CHAIN REACTION EXPANDING A COMPANY IS RISKY BUSINESS.

Byline: Brent Hopkins Staff Writer

An industrial fryer, a bag of lettuce, an espresso machine - they can stock a kitchen or build an empire.

A successful restaurant faces an interesting dilemma when it tries to replicate its initial glories in other locations. If its recipes draw lines out the door and put cash in the till, owners get tempted with notions of branching out. While the quest for growth can be a formula for billions of burgers sold, it can just as easily lend a sour taste to an otherwise sweet business.

``The restaurant battlefield is littered with companies who opened with soft volumes,'' said Tony Serritella, vice president of operations for The Habit Burger Grill. ``They pay the price down the road. It ends up biting them and they have to reel back in.''

Seven years ago, his chain was a three-store operation, relatively unchanged from the way it began in 1969. Serritella and his partners decided they wanted to venture beyond their Goleta roots, slowly creeping across Ventura County and into the San Fernando and Santa Clarita valleys. Seeking to grow with only company-owned stores to preserve the original management structure, they now have a 13-store chain spanning all the way to Glendale and plan to keep branching out slowly.

Not that building a chain is an easy business, according to Ron Paul, president of the Chicago-based restaurant consulting company Technomic Inc. Just because one location's making a million bucks doesn't mean that a second location will bring in another million. Krispy Kreme Doughnuts, which went on a nationwide building spree that continued this week in Southern California, has seen its once-hot brand's stock price plummet more than 70 percent in the past year - to $11.94 on Wednesday.

``There's lots of recipes for success,'' said Paul. ``And a few for failure: over-expansion, leapfrogging from one market to the next and moving into new markets too rapidly.''

The chain faced tremendous pressure from the investment community after going public in April 2004. Though Wall Street loved the stock early on, its relentless desire to see earnings growth forced the chain to stray from its roots. While once a trendy novelty, the doughnuts began turning up in grocery stores, coffee shops and sporting venues.

The Nation's Restaurant News has reported that Krispy Kreme has held talks with its local franchisee, Great Circle Family Foods, to buy back the rights to Southern California.

Great Circle Family Foods President Roger Glickman did not return repeated calls over the past two weeks, but restaurant experts say the chain has become too ubiquitous for its own good.

``What hurt Krispy Kreme was trying to chase Wall Street,'' said Andy Harris, producer of ``The Mario Martinoli Restaurant Show'' on KFI-AM (640). ``When they opened the mini-stores, put them in Albertsons, they lost the cult feeling. It's known for a hot doughnut, but two hours later, it's just not the same thing.''

Other chains are keenly aware of the need to temper their desire to get big quickly. The Coffee Bean and Tea Leaf has grown from 40 stores six years ago, when its present owners took over, to 126 company-owned shops currently. Jay McDonald, the Los Angeles-based chain's senior director of operations, said it rarely franchises stores and strictly maintains the same standards from store to store to ensure consistent product.

And then there's the gold standard for chain expansion: In-N-Out Burger. The Irvine-based chain, founded in 1948, has amassed 186 stores, all still under family control. Its menu and format have changed little, but it has grown at such a gradual pace that its stores stay hot decades after opening.

Though other chains frequently cite it as their model, the secretive operation says little about how it's managed to turn a drive-through stand into one of the industry's most respected brands.

``In-N-Out Burger is a very private, family-owned company and in keeping with our heritage we prefer to maintain a low profile to the public and within our industry,'' wrote spokeswoman Michelle Guzman in an e-mail. ``Unfortunately, we do not discuss aspects of our business - such as operating strategies, store sales, growth, etc.''

The chain's slow growth and careful protection of its brand name have paid off, creating legions of devotees who line up come lunchtime. George Vanca, a retired film technician from Tarzana, counts himself among that bunch. Living near Ventura Boulevard, he has ample options if he wants a burger, but he opts to blow by the others to brave the lines at the Woodland Hills In-N-Out.

``I don't eat hamburgers that often, but when I do, I want an In-N-Out burger,'' he said. ``It's just better quality. They go out of their way to do it right.''

If a chain can tack on locations without losing the feeling it had when it was a hot new idea, analysts agree it can survive. Losing that feeling, however, transforms it into a facsimile that grows weaker with each new copy.

``It's important to have a very clear concept of who you are, like In-N-Out,'' Harris said. ``For Krispy Kreme, they had it at first, where it had to be special, it had to be hot, it had to be fresh. Once they lost that, it became a commodity. And there's a lot of other good doughnuts out there.''

Brent Hopkins, [phone]

brent.hopkins(at)dailynews.com

CAPTION(S):

2 photos

Photo:

(1 -- color) The lunch crowd lines up at the Woodland Hills In-N-Out on Wednesday. The family-owned, tightly run hamburger chain is considered the ``gold standard'' of expansion.

Gus Ruelas/Staff Photographer

(2 -- color) Valerie Barnes readies an order during Tuesday's grand opening of a Santa Monica Krispy Kreme Doughnuts outlet.

Tina Burch/Staff Photographer