CHARLOTTE, N.C. - Back in his Los Angeles college days, Stephen Cooper and his buddies would trek 1,000 miles across the Rocky Mountains to restock their coolers with Coors.
Decades later, Coors doesn't need a cult following to sell its six-packs, available at every corner store. That's a lesson Cooper thinks about often as the corporate turnaround specialist seeks to save troubled Krispy Kreme Doughnuts Inc.
Cooper, whose clients have included Enron Corp., believes the North Carolina purveyor of "Hot Now" treats counted on little more than its cult-like popularity to drive its success as it quickly expanded beyond its regional roots.
"You can't rely on word of mouth to keep expanding the circuit of very loyal customers," Cooper said.
But not too long ago, it seemed like that's all it would take.
The company started to open stores outside the South in the mid-1990s, and when a Krispy Kreme store arrived in your town, it was as if royalty had come to visit. Lines stretched for hours as people prevented by geography from eating a Krispy Kreme doughnut waited eagerly for a taste.
Investors were no different, snapping up shares with the fervor of transplanted Southerners denied their doughnuts. From an initial offering at $21 a share in 2000, the price rose to $105 later that year before a pair of two-for-one stock splits. Krispy Kreme opened nearly 400 stores across the U.S. and as far away as England and Australia.
The ease of that success, Cooper believes, was the problem. Instead of focusing on running an efficient operation in an industry with razor-thin margins, he said, the executives at the Winston-Salem-based company were enjoying the glow of their rapid expansion and rising stock price.
"You have to be able to make the transition from being a word-of-mouth kind of myth-driven marketing company into one that has a much more structured, objective-driven sales marketing program," Cooper said.
That didn't happen, and today, the number of Krispy Kreme stores stands at less than 350, with plans to close even more. Shares in the company have fallen nearly 90 percent from their 2003 peak.
Cooper arrived in January, taking over for ousted chief executive Scott Livengood, a 28-year veteran of the company who drew criticism for blaming Krispy Kreme's decline on the low-carbohydrate diet craze. Krispy Kreme hasn't filed a quarterly financial report since November 2004, and a federal investigation into the company's books is still pending, as are several lawsuits filed by franchisees and workers who claim to have lost everything in the collapse.
Cooper has three decades of experience in restructuring and rehabilitating troubled businesses, including stints at Trans World Airlines Inc. and Enron. Instead of taking his "success fee" in cash, he's being paid with 1.2 million options for Krispy Kreme stock. Priced at $7.75 apiece, they are worthless unless Cooper can boost the share price from its current value of around $6.
He has succeeded before in the same situation. He led the recovery of Boston Chicken, which declared bankruptcy in 1998 after a similar experience with a high-flying stock price and rapid expansion. That restaurant wound up as part of McDonalds Corp., which changed the name to Boston Market.
But despite its legal and regulatory problems, Cooper believes Krispy Kreme will avoid bankruptcy. He envisions a leaner company with fewer and smaller stores. And like market leader Dunkin' Donuts, which has stayed on top by pushing its coffee and other offerings, Cooper said there will be as much emphasis at Krispy Kreme on what comes with the doughnut as the doughnut itself.
"We have a great product with our doughnuts and we want the public to know we also have a great selection of coffee and other beverages," Cooper said.
Becoming a place that's about more than doughnuts might be just what Krispy Kreme needs. St. Joseph's University food marketing professor John Stanton said a better model might be Seattle's Starbucks Corp., which has retained the mystique of its brand, without a big, national advertising budget, even as it has expanded to point where comedians joke about the ubiquitous nature of the company's nearly 7,000 stores.
"I think the key with them is their cafes," Stanton said. "It's little to do about the coffee. It's the ambiance."
To get there, Cooper and Krispy Kreme must first finish fixing the problems left behind. Last week, the company revised its pretax earnings from 2001 to 2004 for the second time, reducing reported income by an additional $10 million.
Sales are also down. The company said it expects sales of $130 million in the third quarter, down from $170 million in the same period last year. The company's lenders have agreed, however, to wait until April 30 for the overdue financial statements.
The recovery will also require some resuscitation of the Krispy Kreme brand. It's almost impossible for companies like Krispy Kreme to regain their luster after falling out of favor with consumers and Wall Street investors, said Harlan Platt, a professor at Northeastern University who follows corporate turnarounds.
He compared Krispy Kreme's fate to that of Hard Rock Cafe, another high-flyer that no longer has them lining up out the door.
"The chances of them coming back are slim," Platt said. "They are not going to be a national chain, but they can take advantage of their strong appeal in the South."
Perhaps with that in mind, along with expectations tempered by Krispy Kreme's past experience with it own success, Cooper believes he'll leave Krispy Kreme as a smaller regional company, but with a plan for more manageable growth.
"I certainly don't expect we will get the word-of-mouth buzz we got a few years ago," he said. "I don't see in the foreseeable future any compelling reason why we should not be able to have a good amount of future growth."