Journalists will always have a soft spot for Krispy Kreme donuts. Back in 2003, when the company was launching and doing a very good job of building the buzz around its brand, the company’s flacks used to flood newsrooms with donuts, which never seemed to last long, but did seem to help contribute to a little Krispy Kreme mania for a while there.

Anyone who travelled on a plane around that time will remember it well. Travellers flying out of Sydney airport would collect big rectangular boxes of 12 or 24 donuts, and then take them back to loved ones in other cities.

It was as if an overpriced and rather unhealthy donut had become an exotic delicacy.

The hype probably reached its peak when queues at the first store launched in suburban Melbourne stretched for hours. Australia had gone crazy for donuts.

Except that, of course, this looked, felt and tasted like a big fad. In today’s health-conscious society, donuts such as Krispy Kreme’s were never going to become part of anyone’s regular diet, at least not in the way donuts are loved in the US.

When Krispy Kreme rapidly expanded to 50 stores to capitalise on the hype, the chain almost immediately went from novelty to normality, at least from a branding perspective. From an operational perspective, it sounds as if the efforts to capitalise on the fad were not well executed.

Yesterday, chief executive John McGuigan blamed “several factors, including location, sales declines, high rents and high distribution costs” for the decision to put the business into administration — which in retail is a bit like saying “we stuffed pretty much everything up”.

Indeed, you are left with the distinct impression that the company hoped it could ride the hype, and didn’t worry too much about anything else.

What makes this story particularly interesting is the calibre of people who backed the company. I think you can understand why the initial investors — including McGuigan and Rams Home Loans founder John Kinghorn — got involved, but the $16 million investment by the Millner family’s Souls Private Equity in 2006 is the really surprising one.

Although Souls Private Equity did wise up pretty quickly: just two years after putting cash in, they’d written the value of their investment down to zero.

The fad had faded after just five years — although it took another 24 months to finally hit the wall.

*This story was originally published on Crikey sister site Smart Company

Peter Fray

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