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April 2009
YMCA Servant Leader
By Ellison Clary

     Many Carolinians know the story of Krispy Kreme, the homegrown doughnut company. After six decades of building regional loyalty, it broke into national consciousness with success as sweet as its sugar-glazed confections.

     The Winston-Salem firm went public in 2000 and its stock sparkled. It split twice and was still selling at near $50 as it expanded into many states and several foreign countries.

     But almost as quickly, it fell flat as unleavened bread. Profits proved elusive, and shares plummeted below $2.

     Still, Chief Executive and President Jim Morgan believes strongly in the company.

     “Krispy Kreme has the potential to be one of the five or 10 most recognizable brands,” Morgan says simply. “As far as we know, we make doughnuts like nobody else,” he adds, as he professes his favorite is the Original Glazed treat the company started with in 1937.

     “I think we’ve got the best doughnut in the world,” he says with conviction. “Maybe we have the best sweet product in the world.”

     If that sounds a little like religious fervor, there’s a reason. Morgan leaves no doubt that faith drives every facet of his existence.

     It’s no accident that he’s talking about Krispy Kreme in a conference room at Charlotte’s Harris YMCA. Since he and wife Peggy moved to the Queen City in the mid-1980s, he’s strongly supported the YMCA of Greater Charlotte. The reason, he says, is that the “C” in the acronym for Young Men’s Christian Association is a capital letter and the word is a critical part of its mission.

     In May, the Charlotte Y will present Morgan with its John R. Mott Award, named for a man who championed the cause of displaced prisoners during both World Wars and who won the Nobel Peace Prize in 1946.

     The honor goes annually to a person who exemplifies Mott’s ideals through long service to the YMCA as well as adherence to its Christian mission.

     “It’s very humbling,” Morgan says, “even more because of the people who have won it. To be on that list will be one of the great honors of my life.”

     Former Mott Award winner Russell Robinson, a founding partner of the Robinson, Bradshaw & Hinson law practice, calls Morgan “a superb choice.”

     “He puts his beliefs and values based on his faith foremost in all he does,” Robinson says.

     Morgan credits his father, Heyward Morgan, for setting his life’s course. “He helped me understand that your career is not the most important thing in your life,” Morgan says. “It’s your faith, your family and your friends.”

     At Krispy Kreme, Morgan has instituted extra holidays for employees, giving them occasional Fridays or Mondays off during the summer. Management’s only request is that they use the time for faith, family or community.

     After a year at the helm, Morgan names his concern for those Krispy Kreme employees as the hardest part of his job as he continues steering the company in a 180-degree arc toward profitability.

     “It’s their passion,” he says. “They’re loyal to a fault. We’ve got people who have been here for 20, 30 and 40 years.

     “I told them our mission is not to sell more doughnuts,” he adds. “Our mission is to use this incredible brand called Krispy Kreme to make a difference in the lives of people we touch. If we do that, we’ll sell a lot more doughnuts. Our shareholders will be happy and all the other constituents will be as well.”

 

Morgan’s Mark: Basic Humanity

     Attorney Robinson says Morgan excels at turnarounds “because of his basic humanity and the way he treats people.”

     J. Frank Harrison III, chairman and chief executive of Coca-Cola Bottling Consolidated Company, is another Mott Award winner. He heaps praise on Morgan, who serves on his board.

     “When Jim provides leadership,” Harrison says, “he always does so with a servant’s heart.” Besides Christian leadership, Harrison says, he admires Morgan’s keen intellect, energy and work ethic.

     Morgan is working on the experience of visiting a Krispy Kreme store, with an eye on making it more compelling. The average customer visits Krispy Kreme six times a year. With a warm greeting and top service, that person might drop by twice as often, he thinks.

     Adding complimentary products such as Kool Kreme soft ice cream, served with access to a fruit topping bar, is bound to help, he says. The appeal of doughnuts is strongest in early mornings and in cooler weather, while ice cream attracts customers in afternoons and evenings, especially when temperatures rise.

     Baked goods are on the way, too, and these muffins and bagels will be distinctive enough to fit with the unique doughnut line, Morgan says.

     With elements like this, Morgan believes his plan for profitability and measured expansion will succeed, even in an unpredictable economy where raw material costs can gyrate dramatically.

     Growing up in Greenville, S.C., Morgan and a neighborhood playmate habitually stopped at a Krispy Kreme on trips uptown—to a YMCA facility. Back in the 1950s, he could get a doughnut, sometimes two, for 5 cents. Today, a dozen remains a reasonable $6 in most Krispy Kreme locations.

     “The economy doesn’t seem to be our enemy,” Morgan says. “We are an affordable indulgence. If you’ve had a bad day, maybe our doughnuts are a great way to treat your family without spending much money.”

     Yet the company whose board Morgan joined in 2000 fell precipitously far. Expansion-minded chief executive Scott Livengood left under pressure and two star-quality turnaround artists—Stephen Cooper and Daryl Brewster—departed in the face of weak sales, fiscal losses and earnings revisions. Some franchisees declared bankruptcy.

     When Morgan took the helm in January 2008 and started commuting between his Charlotte home and an apartment in Winston-Salem, it was not his first experience with spiking sour performance. He’d steered regional investment banking and brokerage firm Interstate/Johnson Lane to a financial turnaround that led to its purchase by Wachovia Corporation in 1999.

 

Company’s Decline A Classic Story

     Morgan calls Krispy Kreme’s dramatic decline a classic story. “With the wisdom of hindsight, it appears that they took on franchisees and grew too quickly,” he says.  “There was even a time when they continued to do well in spite of themselves.  Sales began to drop off and it became difficult to cover the fixed costs that had been built up in the aftermath of the successful openings.”

     Morgan joined the Krispy Kreme board a year after the company gained its listing on the New York Stock Exchange. Despite the fact that they had little choice at the time, he says, the firm probably never should have gone public because it’s much easier to run a company its size privately. So, at every opportunity, he’s operating Krispy Kreme as if it were a private company.

     “We’re trying to make decisions as if the only thing that matters is where we’re going to be years from now, not days, weeks or months,” he says. “We’re trying not to be a company that survives, but one that thrives and grows again.”

     Today’s Krispy Kreme still boasts a sizeable footprint. It’s in 37 states and 15 countries. The roughly 500 stores include about 90 that are run by the company, primarily in the southeastern United States. It has about the same number of domestic franchise stores. All its 250 international stores are franchised.

     Morgan wants to shrink the “footprint” of company-owned stores, but open additional stores under a new small store concept and continue growing franchisees in the United States and around the world. In 2009, Krispy Kreme will enter China, Malaysia and Turkey.

     Half of Krispy Kreme’s business is wholesale or, in company lingo, off-premises. This involves packaged products sold in groceries and convenience stores. The typical customer is a mom buying for her family. For that market, Krispy Kreme is producing products with a longer shelf-life, such as glazed honey buns.

     For the retail half, no profile fits. “Our typical customer is as diverse as you could imagine,” Morgan laughs. “All you’ve got to do is go to one of our stores and see who comes in. That’s part of the thing I love about it.”

     To help establish “world class” service, Krispy Kreme is setting up tools for franchisees to use in sharing best practices. These include special Web sites where they can communicate with each other and with management.

     Morgan hopes to see many more situations in which a 4,000-square-foot factory store, with doughnuts rolling off a cooking line, serves a growing number of nearby stores at 1,200 square feet or smaller. Most would still sport the red neon “Hot Now” sign that has become a Krispy Kreme signature. This small store concept is the cornerstone of the company’s long-term growth plans.

     A new innovation could be even smaller spots where the entire product is brought in from remote locations. These would fit best in places with high pedestrian traffic, such as Charlotte’s Overstreet Mall.

 

Firm Operates In Unique Niche

     If Charlotte’s uptown did get a Krispy Kreme, it would be near a Dunkin’ Donuts shop in Fourth Ward. Morgan smiles as he explains why he feels little challenge from that chain.

     “Doughnuts are a small part of what Dunkin’ sells and a huge part of what we sell,” he says. “I look at Dunkin’ Donuts and Starbucks and McDonald’s as being in the coffee wars together. The beverage and various savory food items are the big draw.”

Krispy Kreme has upgraded its coffee, he admits, but adds that he sees coffee as a complimentary product and not nearly the attraction of his company’s distinctive confections.

     “Nicely, we’ve got our own little niche,” he says. “I’m not sure we have a competitor.”

     Still, Krispy Kreme landed recently on an Internet list of 15 companies that might not survive 2009. Morgan’s eyes flash at that.

     “Nowhere does it say that we’ve paid off $40 million of debt in the last two years,” he says. “The last time we made a public statement, we had over $30 million in cash in the bank and the debt is only about $70 million now.

     “We were conspicuously silent as a result of that list,” he continues, adding that, “Over time our performance will speak for itself; I don’t think we’ll have to say a word.”

That fits Morgan’s projection. He told the board his turnaround measures would take two years to produce tangible results. Now 61, he thinks he’d like to stay on after that happens, maybe until he’s 65.

     Until then, Morgan admits to another aspiration. It’s related to the 2002 shareholders meeting when the company was still riding high. Baseball Hall of Famer Hank Aaron visited that Winston-Salem session to celebrate the Krispy Kreme franchise he’d won for an economically challenged neighborhood in Atlanta. Aaron still has that store that provides employment—and role models—for its community.

     “I’d love for Krispy Kreme to get to the point where helping others and making a difference in people’s lives becomes a visible and tangible part of our mission,” Morgan says. “In that sense, we’d be like the Y. The company has a heart for that right now; it just doesn’t fully have the ability to do it yet.”

Ellison Clary is a Charlotte-based freelance writer.
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