Krispy Kreme Doughnuts Collapse

Krispy Kreme should have remained a thriving business even after it gave warning that the number of carbohydrate consumers within America was on the decline in 2004. However, the presence of financial irregularities within its system exposed the reason it was gaining much in a trade that had notable competitors. This paper addresses the major issues faced by the company, and which brought it to its downfall after only four years of good business.

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The first major issue addressed in the article that initially led to a situation of panic within the company and shareholders was the reduced number of Americans willing to consume carbohydrates. By this time, the issue of cutting on the diet must have been on the companys radar. To maintain its competitive state, it should have relied on creative ideas that would ensure as its stock in the sale of donuts was declining; it had another trade, which would bring back its pride. However, the companys reluctance to invest in better income generating activities seemed to slow down its decision making process (Calegari, 2010). At a share price of 40.63 dollars, the company should have gathered enough capital to invest elsewhere. The objective of the company, however, seemed to be centered on expanding the company. This mistake has been repeated severally even to date by large companies especially government owned.

It focuses on expanding brings me to the second issue. Due to the greedy ambitions of the companys executives, the company ended up setting up lots of shops and franchises to familiarize different people with the companys name. However, the major problem emerged when the company could no longer sustain its many shops and franchises due to plummeting stocks. The idea behind franchising involves aiding the franchise in advertising, distribution, and most importantly, manufacturing by providing the needed equipment (Calegari, 2010). Krispy Kreme also relied heavily on high profit-margin equipment for its franchisees. Every profit that was related to the established franchise store was turned into expansion fee. However, all these comforts were fading away faster than the companys management could handle. After six months, the companys stock had fallen by thirty percent (Calegari, 2010). The company was forced to close shop in many areas including hypermarkets.

This issue provides a perfect testimony of how untimely ambitions can lead to the sudden demise of a long desired dream. Also, the wall street consultants can be very convincing when it comes to a company's welfare. This is seen by the initiative the company took in 2000 when it announced an initial public offering. The stock exchange market is a playground for those willing to risk a lot and gain a lot. In any case, if this kind of individuals and entities lose big, they have backup plans, which can bail them out if need be. In the case of Krispy Kreme, there seemed to be no airbag for their already crushing vehicle. The entire company was soon going to turn into a wreck, and all its chief executives would be behind the wheel. When the companys case became public, they tried some problem-solving mechanisms, which backfired almost immediately. The company tried buying back some of its franchises, but the move was met by a law restricting reacquisition of franchises (Calegari2010). Also, the company had its set of additional problems to deal with. During this time, many Wall Street analysts were still recommending the company as a buy. However, during the second half of 2004, the analysts optimistic beliefs turned pessimistic.

The SEC investigation was now headlining news in all of America and the first executive to fall behind the wheel was Krispy Kremes chief operating officer who stepped down in August 2004. During the investigation, SEC raised serious claims about the company, and the board of directors decided to give an announcement that stated the board was restating the financial statements for the previous fiscal year to correct errors in the statements. After thoroughly going through the statements again, the board decided to reduce pretax income to between six million and eight million (Calegari, 2010). The release of its revisited statements was however delayed due to the ongoing SEC investigation. However, failure to release its statements would be in violation of their a hundred and fifty million credit facility guaranteed to the lenders. During this time, the companys banks were authorized to terminate the company and demand immediate payment for outstanding payments (Calegari, 2010). The New York Stock Exchange viewed the current situation as a collapse situation. This is because if the company did not release its statements in time, and if its lenders did not offer it a credit waiver, it was at risk of being delisted from the stock exchange.

However, two questions remained unanswered: were the companys franchise scandals enough to drive its stock of the stock exchange? Were there deeper issues within the companys system that deserved scrutiny?

References

Calegari, M. (2010). Financial Analysis of Krispy Kreme's Earnings Forecasts, Joint Venture Investments, and Franchise Repurchases. Issues in Accounting Education, 25(1), 85-118.