Ah, that smell! The smell of featherlight, just-out-of-the-fryer doughnuts covered in a sugary glaze. The smell so good it drew lines of single-minded devotees, zombie-like, to the wholesale factory during the only time they were allowed to buy them -- between midnight and 4 a.m., through a window cut into the wall. Even the name was delicious: Krispy Kreme.
That’s how the iconic company started, in Winston-Salem, N.C., in the 1930s. How it nearly ended, decades later, is a case study in how franchises can stumble. First there was the sale, in the 1970s, to an international conglomerate so big it peddled everything from luggage to bras to window treatments. For the new parent company, a doughnut chain was a handy way to unload products made by its other myriad divisions, including soup and ice cream -- which it actually sold at Krispy Kreme outlets. To cut costs, it even committed the sacrilege of changing the doughnut recipe.
Saviors emerged in 1982, when outraged franchisees banded together to buy back the company. But 18 years later, when the new owners took it public, the brand got sidelined again while scrambling to satisfy Wall Street’s demand for higher earnings, fast. It responded to this pressure by abandoning its famous neon-clad promise of “Hot doughnuts now,” making some of its signature product in central kitchens and trucking it to stores, and by selling cold doughnuts -- cold Krispy Kreme doughnuts! -- everywhere from 7-Elevens to gas stations to supermarkets, effectively competing against its own franchisees.
Meanwhile, the head office kept the balance sheet looking as hot as the doughnuts had once been. This was done in part by requiring franchisees to buy equipment and the doughnut mix from corporate’s own manufacturing and distribution division -- which came to account for nearly a third of the company’s revenues by 2003, all on the backs of franchisees -- and by adding hundreds of new locations (including many in New England, which were routed by a local religion known as Dunkin’ Donuts). So while revenues were reported to be rising, same-store sales remained ominously flat.
The holes in this strategy became apparent as franchisees filed for bankruptcy protection, stores were shuttered and Krispy Kreme’s stock price plummeted from a high of nearly $50 in 2003 to $6 only two years later.
And yet… Krispy Kreme is still among us. Better than that, the company is again flourishing, nabbing an impressive 18 spot on Entrepreneur’s 2017 Franchise 500 list. The story of how Krispy Kreme and other companies got from peak to valley to peak again is more than the tale of firms that faltered, recovered and thrived. It’s an object lesson in how companies of all sorts can avoid hitting the skids, how prospective franchisees can avoid companies that are heading for trouble and most important, how with the right leadership and timing, even the most damaged brands can be revived and made stronger and more profitable.
Lesson 1: Get your hands dirty
Julie Hall remembers the day she had to work the fry-o-lator at McDonald’s. She hadn’t signed up for the job; she was a public relations pro with past experience representing Dunkin’ Donuts, Baskin-Robbins, Au Bon Pain and others. But when her company took on the Golden Arches as a client, Hall and all her colleagues were required to work in a store for a week. I went to college for this? she recalls thinking as she made yet another batch of fries. But looking back on it now, she says, “It was the best experience I could have had, because I understood the challenges the people in the store had. It was brilliant.”
Ask any franchising expert for advice, and they’ll tell you this: If you’re a franchisor, hire people with experience and make sure they get down into the trenches every now and again; if you’re a franchisee, buy into systems run by leaders who truly understand their franchisees’ challenges. These are pieces of advice that seem so obvious, they’re hardly worth mentioning. But they are worth mentioning, and here’s why: Despite what the International Franchising Association estimates is its $1.6 trillion annual economic impact in the United States, “nobody teaches” franchising in business school, says Joe Mathews, CEO of the consultancy Franchise Performance Group. “It’s not on anybody’s radar screen.”
That’s not entirely true. There are franchising schools, and an industry of consultants for hire to help companies at critical times. But compare that to the reams of academic studies and serious researchers who study the minutiae of other industries and produce well-educated graduates who are practically bred for success atop certain kinds of companies and you see just how underreported franchising is. One of the most comprehensive studies of the industry, by a professor at the Weatherhead School of Management at Case Western Reserve University, looked at 157 franchise businesses in 27 industries over 12 years -- and it dates back to the 1990s.
This means that few future business leaders are schooled in mastering the franchise model. Instead, franchises are often led by people who were successful in other realms -- like those who debuted the concepts in the first place. “What you see is someone who comes up with a great idea for a restaurant. They’re hearing more about franchises, so they say, ‘This idea is great. I can make money by having other people do the same thing and pay me royalties,’” says Scott Ratchick, a lawyer in Atlanta who represents franchisees. “Well, they know how to run their restaurant. But they have no earthly idea how to run a franchise operation.”
And sometimes franchises are managed by people who were successful in completely unrelated industries, which doesn’t necessarily translate to being savvy about the business they’re in now. Especially if they don’t make a point of getting into the trenches like Hall did. A succession of chief financial officers who paraded through Krispy Kreme headquarters, for instance, included one who had worked for a kitchenware retailer and another who was an investment banker. The private equity firm that bought the now-defunct Hollywood Tans installed the former head of a tutoring service as CEO. “I know franchise companies that are being run by attorneys,” says Don Welsh, a Sonic Drive-In franchisee in Philadelphia who is also a consultant to franchise companies and partner of Franchise Performance Group. “They don’t know anything about the core business.”