Posted 21 May 2007 - 11:05 AM
Rise and fall of biggest Krispy Kreme franchisee
Commentary: Story holds lessons for others thinking about franchising a hot concept
By Herb Greenberg, MarketWatch
Last Update: 10:30 PM ET May 20, 2007
SAN DIEGO (MarketWatch) -- If you ever are thinking about buying a franchise for a hot concept, you first might want to check with Rich Reinis and his son-in-law, Roger Glickman.
Until a few years ago, their Great Circle Family Foods in Southern California was the biggest and most successful of the Krispy Kreme Doughnuts (KKD : krispy kreme doughnuts inc com) franchises. Both had quit their day jobs Reinis as a lawyer and Glickman as director of real estate for Sony Theatres and appeared to be living the American dream. "It was a fairy-tale opportunity," Glickman says.
Their first unit opened in 1999 on the site of a failed Kenny Rogers Fried Chicken restaurant in the Los Angeles suburb of La Habra. "It was staggeringly successful," Reinis says. Compared with the average independent doughnut shop in Southern California that did $300,000 to $500,000 in sales a year, the La Habra store boasted sales of $141,000 in its first week; it did $9 million in less than 12 months.
Within nine months, Great Circle opened a second store 35 miles away in Van Nuys. By then, Krispy Kreme was getting enough of a cult following that the imminent opening of the new store made it into Jay Leno's opening monologue on "The Tonight Show With Jay Leno." Opening-day crowds were so big in Van Nuys that "we had police all around us," Reinis recalls. "It was an unbelievable success, doing $211,000 in the first week."
As word of Great Circle's success spread, Reinis started getting calls "from all over the world" inquiring about how to get a franchise. Pretty soon, "Lawyers were calling me and telling me how smart I was to get out of the practice of law," Reinis says. With the exception of their salaries, which were similar to what they earned in their old jobs, "We poured every penny back into the business," Reinis says. To keep up the pace of expansion, Reinis and Glickman made personal guarantees to finance the business; Reinis borrowed $1 million against his house.
Were there red flags? "Sure," Reinis says, pointing to several, including company-owned stores that he believed were run "below acceptable standards," and the lack of a formal association of franchisees. "But when Krispy Kreme is on the cover of Fortune as the hottest brand in the country, you overlook them."
By late 2003, and Glickman thought they were about to be rewarded for their risk. According to Reinis, they had been told by Krispy Kreme's former chief executive, Scott Livengood, that the parent company would buy Great Circle's 23 stores for $70 million. ( Livengood declined to comment; Krispy Kreme didn't return phone calls or emails seeking comment.)
"In my head, I began spending the money," Reinis says. "We were going to be wealthy." Rather than buying Great Circle, Krispy Kreme paid $67 million to buy six stores from a group of former executives. The deal with Great Circle never got done. And despite slowing sales growth, Reinis and Glickman were bound by their contract to keep building stores or face a 15% surcharge on the price of doughnut mix. By the end of 2004, they had 31 stores and 1,400 employees.
As Krispy Kreme's fortunes started to crumble, Reinis says the company started charging franchisees "outrageous sums of money" for everything they were required to buy from the parent company. Without a formal franchise group, he says, the franchisees were powerless. And with no deal to sell Great Circle, "I was panicking," Reinis says.
He hired "the two best bankruptcy lawyers: one for me personally and one for the company," he says. "It was the lowest point in my life."
In 2005, both Reinis and Glickman and Great Circle sued Krispy Kreme in Los Angeles County Superior Court alleging, among other things, that the company overcharged Great Circle on products purchased from Krispy Kreme. The suits were later settled. Krispy Kreme subsequently bought three Great Circle stores for $2.9 million and Glickman avoided personal bankruptcy. Great Circle has been whittled down to 12 stores. Reinis and Glickman remain officers and directors, but Reinis, 62 years old, is back to the daily grind of being an attorney and a better one than before he went through this process, he says while Glickman, 39, is running a chain of laser-eye-surgery clinics. "We had to earn a living," Reinis says.
If there is a lesson Reinis learned, he says, it is that if a franchisor is more interested in expanding the brand and making the parent company look profitable without considering the interests of or even at the expense of the franchisee "that franchisor will doom the franchisee." And the experience won't be sugar coated.
Herb Greenberg is senior columnist for MarketWatch and contributor to CNBC television based in San Diego. He does not own stocks (except for shares of his employer), and he does not sell individual stocks short or invest in hedge funds.
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