Krispy Kreme seeks new CEO to replace interim leader

Nation's Restaurant News, Nov 7, 2005 by Sarah E. Lockyer

WINSTON-SALEM, N.C. -- Signaling the beginning of the end for turnaround firm Kroll Zolfo Cooper's involvement with embattled Krispy Kreme Doughnuts Inc., the operator or franchisor of about 400 shops last month began searching for a new chief executive.

Currently, KZC's chairman, Stephen Cooper, is Krispy Kreme's interim chief executive. He was named to the post after Krispy Kreme's board of directors sought and received in January the resignation of longtime chief executive Scott Livengood.

The Winston-Salem-based company said in a statement that it is working with executive search firm James Mead & Co. "to identify and retain a CEO as soon as possible."

In addition, Krispy Kreme named Jeff Jervik its new executive vice president of operations, effective Oct. 27.

With the once-hot chain now roiled by prolonged sales erosion, litigation against the franchisor by its own employees, and accounting investigations by federal authorities, Krispy Kreme franchise owners have been clamoring lately for new leadership.

The company also must deal with several lawsuits against it by franchisees, including a bitter complaint filed in Los Angeles by the principals of the chain's largest group over the franchisor's alleged plot to bankrupt the chain's operators.

Other operators just want the hoped-for new leaders to move the system forward once KZC's turnaround work is finished.

"Certainly from our perspective we would like to see the brand led by a restaurateur," said Gerard Centioli, a partner in the 12-unit, Seattle-based Krispy Kreme franchisee KremeWorks USA LLC, a division of Icon LLC of Chicago. "Restaurateurs should lead restaurant companies, and while clearly Krispy Kreme is more than a restaurant company, at the heart of it, what must perform are the units. I don't believe anyone has a better perspective on that than a restaurateur."

Centioli did not make light of the "significant financial engineering" Kroll Zolfo Cooper has had to do since its relationship with Krispy Kreme began in January, but he said he viewed KZC's role as an interim one and looked forward to new management.

"We think there are things that need to be done to move the brand ahead," he said. "When permanent management is in place that will be done."

Cooper, a well-known turnaround specialist, was made chief executive and chief restructuring officer of troubled energy company Enron Corp. after its 2002 downfall. This July, while serving as Krispy Kreme's chief executive, Cooper was named chairman at bankrupt auto parts maker Collins & Aikman Corp. Cooper also led the turnaround at the Boston Market chain, which declared bankruptcy in 1998 and subsequently was purchased by McDonald's Corp.

"While there are a number of challenges still facing the company," spokeswoman Laura Smith said, "Krispy Kreme's board of directors has determined that the time is right to move forward with a search to find a permanent CEO to lead Krispy Kreme."

New operations boss Jervik reports to Steve Panagos, another Kroll Zolfo Cooper turnaround executive, who is Krispy Kreme's president and chief operating officer. Jervik oversees all unit operations, both corporate and franchised, and the company's wholesale business.

Before joining Krispy Kreme, Jervik owned and operated a chain of Papa John's Pizza restaurants in Hawaii. Previously, he was national vice president of operations for Pizza Hut Inc., where he oversaw operations at more than 1,000 Pizza Hut locations.

In a statement Jervik said there was "tremendous potential in the Krispy Kreme brand," and that "while we have some challenges ahead of us, I believe that they are manageable and that the opportunities for this business are significant."

Franchisee Centioli said the news of Jervik's appointment was "very positive."

"Certainly, [his appointment] is very consistent with our view that the company should be run by a restaurateur," Centioli said.

Other franchisees, however, are not as happy with recent moves made by Kroll Zolfo Cooper. In September, two partners in Los Angeles-based Great Circle Family Foods LLC, the chain's largest franchisee, filed a lawsuit alleging Krispy Kreme and its current management team tried to force their company into bankruptcy. The heads of 29-unit Great Circle also said executives of the franchisor misappropriated marketing money and falsely billed the franchisee for deliveries while demanding cash for payments.

Krispy Kreme has said it would "vigorously" defend itself against the charges.

Richard Reinis, chief executive of Great Circle and one of the plaintiffs, said Krispy Kreme has never said it planned to force franchisees into bankruptcy but that the strategy became clear with filings for bankruptcy protection by the chain's Canadian and Philadelphia regional franchisees. Reinis said he believes Kroll Zolfo Cooper plans to "take the units back cheaply."

"[Kroll Zolfo Cooper] will benefit from driving franchisees into bankruptcy," Reinis said. "It is too hard for accountants to run a doughnut shop."