Is The Glaze Off Krispy Kreme?

(AP)  In the land where Krispy Kreme doughnuts are an institution, Matt Hollowell walked out of a Dunkin' Donuts store with a large coffee in one hand and a sack of doughnuts in the other.

If Hollowell felt like a traitor to the "Hot Now" doughnut, he showed no guilt.

"I'm from Charlotte, so I've eaten plenty of Krispy Kremes," the construction worker said when asked why he had abandoned the local favorite for the Yankee invader. Now, he said, "I just think the glazed Krispy Kremes leave you with a greasy feeling."

Those are harsh but telling words for the company founded in nearby Winston-Salem in the late 1930s.

Since going public four years ago, Krispy Kreme has been a standout on Wall Street, where its stock price climbed in lockstep with soaring profits. That changed abruptly Friday, when shares plunged nearly 30 percent after Krispy Kreme warned that profits are expected to fall 10 percent this year.

Company executives blamed the popularity of low-carb diets like Atkins and South Beach for driving down sales of its deep-fried, high-carb treats. But analysts say there's more than just a diet trend to blame for the hole-in-the-middle feeling plaguing Krispy Kreme investors.

One problem may be the fact that the novelty of Krispy Kreme -- particularly its signature glazed donut -- is wearing off. J.P. Morgan analyst John Ivankoe cited "waning fad appeal" as one of the company's problems in a letter to clients last week. He said Krispy Kreme's increased reliance on sales in grocery stores and other retail outlets, which makes the doughnuts more available and therefore less unique, was also hurting business.

The company, which operates more than 360 stores, may also have grown too fast.

"The low-carb fad is certainly having an impact but there are a number of other things, such as its rapid store expansion and the (low) productivity in its new stores," said John Glass of CIBC World Markets. "The silver lining is that the company agreed to slow down growth and close down some of its underperforming stores."

Krispy Kreme said last week it will shut stores in Charlotte, Atlanta and Winston-Salem that are smaller than its usual "factory" stores, where the doughnuts are made on-site and sold hot out of the oven

Krispy Kreme CEO Scott Livengood said last week that until recently, the low-carb trend had "little discernible effect on our business." Now, he said, "it's impossible to predict if low-carb is a passing fad or will have a lasting impact."

On Tuesday, company spokeswoman Amy Hughes said of the low-carb trend, "We are not using it as a blanket excuse for everything."

Competition from the more ubiquitous Dunkin' Donuts may also be a problem for Krispy Kreme. Dunkin' Donuts, which touts the quality of its coffee in its advertising, sells a more diverse line of breakfast foods than Krispy Kreme, with bagels, muffins and breakfast sandwiches in addition to its own doughnuts.

Randolph, Mass.-based Dunkin' Donuts said it hasn't seen any low-carb effect on sales at its 4,000 stores in 39 states.

"We are paying attention to consumers' increased interest in low-carb foods," Dunkin' Donuts said in a statement. "However, we have not seen any recent decline in our baked goods sales of which doughnuts are a major contributor. In fact, in each of the past 12 weeks we have exceeded our overall sales goals for the business."

Some marketing specialists question whether there are really enough low-carb consumers to hurt companies like Krispy Kreme in the long term. Harry Balzer, vice president of NPD Group, a Port Washington, N.Y., consumer research firm, said only about 6 percent to 7 percent of Americans are on a low-carb diet.

Still, Balzer said, companies like Krispy Kreme that sell high-carb foods need to take aggressive action to protect themselves.

"For this moment, all those people who are selling foods with high sources of carbohydrates need to deal with it," he said.


By Paul Nowell