Krispy Kreme Example – Leases

A Krispy Kreme franchisee is closing several stores citing lease problems.

…said it plans to close about half of its 15 Chicago area stores as it reorganizes under court protection.

Sweet Traditions LLC, of St. Louis, blamed a lease dispute involving highway oasis for its financial problems, as well as a dearth of new products from troubled Krispy Kreme Doughnuts Inc., which has suffered accounting lapses and a change in managers. The company said it will cut about 110 to 140 jobs from its current payroll of more than 600.

Sweet Traditions abruptly closed its three highway oasis locations in May, citing high rent and low foot traffic. Schlegel said the company had been obligated to pay leases at a total of seven oasis location, even though it had shuttered three and had not built stores at the other four.

“We were needing to get out of those leases,” Schlegel said. Bankruptcy allows companies to void unwanted leases.

So the franchisee filed bankruptcy to get out of those leases – drastic measure for choosing bad locations.

I see this problem all the time in my law practice. Leases can bring down franchisees very quickly, and writing that monthly lease check is as painful as writing that royalty check. All successful restaurateurs I have spoken to say a great lease (low price, great visibility and attractive traffic flow, etc.) are one of the important pillars in deciding on whether to open a location.

Schlegel said some corporate practices at Winston-Salem based Krispy Kreme had also hurt her company. At one time the company required its franchisees to build large factory stores, where all doughnuts are made on site. The stores cost about $3 million each, Schlegel said, a large capital investment that was difficult to recover.

I’ll say. Making up the $3 million investment by selling $.79 donuts is long road.

Schlegel said much smaller stores can do well at far less cost.

“Union Station is 800 square feet,” she said. “Its a great location and does great business.”

Krispy Kreme suffered accounting problems for several years and replaced some in top management. Schlegel said that distracted the company from bringing out new products.

Now the company is experimenting with ice cream, she said, which is being tested at her stores in Peoria and Bloomington. “Its doing very well,” she said.

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