This Floyd Norris’ NY Times column does a nice job of explaining the developing debacle of Krispy Kreme, the share price of which peaked at $49.74 in the summer of 2003, but which has fallen as low as $9.35 recently. An earlier post on the company’s developing troubles may be reviewed here.
What happened? Easy. Most Krispy Kreme franchises don’t make money:

Krispy Kreme’s company-owned stores report an operating profit, but not one large enough to cover corporate overhead. The real profits have come from the company’s dealings with its franchise vendors. The franchises pay royalties of 4.5 percent to 6 percent of sales, plus 1 percent for advertising and public relations. And they must buy all their supplies from the parent – paying hefty markups that provide 20 percent profit margins for Krispy Kreme.
All that would be fine if the franchises were doing well. But many are not, and some are turning to Krispy Kreme as the lender of last resort. Some of these borrow from the parent and others sell their franchises back to it. One lucky operator had a deal that forced Krispy Kreme to buy at a price set in more optimistic times. In other cases, the parent bought for reasons the S.E.C. may be looking into, since its insiders held stakes in franchises the company purchased.
Until recently, it had been hard to tell how the franchises were doing. But the combination of additional investments in franchises and new accounting rules – imposed as a result of the Enron scandal – has forced the company to disclose more. In the quarter ended in October, the joint ventures lost $2.1 million after coming close to breaking even a year earlier.

The lesson of Krispy Kreme is simple, and it is the same one that the Boston Market bankruptcy of the 1990’s should have taught us. If the people who actually sell the product are not doing well, then neither is the enterprise.
Put Krispy Kreme on your bankruptcy watch list for 2005.