Krispy Kreme & Starbucks

I was thinking of Gordon's post on Krispy Kreme's this morning as my dad went to go get some KK donuts "for the kids." I remember living in Atlanta in 1993 when KK were something only found in the southeast and were something really amazing. Have profits slowed because of overexpansion into markets where KK was unknown? Gordon also alluded to the Atkins march against doughy treats. Because I do a lot of thinking about markets and competitors, I started making an argument (to myself) that KK really competes against Starbucks. They don't have competing products, but they are in the same time slot. You can't justify stopping at both places on the way to work or taking the kids in the stroller in two directions.

In Milwaukee, Stone Creek Coffee and Bruegger's Bagels share storefronts for a one-stop coffee and sustenance destination. I may not be the first to suggest this, but a one-stop Krispy Kreme and Starbucks destination would be an attraction. I don't drink coffee, but surely there is some overlap there.

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What started as another Atkins belt-tightening has turned into a crash diet for Krispy Kreme. According to the W$J, the latest quarter was down again, and included first decline in same-store sales since Krispy Kreme went public in 2000. Bad news. And so unexpected from a company that has been around as long as Krispy Kreme. This looks like a company that went into too many markets too fast. Support for new store openings was rabid, but not enduring.

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Entrepreneurial blogs are talking about franchising. David Patterson started it over at Small Business Trends by citing this study of the International Franchise Association. Jeff Cornwall then observed:

Franchising is often not the happy partnership that the marketing packages franchisors send out to interested parties. Franchisees will often band together in an almost union-like manner. In fact, one of the most common seminars for franchisors done within this industry addresses the litigation issues they face with their franchisees. Broken promises, unmet expectations, and a perception of little value for the often high monthly fees paid to the franchisor lead to these legal battles.

This is all true, which makes franchising great fun to teach in a law school. Given the high absolute number of franchises in the U.S., I suspect that seemingly large number of disputes represent a very small proportion of the whole. At any rate, franchises are certainly more successful than most marriages. While I always advise prospective franchisees to be very cautious (a piece of advice most often ignored), the conflicts inherent in the relationship normally do not bring it down.

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Over the summer I wrote about a small Madison family business called The Soup Factory. Last week I finally tried Simply Soup, another Madison production. Great soups ... plus an Italian ice cream bar. That is a killer combination. They have only two locations so far, but their website announces franchising opportunities. (It just looks like a franchised concept ... much slicker than The Soup Factory.)

If you are thinking about franchising a soup restaurant, you might also check out Al Yeganeh's new concept. Yeganeh, immortalized as the "Soup Nazi" on Seinfeld, has begun franchising under the name "The Original Soup Man". According to the chairman of the new venture, "He's a total character and characters sell." Unfortunately for franchisees, however, most customers won't be able connect Yeganeh with the Soup Nazi, at least if Yeganeh has his way. According to the WSJ$, franchisees will be "strongly discouraged" from using references to "Seinfeld" or the Soup Nazi in their marketing:

For all the attention and business that the "Seinfeld" publicity has brought him, Mr. Yeganeh is not exactly grateful -- in fact he says he loathes the show's star. He refers to Jerry Seinfeld as "Jerry the Clown," and insists that it was he who helped make Mr. Seinfeld what he is today. The source of the friction is the nickname that the show made famous, the "Soup Nazi," which he says is offensive.

Yeganeh claims that he doesn't need the money that would accompany a successful franchise. It's a good thing because this business is off on the wrong foot.

Thanks to Professor Bainbridge for the tip.

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State Street in Madison is an amazing little economy, with stores coming and going with regularity. Madisonians value the unique flavor of State Street, which is a combination of local and national businesses. In my two years here, however, I have noticed an increasing number of franchises on State Street, and today I picked up a sandwich at Jimmy John's, which claims to have the "World's Greatest Gourmet Sandwiches." They really are quite good, but how hard is it to make a good sandwich? (A: not that hard) Based in Elgin, Illinois, Jimmy John's now has three stores in Madison, and I believe all of them are franchised. The company has a nice website, which contains the following numbers based on 14 franchise stores:

* Average Sales: $849,779
* Average Food and Paper Costs: 25.91%
* Average Income from Operations: $226,806
* Average Unit Net Profit: 26.69%
* Average time before a first-time franchisee is doing so well that they decide it'd be silly not to open another franchise: 18 months

So they count "income from operations" as "net profit"? It's hard to tell whether "operations" includes financing costs and lease payments on the store property, but it is pretty clear that franchisees are not taking home over $200,000 from these stores. (If nothing else, the website contains the following: "How much can I make as a Jimmy John's franchisee? We are restricted by the Federal Trade Commission and various state franchise sales regulations from providing you with specific profit projections. To learn more about actual experiences, we suggest you contact existing franchisees.") The franchise fee is $30,000, and the royalties are 6 percent of gross sales. All this for a store with a menu that is nothing special? No, I am afraid that it will be hard to get me excited about a new food franchise until someone executes my idea for a Vegan fast food restaurant.

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Which franchise would you choose? Having watched people choose franchises, I am always impressed at the power of the moment to overwhelm good business sense. Especially in fast food, where fads are plentiful. Starting and maintaining a food franchise that is successful over the long term is no small feat. Even a brand as established as Krispy Kreme, with roots dating back almost 70 years, has hits some speed bumps lately.

My hunch -- completely uninformed by data -- is that food franchises with a full menu (the various burger restaurants, for example) are more likely to have staying power than food franchises with a specialty product (pastries, juices, ice cream, etc.). It's also pretty clear that the oldest food franchises, like McDonald's, have lost a lot of their appeal. They still get a lot of business, but I wonder if purchasing such a franchise is still a great value proposition.

Which leads me to Gandolfo's Deli. Yesterday, while perusing a BYU sports board, I found an entry with the heading, "GANDOLFO'S COMING TO VEGAS!!!" This was followed by a response: "GANDOLPHO'S TO NORTH CAROLINA TOO." The caps belong to the writers. I had never heard of Gandolfo's, but that sort of excitement catches my eye. From the website (linked immediately above), this appears to be a company in heavy growth mode. The front page proclaims: "Start your own franchise and experience success." The focus here is on potential franchisees, not customers.

My initial response is to wonder whether the world needs another deli. Actually, Madison could use one, but still. Is this likely to be a long-term success? The nice thing about delis is that their menus have some room for play. And sandwiches are not going out of style anytime soon. This is a franchise that might be worth exploring.

Speaking of good franchises, a burger place that I still like is Culver's. They are now celebrating their 25th anniversary, so this is not a flash in the pan. They have a broad menu (considering the format) and high-quality food. Everything there is better than anything at McDonald's.

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So, is this a franchising idea that could work in the U.S.? We encountered our first Nutelleria in Frankfurt earlier today. The concept comes from Italy, but it translated nicely into German. For photos, check the next page.

My first encounter with Nutella was over 20 years ago in Austria. At that time, it was unavailable in the U.S. Now Nutella is available in most general grocery stores. People love it for obvious reasons. The Nutelleria capitalizes on those warm feelings, offering a narrow range of products like crepes, muffins, and milkshakes, all laced with Nutella.

These pictures attempt to provide some feel for the surpisingly mode store. The decor was all about Nutella, of course, and the most clever part was the artwork, a few samples of which appear below. (For a slightly larger version of each picture, just click.)

UPDATE: To see the Nutelleria photos, go here.

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Did you notice what happened to the price of Krispy Kreme stock yesterday? It dropped by 29 percent! Wow! The drop was the result of this press release, in which Krispy Kreme announced that it was lowering its earnings projections for the coming year by 10 percent. CEO Scott Livengood blamed the company's decline on the popularity of low-carb diets:

For several months, there has been increasing consumer interest in low-carbohydrate diets, which has adversely impacted several flour-based food categories, including bread, cereal and pasta. This trend had little discernable effect on our business last year. However, recent market data suggests consumer interest in reduced carbohydrate consumption has heightened significantly following the beginning of the year and has accelerated in the last two to three months. This phenomenon has affected us most heavily in our off-premises sales channels, in particular sales of packaged doughnuts to grocery store customers.

The company is discontinuing Montana Mills bread concept, which it acquired about a year ago. Boy, I sure hope this low-carb fad dies before all of the good bakeries go out of business.

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 "Colonel's landmark KFC is mashed." That is the headline in the Deseret News story about Harmon's original Kentucky Fried Chicken in Salt Lake City. The story behind this store is one of the great stories in America's vast entrepreneurial lore. You can get a pretty full version of the story here, including pictures of Harmon, Sanders, and the original Harmon's Cafe in its heyday. (For this story, along with others in franchising history, see John Love's excellent history of McDonalds: Behind the Arches.) If you have time only for the abridged version, here it is:

A year after meeting the Harmans, the Colonel traveled to a religious conference in Australia. He had a short stop in Utah, so he looked them up. "I took him to Hotel Utah's Roof Garden for lunch, and through the Salt Lake Temple grounds and the Bingham Copper Mine," Harman recalled during an interview with the Deseret News. "On the way out there, we mentioned we needed some kind of a specialty item for the restaurant."

Harman planned to take his guest out to dinner, but Sanders insisted on cooking it. It took a while to borrow the pressure cooker, find four chickens and heat the oil to the necessary 400 degrees. "We ended up having dinner at 10, and my wife had been sitting out there since 5 o'clock," said Harman.

He watched when [Harmon's wife] Arline picked up a drumstick and took a taste of it. "She never said anything, but she got the darndest gleam in her eye, and I knew it was good," Harman said. "It was so much better than any chicken we'd ever had."

With a handshake agreement, the couple agreed use Sanders' recipe on their menu and pay him a nickel for each chicken they sold.

Harman wanted to advertise the chicken on the cafe's 10-foot-high windows, but he wasn't sure what to call it. He conferred with his sign painter, Don Anderson, who agreed that Utah Fried Chicken didn't sound right. "Kentucky" had an image of Southern hospitality and good food.

My wife is from Salt Lake City, and it took me a long time to understand why they referred to the KFCs as "Harmon's." Now you know, too.

Thanks to Juan Carlos Lozano for the pointer.

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In my Law & Entrepreneurship class, we have moved on from venture capital to franchising. We begin each section of the class with a case study (like business school, only we focus on contracts). This year, our franchising case study is the Wisconsin, fast-food juggernaut Culver's. In reading Culver's promotional materials and franchise agreement, I was intrigued by their requirement that all franchisees personally operate their stores.

Consider this from the Culver's web site:

Our owner/operator philosophy is one of the core elements to our success. We require each franchisee to personally manage and operate their restaurant in a full-time capacity. He/she cannot delegate management or operational responsibilities to another individual without the written consent of [Culver's] and must maintain a minimum of 50 percent ownership in the operating business entity.

The owner/operator requirement is a nod to Ray Kroc, who imposed the same requirement on early McDonald's franchisees. According to Kroc, an owner/operator had obvious advantages over the area developer. Most importantly, the owner/operator was heavily invested (both financial and human capital) in the success of a single outlet, thus creating intense incentives to succeed.

Contrast this to Krispy Kreme, which finances expansion through area development contracts. For what it's worth, my money is on Culver's.

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As a native of Wisconsin, I should know more about Frank Lloyd Wright. Sure, I watched Ken Burns' film, and I visited the Robie House while I was living in Hyde Park. But I don't know much about the man and his work, except that I love the Robie House chairs and windows.

Today I left work early to go for a fall color drive with my wife and twin sons (age seven). We decided to head for Spring Green, about 25 miles from our home. I wanted to tour Taliesin, Wright's magnificent home. Unfortunately, children under 12 are not allowed on the tour. Even if they were, the tour is $40 per person, which seems a bit steep for us frugal Wisconsinites. So we contented ourselves with a drive-by.

As we took in the beautiful color in Spring Green, I wondered about Wright the man. Perhaps this is a by-product of doing this blog, but I wondered if we might consider him an entrepreneur. Of course, he is usually referred to simply as an architect. Nevertheless, he surely displays the attributes we normally associate with entrepreneurs, including innovation coupled with implementation.

You might be forgiven for wondering why I would care what we call him, but this issue has become salient for me recently because of my participation in a group that is exploring ideas to promulgate entrepreneurial values across the UW campus. I will write more about this in the future, but we are struggling with fairly fundamental questions relating to the viability of our enterprise. Questions such as: What attributes distinguish entrepreneurs from other people? Should anyone outside of the business school care about entrepreneurship? To what extent is wealth creation central to the idea of entrepreneurship?

I would be happy to hear your thoughts.

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