The sad success story of Krispy Kreme

Selling Krispy Kreme doughnuts to help my school raise money was fun, educational… and challenging.

It wasn’t that I had to get up early on Saturday mornings to grab those boxes of fresh doughnuts. And going door to door selling them by the dozen didn’t intimidate me either.

I’ve always been a people person, for one thing. Besides, those doughnuts sold themselves.

My biggest issue was resisting the temptation to eat my inventory as I made my rounds. At the time, I could wolf down six of them without a second thought – especially the ones with chocolate, whipped cream, and a literal cherry on top.

Yet for as good as they were, Krispy Kreme wasn't simply a doughnut company back then. It was an institution: a part of Southern culture.

Those green and white boxes showed up everywhere: at fundraisers, church gatherings, office meetings, and family get-togethers. And they were welcome every single time.

That’s not the case today, unfortunately.

Today, I’m much more likely to see the brand in my local grocery store near the closeout section. The donuts look like they’ve been sitting there for a week: hardly the hot, fresh, practically irresistible pastries of my youth.

How did such an iconic company with an almost cult-like following devolve so badly?

The answer, believe it or not, has little to do with donuts. It's much more about what happens when a company destroys its economic moat by forgetting what made it special to begin with.

To understand what went wrong with Krispy Kreme, we need to first understand what it did right.

The brand dates back to 1937, when Vernon Rudolph began selling doughnuts in Winston-Salem, North Carolina. His original operation did indeed involve packaging them for local grocery store distribution.

But that only lasted so long, as the aroma from his bakery began driving pedestrians crazy. They wanted to buy his donuts directly, and he obliged by cutting a hole in the wall and serving them on premise, hot and fresh.

That right there was Krispy Kreme’s moat in the making.

You see, Rudolph wasn’t just selling a snack that way. He was selling an experience.

There was the smell of the sweet dough baking, for starters, that triggered a sense of anticipation. And standing there watching each ring move down the production line amped it up further as customers waited to see Krispy Kreme’s “HOT NOW” sign turn on whenever a fresh batch was good to go.

Don’t get me wrong. Actually eating those donuts was a big deal, too. I already told you how delicious they were.

But that deliciousness went on to inspire something much bigger as their fame spread across the South. The more people brought them to gatherings, the more they inspired a sense of comradery and communion that was hard to beat.

You could purchase doughnuts just about anywhere. But a hot Krispy Kreme just could not be duplicated.

That's Lesson No. 1 to be learned from the larger saga: It’s imperative that companies know what makes them special.

And then they have to protect it at all costs.

Over the decades, Krispy Kreme became such a craze that the company decided to go public in 2000. Even as investors were hyper-focused on everything dot.com, they still took time to send shares jumping more than 75% at the IPO.

Four years later, revenue had surged from roughly $200 million to over $440 million. And Krispy Kreme had more than 350 stores across 45 states.

By 2003, its market capitalization was over $3 billion.

That was a problem, however. Because Wall Street was basically valuing a doughnut company like a high-growth tech business. And the higher investors sent the stock, the more growth they expected.

So Krispy Kreme gave them what they wanted. It opened more locations… pushed more doughnuts into grocery and convenience stores… and even acquired a bread chain called Montana Mills for approximately $40 million.

This brings me to Lesson No. 2: Growth is not a moat. Nor is it an automatic sign of real, healthy, sustainable operations.

Companies can fake it for confusingly long periods of time, especially when they’re working with high levels of borrowed money. But opening stores and acquiring businesses doesn’t automatically increase intrinsic value.

They have to be opened and acquired appropriately.

Moreover, the massive factories Krispy Kreme was building were very expensive, costing between $2.5 million and $3 million a pop. Dunkin’ Donuts, meanwhile, could get one running for around $250,000.

That kind of spend is only worth it if customers are continuously lining up for the output. But the truth is that without its hot-from-the-oven, community-fueled appeal… Krispy Kreme was turning itself into just another donut brand.

Which brings me to Lesson No. 3: Never initiate long-term expenses based on temporary demand. It’s just not going to go well.

I’ve already half-broached Krispy Kreme's biggest mistake in the last few lines, but let me state it bluntly here.

Management put its donuts wherever it could. More distribution meant more sales potential, which probably sounded great in the boardroom.

Yet that mindset ate away at the company’s original “HOT NOW” appeal. The experience was gone, leaving just a donut that was probably days old by the time you bit into it.

Without that unique, personal touch backing it, the brand lost its luster. Stores started closing, and Krispy Kreme had to report its first quarterly loss in 2004.

Worse yet, investors began questioning its previous reporting, leading to an SEC investigation. It didn’t take long from there for management to publish some “clarifications” on past financial results – like how it was basically forcing franchisees to purchase excess inventory.

The stock cratered to roughly 98% from its peak – something a solid understanding of Lesson No. 4 would have prevented: A great product doesn’t automatically translate into a great investment.

No matter how much you’d like to think otherwise.

JAB Holding bought the embattled Krispy Kreme in 2016 for about $1.35 billion.

Five years later, it returned to the public markets, only to make very similar mistakes.

In March 2024, management announced plans to intensely expand its partnership with McDonald's (MCD). And Wall Street’s “any growth is good growth” crowd promptly sent shares up almost 40%.

Once again, I understand the reasoning if we’re just looking at numbers on a spreadsheet. They add up very nicely that way thanks to the thousands of distribution points McDonald’s offered – all without Krispy Kreme having to build new expensive stores.

Unfortunately though, the glaze was long gone from the donut.

McDonald’s realized that after only about 2,400 of its restaurants rolled out the program. Consumer response was so underwhelming that corporate soon backed out of the deal altogether.

The way I see it, Krispy Kreme rushed its recovery. It wanted immediate and extreme success, which means it overlooked Lesson No. 5…

Great businesses compound naturally. They don't try to cheat time.

Most wide-moat companies are built up slowly. Management makes a move, then puts in the time necessary to evaluate and encourage that move.

If all goes well, then it makes another one.

Tying back in with Lesson No. 2, growth itself should never be the objective. Our focus as investors should be on per-share value creation.

A company with disciplined management, a fortress balance sheet, and a durable moat that grows 6% annually for 20 years is always going to win out over one with 30% short-term expansions that weaken its competitive advantages in the process.

Krispy Kreme started with something almost priceless: a beloved product, loyal customers, scarcity, an experience, and an iconic brand.

That results in something you can't manufacture… but you can destroy.

Even a powerful moat can dry up if it’s not properly maintained. So the next time you see a company reaching for the stars before they’ve built a durable rocket, remember the sad story of Krispy Kreme.

Then find an alternative investment that’s doing the exact opposite.

Happy SWAN investing,

Brad Thomas,
Editor, Wide Moat Daily