Krispy Kreme Australia in administration, directors will attempt restructure

Donut retailer Krispy Kreme Australia has been placed in the hands of administrators after being hit by a combination of falling sales, high distributions costs, unsustainable rents and poor store locations.

However, the directors of the company, who include chief executive and major shareholder John McGuigan, are likely to present a restructuring plan to the voluntary administrator in the coming weeks in an effort to make the company more “financially stable”.

McGuigan said in a statement released this morning that while turnover and profitability was strong in its better-performing stores, the drag from underperforming stores was too much.

“Several factors, including location, sales declines, high rents and high distribution costs, have meant that a number of stores are losing money,” McGuigan said.

“Directors have determined that a restructure is necessary and the appointment of a voluntary administrator is the responsible action in view of the risk of insolvency if the company continued to operate in its current form.”

Krispy Kreme Australia, which launched amid much hype and strong sales in Australia in 2003, attracted some of Australia’s top corporate names as investors.

In addition to McGuigan, investors include the Millner family’s Soul Private Equity vehicle (which spent a whopping $16.995 million for a 24% stake in February 2006), former Allco boss David Coe and Rams Home Loans founder John Kinghorn.

Kinghorn is the company’s key secured creditor and is believed to have been providing the company with financial support – believed to now be in the millions of dollars – to keep the company afloat since the start of this year.

McGuigan said Kinghorn and the American owner of the Krispy Kreme brand, Krispy Kreme Doughnut Corporation, are supportive of the decision to go into administration and try to restructure the company.

The chain’s 50 stores – all of which are company owned – will continue to trade for the moment. However, industry experts say up to half of the stores are unprofitable, which suggests some major rationalisation is required for the company to return to profitability.

Krispy Kreme Australia admits redundancies for some the company’s 600 staff are a possibility, but says all entitlements will be met.

While Krispy Kreme stores attracted long queues when the company first launched, the business has struggled in recent years with the weak retail environment, poor site selection and a high-cost distribution model that meant fresh product had to be delivered to stores every day.

The problems were underlined in September 2008 when Soul Private Equity wrote down the value of its investment in Krispy Kreme to zero.

Krispy Kreme asked advisers from accounting firm Deloitte to sell the business in March of this year, but this process was unsuccessful, with little interest from potential buyers.

However, McGuigan remains determined to push ahead.

“The directors believe the company’s core business, which has a seven-year history in Australia, remains strong and that a financially stable company will emerge from the process.”