Krispie Kreme

D IGISCENTS IS NO LONGER WITH US, ALAS. The San Francisco Bay Area company, born in 1999, (three short years ago) came to an very untimely end last year, (2001) before it could release the iSmell Personal Scent Synthesizer, a small box to be connected to a PC, which would blend aromatic oils to emit “scented content” matched to whatever you were watching or listening to on the computer. The company planned to set up a Web site “for all things that smell,” euphoniously named “the Snortal.” While this may smell like a high-concept high-tech hoax, in fact it cost investors $2O million. The company even managed to snag a big-name partner in Procter & Gamble, but still perished.

I AM CONVINCED THAT HISTORY itself would have been changed had DigiScents partnered instead ........... Krispy Kreme. Or at least the history of the olfactory computer peripherals.

It is indisputable scientific fact that no aroma is sweeter than what wafts from a doughnut shop. (Amen) I’ve collected considerable empirical data in the field demonstrating that a hot glazed Krispy Kreme doughnut, when plucked from the production line and popped immediately into the mouth, is the ultimate, transcen-dent “user experience.” The CEO of Krispy Kreme is Scott Livengood, and I should think he is.

DigiScents never made it to an IPO. But Kristy Kreme did, hidden in the Class of 2000, filled with and HomeGrocer and the like. Since trading publicly in

April 2000, shares in the Winston-Salem, N.C.-based company have gone up 309 percent, (Yes, 309%) while the Nasdaq has dropped 61%. Why? Alimentary, my dear Watson.

TASTY TREAT. Lots of investors embraced dot coms that tried to solve the “last mile” problem of E-commerce. Webvan, to take the most infamous case, blew $1.2 billion in a noble experiment delivering perishables to the doorstep. Krispy Kreme, however, doesn’t have to worry about even a “last hundred miles” problem. Its customers travel great distances for the ineffable pleasure of consumption on the manufacturer’s premises. Every opening of a new Krispy Kreme has a story of first day customers having driven hundreds of miles—even crossing international borders—just to be able to taste the authentic article when the chain’s “Hot Doughnuts Now” sign is first lit. Little Krispy Kreme could teach Microsoft a thing or two about “lock-in.”

LET’S SEE: When Webvan filed to go public (Class of ‘99), it could boast that in 21/2 years of existence, it had revenues of $395,000. (To clarify: That wasn’t a number for a quarter or a year; it was cumulative.) When a single Krispy Kreme store opens, its revenues, selling only airy circles of sugary, fatty goodness, can exceed $480,000 in a single week.

Fast companies went public after a few quarters of existence;fat company, on the other hand, was patient, acquiring 252 quarters of operational experience (it was founded in 1937).

The company uses its own history shrewdly in marketing a retro design in its stores. It’s tempting to believe that Krispy Kreme’s success is that of a corporate innocent, powered solely by its delectable product, rising democratically from the small-town South. In fact, one must have a net worth of $5 million merely to apply for a franchise; each store requires an almost $2 million investment (more than double the amount for a new McDonald’s); and investors must commit to opening multiple stores in a region.

With only 222 stores open to date, June 10, 2002, Krispy Kreme seems to have enviable prospects: a great product, lots of room for growth, and investor confidence, as evidenced by its outperforming the market. But that brings us to a problem: Investors have been rather too keen to embrace Krispy Kreme, bidding its price way up, far faster than profits have grown. Krispy Kreme’s price-earnings ratio is 82, when Starbucks’s is 46, Coca-Cola’s is 36, and McDonald’s is 25.

KRISPY KREME INVESTORS seem to be expecting a store on every other corner, like Starbucks—and accomplished soon. It has a ways to go: Starbucks has more than 4,200 stores in North America (including 68 stores that are within two blocks of one another in Manhattan alone). Overly rapid expansion brings risks that shareholders of Boston Chicken once upon a time learned all too much about. Be careful what you wish for: Even if Krispy Kreme were to achieve Starbucks-like ubiquity, wouldn’t we have a public health disaster on our hands?

In the past, all-star investors have been guided by their stomachs and made lots of money. I’m thinking of Warren Buffett’s fondness for Coca-Cola, See’s Candies, and Dairy Queen—and, earlier and even more aptly, Peter Lynch’s discovery of Dunkin’ Donuts. But they never indulged their taste buds to the extent of disregard-ing the relationship of the price paid to the earnings expected. Investors can be absolutely crazy for Krispy Kreme, but they must keep an eye on dollars, not just scents..



JUNE 10, 2002, (pg. 37)

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