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.

Two years into its aimless chapter 11 case, UAL Corp. finally requested that the Bankruptcy Court allow it to reject its existing labor contracts with six unions if the company cannot reach consensual agreements on modifications to the contracts by January, 2005.
Better late than never, but geez United, let’s get on with it.
In its motion, United disclosed that it needs an additional $725 million in annual savings from its 62,000 workers in order to maintain sufficient liquidity to avoid a default under its interim bankruptcy financing even though United employees provided wage cuts valued at $2.5 billion a year earlier in the case. United now needs to generate additional savings because the airline business has been hammered even further by a compbination of low ticket prices, competition from discount airlines, high fuel prices, and unfunded pension obligations.
Moreover, UAL used the filing to remind the Court that it must also reduce its pension liabilities in order to secure exit financing to fund a plan of reorganization in its chapter 11 case. Consequently, unless consensual modifications of those liabilities are obtained, United will request that the Court approve United’s termination of its four pension plans, which would foist a substantial portion of the unfuned pension liabilities onto the federal Pension Benefit Guaranty Corp., which is not exactly in great shape itself.
United’s proposals are meeting with angry opposition in its chapter 11 case from the various unions and the PBGC. As a result, it appears that United will probably be required to endure a prolonged court battle on its motion to reject the labor contracts. Under the Bankruptcy Code, United has to prove that the rejections are necessary to permit the company to reorganize, that they are fair, and that the company bargained in good faith with the unions.
Legacy airlines are doomed to failure in the current airline industry absent change that will allow them to compete with the discount airlines. Nevetheless, the glacial progress in United’s chapter 11 case reflects the difficulties involved in changing a legacy airline’s culture. Although perhaps not best for United and its various parties-in-interest, the best thing that could happen to the airline industry as a whole would be for the Bankruptcy Judge in United’s case to issue an order requiring United’s parties-in-interest to show cause why United should not be liquidated. Only that type of industry shattering event is likely to shake the intractable view of airline unions that the past largesse of the legacy airlines is sustainable in the future.
Meanwhile, in this Wall Street Journal ($) op-ed, three authors involved in airline industry/bankruptcy issues provide the following proposal for dealing with unfunded pension obligations of the various legacy airlines:

We believe that the airlines, airline unions and the administration should work together to propose to the Congress a new alternative to the “lose-lose-lose” Chapter 11 approach. This would present an airline and unions with the following new choice: First, management and a union would need to agree collectively to freeze an existing defined-benefit pension plan. Importantly for the PBGC, its liability as guarantor of the plan would be capped as of the freeze date and would decrease over time. Second, the unfunded liability of the frozen plan then would be amortized over a specified time period that would be longer than what current law allows. Here’s where compromise is needed — the PBGC will want a shorter period for the unfunded pension liability to be paid; the airlines will want longer. One thing is clear: The existing pension funding law, particularly the so-called deficit-reduction contribution provisions, so accelerate the funding of significantly underfunded pension plans as to make the freeze option unrealistic absent a longer time period to satisfy the unfunded liabilities. Finally, management and labor would negotiate and agree upon a new, replacement defined-contribution pension plan.

This NY Times article reports that CBS executives are smiling these days, and Dan Rather’s recent resignation as CBS anchorman does not really have much to do with it.
This is further confirmation that the mainstream television networks are really just entertainment venues, and that their news divisions have turned into just another entertainment show that they feel compelled to run for public relations purposes. Thus, so long as the news divisions are marginally profitable or do not lose much money, the networks don’t really care much about the quality of the product.
My sense is that this is not the way that Edward R. Murrow thought that television network news was going to develop.
Meanwhile, this editorial provides The Economist’s view of Mr. Rather’s resignation, including the following observation:

Mr Rather’s retirement epitomises two broader shifts of power. First, the old media are losing power to the new. And, second, the liberal media establishment is losing power to a more diverse cacophony of new voices.

Don’t miss Holman Jenkins, Jr.’s Business World column this week in the Wall Street Journal ($) in which he reviews the rather remarkable effects of the Sarbanes-Oxley legislation, which was Congress’ knee-jerk public relations reaction to the WorldCom and Enron scandals:

No wonder that the annual bill for Sarbox is going through the roof, with the latest estimates being about $6 billion for the Fortune 1000 alone. One investment banker estimates that a small company nowadays would have to generate $150,000 in free cash annually just to cover the additional paperwork before it can even consider going public. Then there’s upwards of $100,000 each to insure all who sit on its board, if any can be found. Oh yes, and the fact that audit fees, for the average company, have risen about 50% in a single year.
No wonder, too, that the number of companies alerting the SEC that their latest financial reports will be late doubled last quarter, adding to a backlog of late filers that recently topped 600. One strategic-investor type who sits on the boards of a number of companies called a few weeks back to gripe in detail about what all this was costing the economy. Under the SOX regime, something as slight as an anonymous letter alleging accounting irregularities can effectively deliver a company entirely into the control of outside auditors. Directors, so fearful about their own liability that they stop thinking about what’s good for the business and worry only about securing their own alibis, write a blank check with shareholders’ money to do whatever the auditor dictates.

And though Sarbox compliance has become a gravy train for auditors, Mr. Jenkins points out that it has come with a “Faustian Caboose:”

But, ahem, Sarbanes-Oxley has at least fixed a lot of real problems, right? Let’s recall that the Internet and telecom bubbles were occasioned by investors who weren’t interested in published financial accounts — they were interested in the speculative potential of new technologies and new business models.
Secondly, there was the problem of how company promoters and CEOs behaved in the presence of a stock market willing to throw money at such speculative endeavors. Neither of these issues is addressed by Sarbanes-Oxley. Nor does any legislative solution for the inherent risks and foibles of market capitalism suggest itself.
Sarbox, rather, is the last gasp of a corporate governance kludge in which auditors became, in the public’s eye, something they’ve never been in their own eyes: namely proof against fraud. In the audit industry’s eyes (or at least in its behavior), the mandatory audit is a welcome gravy train that has gradually revealed an unwelcome Faustian caboose. Whenever a company blows itself up in an accounting scandal, the accountants pay for their gravy train by serving as an additional set of deep pockets for trial lawyers to sue.

So rather than encouraging beneficial risk taking that spurs economic development and job creation, Congress gives us Sarbones-Oxley, which is nothing more than a regulatory straightjacket that could well chill markets in the long run. This is a common occurrence when our elected officials pass legislation to facilitate public relations for their re-election campaigns rather than to provide a real benefit for their constituents.