di_vur_se_fi, you wrote:
<< ALL of the joint venture partners appear to be leveraged to some degree or another. For example, N. California has $10 million in debt and Glazed Investments has another $10 million in debt (to third parties). KKD has equipment leasing programs, investments in affiliates and debt guarantees to many of its joint venture partners. KKD often announces new joint ventures where they take a 33% or so stake. When the balance sheets of those entities are examined, it appears that KKD puts up most if not all the capital. What is the partner putting up? Where are the deep pockets?
Which of KKD's franchisees would you consider to have deep pockets? >>
Good points all. By deep pockets, I didn't mean debtless, I only meant that KKD usually requires a big up-front investment (not necessarily unencumbered capital) from potential franchisees, as opposed to Boston Chicken, which basically allowed any average Joe with dreams of avarice to open a new store with company money. But I agree that KKD has bailed out a number of franchisees to date, and continues to maintain large stakes in numerous ventures. And even in cases where the franchisee debt is to third parties, KKD's debt guarantees can often add significant risk to the balance sheet without an appropriate return for that risk.
...KKD requires deep-pocket franchisees...
IMO, that is another misconception. ALL of the joint venture partners appear to be leveraged to some degree or another. For example, N. California has $10 million in debt and Glazed Investments has another $10 million in debt (to third parties). KKD has equipment leasing programs, investments in affiliates and debt guarantees to many of its joint venture partners. KKD often announces new joint ventures where they take a 33% or so stake. When the balance sheets of those entities are examined, it appears that KKD puts up most if not all the capital. What is the partner putting up? Where are the deep pockets?
Which of KKD's franchisees would you consider to have deep pockets?
I hate to play the Boston Chicken card again, but if you are looking for similarities between KKD's business plan and those of other fast food chains, I would submit that BOSTQ.PK would be a closer match than MCD. For a trip down memory lane:
This one even pointed out the MCD connection:
There is one significant difference between the business plans - BOSTQ.PK loaned boatloads of money to their franchisees and raked in large interest payments from them during the expansion, while KKD requires deep-pocket franchisees and simply extorts the money directly by way of the generated hype surrounding the brand. In both cases, however, the growth model is unsustainable.
When the stores first opened in my area, it was pretty exciting, but the novelty has largely worn off. Folks here tend to prefer bagels to ultra-sweet breakfast fare. No more lines now. KKD will gradually work its way below $30 and then level off for a time in the mid 20s.
You're dreaming if you think otherwise.
CARL - you are obviously blind to the success of Krispy Kreme as a concept. Just like McDonald's in the early days, KKD has a cult like following who crowd into long lines whenever one is opening in a new area and just like MCDonald's back in the 60's, Krispy Kreme is selling a product that folks just can't get enough of. Long lines, happy customers, same store sales up over 10% quarter after quarter, that is the formula for McDonalds and now the same exact thing is happening to Krispy Kreme who has no competition anywhere. No other doughnut product tastes like a Krispy Kreme. When's the last time you saw a block long line outside a Dunkin Donut?? Here in Mn. they DD's are all closed as their stale, icky donuts where unsellable!!! The local Gas Stations sell better donuts shipped in from the East Coast than Dunkin Donuts ever made fresh locally.
No fear-I remember McDonalds from the early 1960s. McD beat the competition by selling a quality product at a price that was 50% below the competition. They used Heinz Ketchup, Guldens mustard and made their french fries from scratch on the premises. They also made a milk shake for a quarter Hamburgers were a dime and I remember buying french fries for twelve cents. KKD is operating from a different approach. They are charging at least 50% to 100% more than their competitors and making their sales by hype. McD was a place you could go to have lunch at a cheap price. Only in Van Nuys as far as I know do you have people bring their families to have dinner at KKD as stated by a previous poster.
...interesting post, mikem. i guess for long-term investors it comes down to whether you believe that KKD will duplicate MCD's success since its early days. I'm still sticking with the bearish side.
1) McDonalds accrued the vast majority of its net worth by way of real estate appreciation, not selling product. Any restaurant chain which wants to build out today must pay today's real estate prices for those prime locations.
2) McDonalds became successful on a cash-flow basis by commoditizing the short-order restaurant (i.e., applying the attributes of mass production, assembly lines, centralized distribution, etc. to the restaurant business). No one could compete with them on price during their initial buildout, and they had a huge head start on the rest of the copy-cat field. On the other hand, KKD is a specialty doughnut shop charging premium prices for a product which could easily be matched by competitors.
3) McDonalds sells meals, not snacks. There are significant differences in variety of products, associated profit margins, frequency of patronage per customer, etc.
There are many other differences, but the bottom line is, the business models are not comparable. Perhaps the most significant difference of all is that MCD has already been successful with its buildout, while many potential pitfalls still await KKD. Hindsight is always 20/20; it's foresight that tends to be more susceptible to mirages and wishful thinking.
Recommended reading: Fast Food Nation by Eric Schlosser