earnings, and largely neglected franchisees were just a sampling of the dysfunction.

"Early on, we were successful in spite of ourselves," said Morgan, 63, a former financial-services executive who came out of retirement in January 2008 to oversee Krispy Kreme's revival.

The goal now, he said, is to once again be successful - this time because of what Krispy Kreme is doing.

Central to the recovery plan is a new hub-and-spoke satellite store initiative that involves smaller outlets, but more of them, Morgan said.

The Krispy Kreme of plummeting profits and stock prices was a network of so-called factory stores ranging from 4,000 to 8,000 square feet, generally in freestanding suburban locations. Not counting the land, the stores averaged $1.8 million to build, according to a report by Roth Capital Partners, making it cost prohibitive to establish enough of them to achieve significant market penetration.

"One of the biggest problems Krispy Kreme has had is we're not convenient," Morgan said.

In other words, they were far from the seeming omnipresence of Dunkin' Donuts - which bookends the stretch of Oxford Avenue in Fox Chase that Krispy Kreme has chosen for its return debut.

Under the new business model, "hub" stores like that one will be closer to 3,000 square feet, and provide product to smaller "spoke" stores of 1,200 to 1,600 square feet. Pedestrian outlets, such as walk-up counters in airports and train stations, probably would not be much larger than 200 square feet, Morgan said.

Won't a faltering economy with so much unemployment and limited disposable income interfere with Krispy Kreme's renaissance plan? There has been no evidence of that, Morgan asserted, calling the company's sweet temptations "an affordable indulgence." (A glazed in Fox Chase is 89 cents.)

Indeed, analysts (who have only recently begun following Krispy Kreme again) think the company is on track to have the first full-year profit since fiscal 2004.

"The hemorrhaging has been halted," Anton Brenner, senior research analyst for Roth Capital Partners, wrote in a June report to investors.

Krispy Kreme's $140 million debt of a few years ago is down to $40 million, with a debt-restructuring announcement expected soon, Morgan said.

The improved financials, however, have not yet triggered a rebound in stock performance. Shares closed down 19 cents, at $5.27 Friday on the New York Stock Exchange. The stock had been as high as $108.50 a share in November 2000.

Krispy Kreme, which continued to expand overseas throughout its problem years, now has more than 600 stores worldwide - about 230 in the United States, including 83 company-owned stores.

In the Philadelphia area, cousins Keith Morgan (no relation to Jim Morgan) and Brian Zaslow plan at least 20 more stores over the next five years, with the second expected to open in April at a former Rite Aid at 16th and Chestnut Streets.

That their Fox Chase shop is open is pure testament to their powers of persuasion. Before Zaslow and Keith Morgan approached him in the spring, said Krispy Kreme CEO Morgan, "we had Philadelphia on a back burner. We weren't ready to get to this area."

Then he experienced the Zaslow/Morgan "energy" - and a franchise was born. Zaslow is a former vice president of marketing for Philadelphia food-service firm Aramark Corp. Keith Morgan was former CEO of Aamco Transmissions Inc., the repair-shop franchiser cofounded by his father, Robert, in 1963.

Keith Morgan praised Krispy Kreme's "tremendous brand awareness, outstanding product, and wonderful consumer loyalty."

The firm's last few years of restating financials, closing stores in certain U.S. cities, and settling all litigation have also been a time of developing new product lines, including more waistline-friendly baked goods. Krispy Kreme stores are also starting to offer more healthful options such as fresh fruit and yogurt.

But at last week's grand opening, it was the traditional doughnuts that brought out most of the 7,500 customers.

"We've been craving them ever since they left five years ago," said Len Pundt of Parkwood, who polished off a dozen with son Albert, 11, and daughter Audra, 8.

Practicing willpower were a half-dozen members of construction union locals who staged a brief protest nearby over the use of nonunion labor in renovating the site, a former Popeye's chicken restaurant.

Of Krispy Kreme's growth goals, Jim Morgan said: "We haven't even scratched the surface." But expansion will come at a controlled rate, he assured:

"We have to crawl before we walk, and we may never try to run again."

Watch a video from Krispy Kreme's opening day at http://go.philly.com/krispy

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