Last updated: August 18, 2019
Topic: BusinessMarketing
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Krispy Kreme Doughnuts (KKD) is a restaurant services company that offers 25 types of doughnuts, a coffee line, espresso-based drinks, frozen beverages and milks. The company produces 7,5 millions doughnuts a day, 2,7 billions a year. In addition to 390 stores in 45 states, the company sells its doughnuts in supermarkets, convenience stores and other retail outlets throughout the United States. Since early 2005, the company expanded internationally with stores in Mexico, Canada, the United Kingdom, Australia, South Korea and Spain. Krispy Kreme employs now 3913 people and has its headquarters in Winston-Salem, North Carolina.

In 1933, Vernon Carver Rudolph bought a doughnut shop in Kentucky from a French chef, as well as the chef’s secret doughnut recipe. Krispy Kreme was born. The company started selling doughnuts to local grocery stores, yet as people walked by Krispy Kreme’s factory, they started asking to buy directly the hot doughnuts. Rudolph therefore cut a hole in his wall to accommodate his customers. Over the years, the doughnut-making process became automatic and outputs grew. In 1976, Beatrice Foods Company of Chicago acquired the company, which was bought back six years later by a group of franchisees led by Jospeh A. McAleer. A renewed focus on the doughnut experience became a priority to the company, with the introduction of “doughnut theaters,” where consumers could watch the doughnuts being made and glazed.

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In 2001, KKD acquired Digital Java Inc., a small coffee company that offered a wide array of hot and cold coffee-based and non-coffee-based beverages. This acquisition was mainly sought to provide a genuine coffee experience to the customers, but also to increase Krispy Kreme’s vertical integration, allowing it to control the sourcing and quality of its coffee, while broadening its beverage offering. In April 2003, Krispy Kreme went on acquiring Montana Mills Bread Co., a bakery chain offering more than 80 types of bread, muffins, cookies, brownies and other treats, to complete its range of products and develop a bakery-cafee strategy.

The company also opened doughnut-making retail stores within Wal-Mart supercenters, where consumers can buy fresh products. Other stores have doughnuts delivered several times a day from the nearest factory store.

Krispy Kreme recently installed an Internet portal designed for employees’ use. It provides employees with data and quick and secure delivery application. In 2003, KKD started using Network Appliance storage systems, in order to maximize storage resources and increase efficiency. It also allows KKD to reduce costs and increase productivity.

At the end of 2001, Krispy Kreme opened its first store outside the United States, in Canada where KremeKo, Inc. is the exclusive developer. Since then the company has expanded to other international locations.

Although the company had had constant growth over the past years and had expanded at a rapid pace, its profits have not met expectations in 2005 due to growing consumer tastes for low-carb food, according to the company. It is still showing important profits though.

The company faces now a SEC (Security and Exchange Commission) investigation and more than 20 shareholder lawsuits about misreporting profits and failing to issue a profit warning as soon as it knew that its profits would fall short of predictions. The company is also accused of “channel stuffing”, a method consisting of delivering more doughnuts to the suppliers than ordered at the end of a reporting period, in order to boost revenues and meet projections, and then taking back the unsold doughnuts at the beginning of the next period.

As a result, its usually well-performing stock has dropped. It traded around 33 dollars in May 2005. Now it is at around 6 dollars! It shows how the company has declined in the eyes of the market. KKD announced the elimination of more than a hundred jobs and major restructuring changes within the company, with the replacement of Scott Livengood by Stephen Cooper as CEO. The company plans on selling and closing down the Montana Mills locations that are underperforming and on which the company is losing a lot of money.

Company’s mission and vision

KKD’s business is high-volume sales and production of its 25 varieties of doughnuts. Its commitment to quality, affordability, customer service and local community involvement has created a faithful enthusiastic customer base. Its doughnut theaters and quality ingredients differentiate the company from others. It is currently drafting a mission and vision statement.

KKD’s doughnut-and-coffee shop concept functions well in locations accommodating drive-through and the company is planning on expanding its presence in locations with substantial customer foot traffic, such as airports, malls or casinos. As the company has set up stores in urban and largely-populated areas, leaving small communities out, it plans on expanding in markets with fewer than 100’000 households. It will also continue its international implementation. The company plans on extending its beverage program, as it believes it will bring substantial new sales. It also pursues a penetration strategy with off-premises sales in grocery stores and supermarkets to increase its visibility and customer base.

The company expanded rapidly over the years, but its overexpansion (notably through the acquisition of Montana Mills) and mismanagement have led to the recent decline of the company in the market. The next months should witness major changes within the company.

Internal Environment Analysis

Corporate Resource Analysis (CRA)

•          Management

–           Management decided to shift the focus from a whole sale bakery strategy to a specialty retail strategy of premium quality doughnuts.

–           Management 101 has been launched to provide training to the management trainee so that they will be able to effectively run their own store and can create mentoring relationship with their employees.

–           Krispy Kreme is a centralized organization in order to manage its bran through franchising.

–           Krispy Kreme makes certain that its employees enjoy working in the organization to ensure productivity by offering non-economic rewards such as the stock options.

•          Marketing

–           Krispy Kreme spends little on advertising but they rely on ever power local mediaand word of mouth; the two most effective way to build recognition, awareness and new customers.

–           Krispy Kreme’s marketing is focused on the product and it targets the masses.

–           Krispy Kreme achieving its differentiated strategy by positioning itself as “doughnut making theatres” where customers could watch the doughnuts being made through a 40-foot glass window.

–           Krispy Kreme offers a superior product which is fresh and hot doughnuts. Moreover, customers exited when a red neon light flashes “Hot Doughnuts Now!”

–           Krispy Kreme has a presence in schools, non-profit groups, and fundraising events which boost its image as a corporate citizen.

•          Finance/Accounting

–           Krispy Kreme offers no dividends, and their equity grade may be reflective of their expansion and growth.

•          Production/Operation

–           Krispy Kreme, through the launch of KKMD, has made its processes in an otherwise mature, technologically stagnant industry one of the most productive players in the industry.

–           Many stores were open 24 hours a day, with much of doughnuts making for off-premises sales being done between 6 PM and 6 AM

–           A typical day’s production ranged between 4,000 and 10,000 dozen doughnuts

Strengths

–           Minimized capital requirements due to franchising providing an attractive royalty stream which puts responsibility for local store operations in hands of successful franchisees who know the ins and outs of operating multi-unit chains.

–           They use a vertical supply-chain, which means that manufacturing and mixing for the doughnuts are done by Krispy Kreme.

–           Sales of mixes and equipment (KK manufacturing and distributing) generated a substantial fraction of revenues and earnings.

–           By sending out an IPO they raised enough capital to completely pay off all long-term debt.

–           They have very good customer loyalty and brand recognition

–           Krispy Kreme offers a variety of products-20 different types of doughnuts

–           Acquired Digital Java- a small Chicago based coffee and non-coffee based Beverage Company.

–           Technologically enhanced-online training courses

Weaknesses

–           The performance and or financial condition of KK are dependent on their franchisees to execute its store expansion strategy, supply issues, and compete in the market.

–           Known as being the “unhealthy” doughnut

–           There niche competitors are quick to offer new products for customers

–           Focused on opening new stores instead of increasing current performance

–           Marketing based solely on reputation-no advertisements

Opportunities

–           When Krispy Kreme took off in 1997 they were in the infancy of their growth and they hope to expand into the market

–           KK would like to expand into colleges and universities, businesses and industry facilities, sports and entertainment complexes.

–           Looking for more franchisees to open up stores worldwide

–           Internet access, larger food menu and other services via internet

–           Premium drinks such as cappuccinos, mocha, espresso etc.

–           Diet or low fat products

–           Co-branding and product diversification

Threats

–           Diet craze had increased over the years-Obesity scare, high cholesterol, Atkins diet, South Beach diet, etc. are still factors that need to be considered

–           Other Quick Service restaurants are serving coffee and desserts

–           Competitive market- Dunkin’ Donuts/Baskin Robbins alliance

 

Financial Analysis

Krispy Kreme’s net sales have increased steadily from 2000-2004. System wide sales has increased by 26.5% from the last fiscal year. As well as, an increase of 45% in net income.

01/31/04          01/31/03          01/31/02          01/31/01          01/31/00

665.59 491.55 394.35 300.72 220.24

Krispy Kreme’s quick ratio is 1.83, which means that they have the ability to pay off their debts. The Inventory turnover ratio is important also. Krispy Kreme’s inventory turnover is 19.06, which means that they are able to sell their inventory in about 19-20 days on average. Return on assets is the key indicator in this line of business to evaluate how profits are being generated from operations. Krispy Kreme’s ROA is 14.6. This means that for every dollar in total assets Krispy Kreme is able to produce $14.60 in net income.

The special skills and know how that Krispy Kreme possesses is shown by having the name franchised out to franchisees all over the United States. It is cost efficient to do this because it minimizes capital requirements, provides an attractive royalty stream and it puts the responsibility in the hands of the franchisees who know the ins and outs of operating multi-chains efficiently.

Competitive Analysis

Krispy Kreme is a part of the Specialty Eatery restaurant. It is traded on the New York Stock Exchange under the symbol KKD. Their SIC codes are 2051 for the bread, cake, and related products and 5812 for eating places. They are in a concentrated market where they control 24.6% of the doughnut industry. Their leading competitors are Dunkin’ Donuts, Starbucks, Winchell’, Tim Horton’ and Cinnabon to name a few.

Krispy Kreme has the ability to align their strategy and execute their brand with high potential which categorizes their aptitude for vision and creativity. Two of their key priorities are brand value and internal culture. By making sure that their employees are satisfied and keeping up with the “Hot Doughnuts Now” slogan they remain in line with their strategic vision.

Krispy Kreme implements a differentiation strategy. This means that they want to distinguish their product from other in the industry. They do this by distinguishing the taste, quality, and simplicity of their product. Other competitors in the market tend to use to same strategy because a competitive advantage of taste is better than cost. Another advantage that KK has is their vertical integration that sets them apart from their competitors. They manufacture their own custom doughnut and makes equipment for all of their restaurants.

One of KK greatest assets is their brand name and taste. By targeting consumer tastes they succeed in the business. They are also known for their marketing efforts through charitable organizations.  They do not spend much money of direct marketing through advertisements but they offer free doughnuts to market themselves.

How does Krispy Kreme create value for its customers?

Value id measured by a product’s performance characteristics and by its attributed for which customers are willing to pay. Krispy Kreme adds values to customers by providing a unique product in a unique environment. The money maker for Krispy Kreme is its original glazed doughnut. Customers are willing to pay for these hot doughnuts that they can see created right in front of their eyes.

Krispy Kreme has made doughnuts “cool” again. This was accomplished through giving the customers exactly what they wanted, hot doughnuts that were fresh and tasty. The name itself is credited ti the popularity of Krispy Kreme. The misspelling of the words “crispy” and “cream” almost guaranteed that customers would not forget the name. the name uniquely identifies Krispy Kreme doughnuts so that customers will forever associate the name with the overall experience that is Krispy Kreme doughnuts.

External Analysis

Generic environment

Krispy Kreme is part of the fast-food/pastries/coffee industry. Although I find it difficult to really categorize its generic environment in one of the four types of businesses provided by the Boston Consulting Group (volume, stalemated, specialized and fragmented), I think it is the most closely related to the one of volume businesses. Indeed this industry presents many advantages, yet few approaches are possible (either company-owned stores, franchisee store or selling in grocery stores and supermarkets). This industry benefits from economies of scale. Although costs are not that high (it is not a very technological industry, it relies on a few machines, but mainly on human workforce and customer service), producing and selling in volume reduces costs. This industry faces global competition and also market maturation. Individually-owned bakeries and cafees are numerous and the market also sees the presence of major chains battling over market shares. Their strategies are usually geared towards greater expansion, greater volumes and lower prices.

Although Americans are known as on-the-go eaters, who never really stop to eat a meal for more than an hour (not like the French for example who enjoy eating for many hours) and easily grab sandwiches and snacks that they can eat in their car, in public transportation or in the office, statistics have shown that restaurants have become an increasingly important part of the American lifestyle over the past few decades, especially as an older, wealthier population favors dining in full-service restaurants. The fast-food chains are therefore losing shares from the casual-dining sector. At the same time, Americans are still very fond of carry-out food prepared for them in a restaurant that they can directly consume at home without “wasting” time cooking a meal. The demand for restaurants and prepared food will continue to grow as more women are working and people in general are pressed for time and seek convenient and economical alternatives to home meal preparation.

Another major trend has recently appeared in the United States: healthier eating habits. Although this trend has also increased in other countries, it has not been as powerful due to prior healthy eating concerns. As the United States have observed a worrisome increase in obesity, with about 60% of the population considered overweight or obese, people have started to look for healthier lifestyles and food. Many restaurants and fast-food chains had to adapt to this growing demand for healthier products, expanding their range of products and displaying nutritional information, even promoting healthier lifestyles in their advertisement. Many fat-free and lower-fat products, as well as low-carbohydrate products (very popular due to the Atkins’ diet followed by Hollywood stars) are now stacked on the stores’ shelves.

The fast-food and restaurant market is very competitive, this phenomenon showing in major price discounts of such companies as McDonalds. Food product prices have inflated, and companies had to lower their development costs of new restaurants and slow down expansion in a very crowded fast-food market. Companies are expected to enter smaller markets, and are at the same time increasingly looking at international opportunities.

External Factor Evaluation (EFE) matrix

Opportunities  Weight            Rating Weighted score

Customer loyalty        0.05     4          0.20

Underdeveloped US markets 0.15     3          0.45

International markets 0.10     3          0.30

High-traffic off-premise locations     0.10     4          0.40

Sales in grocery stores            0.10     4          0.40

E-commerce    0.05     1          0.05

Alliances         0.05     1          0.05

Manufacturing technology     0.05     4          0.20

Threats

Strong competitors     0.15     3          0.45

Entry of new competitors      0.05     2          0.10

Healthier product trend         0.10     1          0.10

Substitute products    0.05     2          0.10

TOTAL           1.00                 2.80

Krispy Kreme is not responding outstandingly to opportunities and threats. It is a little above average (2.50). Krispy Kreme has not acknowledged enough its changing environment. Although it has tried to expand in the United States with the acquisitions of two different companies, it doesn’t seem to have done it with a lot of reflection. The acquisition of Digital Java proved to be working, yet Montana Mills was a huge waste of money and didn’t help much the company expand its business and its clientele. Kripsy Kreme can continue growing in the market place, but it has to take active steps towards healthier products and an increased Internet use, while closely monitoring competitors and substitute products.