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Krispy Kreme turns to tobacco veterans for marketing help

CHARLOTTE, N.C. - Nearly two years after its stock collapsed amid an accounting fiasco, Krispy Kreme Doughnuts Inc. faces a host of lawsuits, a criminal investigation and declining sales. Meanwhile, efforts are under way in New York and Chicago to ban a key ingredient of its famous doughnuts, one that helps make the trademark treats so darn addictive.

Sounds a lot like the challenges faced by executives at Big Tobacco, and that's just where Krispy Kreme has turned to for help.

Last month, Winston-Salem, N.C.-based Krispy Kreme named Charles A. Blixt, a former executive vice president and general counsel at Reynolds American Inc., as its new general counsel. A week later, the company appointed Andrew J. Schindler, the retired chairman of Reynolds American, to its board of directors.

''They have long and (distinguished) careers at (Reynolds) and they left in pretty good shape. It's not a huge transition for them,'' said Mike Lord, a professor of corporate strategy at Wake Forest University. ''Importantly, what's key is that they do have a great wealth of experience to manage under adversity.''

Adversity is what Krispy Kreme faces, and not only on the balance sheet.

Amid hoopla that included lines around the block whenever Krispy Kreme opened a new store, the company expanded too quickly. Shares that once traded above $50 crashed, dropping below $4 late last year. The company has spent nearly two years trying to straighten out its accounting while it works with prosecutors and regulators investigating an apparent attempt by former executives to hide losses.

The doughnut maker is currently six quarterly reports behind in stating its financial reports, but is in the process of filing its fiscal year 2006 numbers, due out at the end of the month.

The latest threat is less imminent, but potentially more devastating. In both New York and Chicago, public health officials want to ban the use of artificial trans fatty acids, found in some shortenings, margarine and frying oils - ingredients in everything from pie crusts to french fries to, yes, Krispy Kreme's famous glazed doughnuts.

''It's a pretty sensible thing to get a general counsel and someone on your board with marketing experience when there's a significant movement out there from health interest groups and health advocates to ban the main product you sell,'' said John Owens, an equity analyst at Morningstar in Chicago.

The company isn't willing to say if there's a direct connection between the push to ban artificial trans fatty acids and Krispy Kreme's decision to hire a pair of former tobacco executives. Blixt was retained to help address critical legal issues, while Schindler was added for his international insights and strong operational and turnaround know-how, the company said in a statement.

''As we progress with the turnaround of the company, Krispy Kreme is dedicated to the attraction and retention of skilled and talented executives,'' a company spokesman wrote in an e-mail to The Associated Press.

Requests to interview Blixt and Schindler, as well as chief executive Daryl Brewster, a food industry veteran from Kraft who took over Krispy Kreme in March, were denied.

Reynolds American was created in 2004 by the merger of R.J. Reynolds Tobacco Holdings and the U.S. operations of Brown & Williamson Tobacco Corp. Blixt, 55, has more than 25 years of experience in corporate law, while the 62-year-old Schindler spent 30-plus years with Reynolds in various senior management positions, including vice president of personnel, executive vice president of operations and chief operating officer, before retiring in early 2005.

''These guys were successful in the tobacco industry fighting all the public health people, and here we have another industry with similar challenges,'' said Paul N. Bloom, a senior research scholar at Duke University's Fuqua School of Business. ''I don't think Krispy Kreme can be accused by people saying they were deceived about the healthiness of the product - it's a doughnut. But that doesn't necessarily stop people from trying.''

For years, Krispy Kreme thrived on impulse business driven by its trademark ''Hot Doughnuts Now'' signs, which light up when fresh pastries roll off the assembly line. Additional free publicity, like giveaways and unpaid celebrity endorsements when Krispy Kreme was at its trendy peak in the late 1990s, helped keep consumers craving the high-calorie treats.

But the company's financial troubles came at the height of the Atkins Diet craze, when carbohydrates were unwelcome on plates nationwide. And while some critics call the New York and Chicago efforts unnecessary meddling, the proposed bans on trans fatty acids are clearly aimed at fast-food restaurants such as Krispy Kreme.

Lord said that means Krispy Kreme needs to get aggressive, embracing retail strategies like those long used within the tobacco business.

''These guys (Blixt and Schindler) know from their experience in the tobacco industry that what you say, when you say it and how you say it matters,'' he said.

They also have extensive expertise using store displays, promotions and pricing deals to drive point-of-purchase sales, Bloom said.

''With special pricing deals, special promotional deals and lots of advertising, I think that can work with Krispy Kreme,'' he said.

For now, Krispy Kreme has one big marketing advantage over the cigarette companies - despite the worrisome trans fat push, there's no effort under way to ban the sale of doughnuts to minors, or locking away the snacks behind store counters. Still, Lord sees plenty of overlap between marketing doughnuts and cigarettes.

''It's one simple product,'' Lord said. ''And they are both bad for you.''