Krispy cream case study final
- 1. 1 Group Members Wajahat Ali Muhammad Qaswar Ata Makhdoom Mudasser Iqbal Tanveer Ahmad
- 2. 2 Krispy kreme. Krispy Kreme is an international chain of doughnut stores that was founded by Vernon Rudolph in 1937 in Winston-Salem, North Carolina, United States. The parent company is Krispy Kreme Doughnuts, Inc. (NYSE: KKD), which is based in Winston-Salem. While selling assorted types of doughnuts, Krispy Kreme's signature item is a glazed doughnut that is traditionally served warm. Products are sold in Krispy Kreme stores, grocery stores, convenience stores, gas stations, Wal- Mart and Target stores in the United States. Internationally, Loblaws supermarkets and Petro- Canada gas stations in Canada along with BP Service Stations and BP Travel Centres in Australia carry Krispy Kreme. In the United Kingdom Tesco supermarkets, Tesco Extra and most service stations carry Krispy Kreme products. The company's growth was steady prior to its initial public offering but profits have decreased in recent quarters. However, new branches have opened in downtown Philadelphia and other locations. History Krispy Kreme's founder Vernon Rudolph and his uncle purchased Joseph LeBeouf's donut shop on Broad Street in Paducah, Kentucky along with a secret recipe for yeast-raised doughnuts in 1933 acquired from a Buffalo, New York businessman. Rudolph began selling the yeast doughnuts in Paducah and delivered them on his bicycle. The operation was moved to Nashville, Tennessee and other family members joined to meet the customer demand. Rudolph sold his interest in the Nashville store in 1937 and opened a doughnut shop in Winston-Salem, North Carolina selling to grocery stores and then directly to individual customers. The first store in North Carolina was located in a rented building on South Main Street in Winston-Salem in what is now called historic Old Salem. The Krispy Kreme logo was designed by Benny Dinkins, a local architect. Expansion occurred in the 1950s, including an early store in Savannah, Georgia, and elsewhere in the South. By the 1960s, Krispy Kreme was known throughout theSoutheast, and it began to expand into other areas. In 1976, Krispy Kreme Doughnut Corporation became a wholly owned subsidiary of Beatrice Foods of Chicago, Illinois. The headquarters for Krispy Kreme remained in Winston-Salem. A group of franchisees purchased the corporation back from Beatrice Foods in 1982. Growth Krispy Kreme began another phase of rapid expansion in the 1990s, opening stores outside the southeastern United States where most of their stores were located. Then, in December 2001, Krispy Kreme opened its first store outside the U.S. in Mississauga, Ontario, Canada, just outside Toronto. Since 2004, Krispy Kreme has rapidly expanded its international operations. IPO and accounting scandals On April 5, 2000, the corporation went public on the NASDAQ at $21 using the ticker symbol KREM. On May 17, 2001, Krispy Kreme switched to the New York Stock Exchange,
- 3. 3 with the ticker symbol KKD, which is its current symbol. The stock reached what would be its all-time high of $50 on the New York Stock Exchange in August 2003, a gain of 235 percent from its IPO price. For the fiscal year ended in February 2004, the company reported sales of $665.6 million and operating profits of $94.7 million from almost 400 stores (including international locations). The market initially considered the company as having "solid fundamentals, adding stores at a rapid clip and showing steadily increasing sales and earnings." Since then it has since lost 75-80% of its value by 2005, amid earnings declines, as well as an SEC investigation over the company's alleged improper accounting practices. In May 2004, the company missed quarterly estimates for the first time and suffered its first loss as a public company. Chairman and CEO Scott Livengood attributed the poor results to the low- carbohydrate diet craze, an explanation viewed with skepticism by analysts as "blaming the Atkins diet for disappointing earnings carried a whiff of desperation". It also must be noted that rival donut chain Dunkin' Donuts has not suffered from the low-carb trend over the same compared period The company has been accused of channel stuffing by franchisees, whose stores reportedly "received twice their regular shipments in the final weeks of a quarter so that headquarters could make its numbers".Krispy Kreme was also dogged by questionable transactions and self-dealing accusations over the buybacks of franchisees, including those operated by company insiders. A report released in August 2005 singled out then-CEO Scott Livengood and then-COO John W. Tate to blame for the accounting scandals although it did not find that the executives committed intentional fraud Management shuffle On January 18, 2005, Krispy Kreme announced Stephen Cooper, chairman of financial consulting group Kroll Zolfo Cooper LLC, as interim CEO, succeeding Scott Livengood who retired as chairman, president, CEO and a director. The company also named Steven Panagos, a managing director of Kroll Zolfo, as president and COO. A turnaround plan in December 2005 aimed to close unprofitable stores in order to avoid bankruptcy New offerings Although based on informal advertising such as word-of-mouth, in 2006, Krispy Kreme moved into television and radio advertisements, beginning with its "Share the Love" campaign with heart-shaped doughnuts. On February 19, 2007, Krispy Kreme began selling the Whole Wheat Glazed doughnut in an attempt to appeal to the health conscious. The doughnut has 83.736 kJ (20 kilocalories in most countries, or 20Calories in the US) fewer than the original glazed (754 kJ vs. 837 kJ) and contains more fiber (2 grams vs. 0.5 grams). As of January 2008, the trans fat content of all Krispy Kreme doughnuts was reduced to 0.5 of a gram or less. The U.S. Food and Drug Administration, in its guidelines, allows companies to round down to 0 g in its nutrition facts label even if the food contains as much as 0.5 of a gram per serving. Krispy Kreme benefited from this regulatory rule in its subsequent advertising campaign, touting its doughnuts as "trans fat free" and having "0 grams trans fat!".
- 4. 4 On July 1, 2010, Krispy Kreme introduced a doughnut that included the soft drink Cheerwine, which was to be sold in grocery stores in North and South Carolina during July.The doughnuts proved so popular the Salisbury, North Carolina Krispy Kreme location, in the town where Cheerwine is made, sold them as well,and after July 31, this was the only place to get them.The Cheerwine Kreme doughnut returned for July 2011 and made its debut in Tennessee and Roanoke, Virginia. Also in 2010, Krispy Kreme Express, a delivery service for businesses, began testing at the Battleground Avenue location in Greensboro, North Carolina International operations The first Krispy Kreme store to open outside North America was in Penrith, Australia, in Sydney. At first the operation was successful, opening 53 other stores around the country However as of November 1, 2010 the entire Australian division went into voluntary administration, with media reports attributing this to poor sales.They have since come out of administration as of December 2010, and continued trading, with fewer stores. Besides the stores that Krispy Kreme operate in the United States and Canada, there are also locations in the United Kingdom, Australia, Lebanon, Turkey, Dominican Republic, Kuwait, Mexico, Puerto Rico, South Korea, Malaysia, Thailand, Indonesia, the Philippines, Japan, China, the United Arab Emirates, Qatar, Saudi Arabia, Bahrain,Hong Kong (2006–2008), andEthiopia. In August 2011, Krispy Kreme's Japan operation planned to increase the number of stores from 21 to 94, and its Mexico operation announced the number of stores would increase from 58 to 128 in five years. In the United Kingdom Krispy Kreme continues its expansion and has plans and funding in place to open further stores in 2012. Franchisee expansion and reduction New england In 2002, Krispy Kreme opened its second store in New England in Newington, Connecticut. What followed was a period of aggressive expansion throughout the region; this included a Krispy Kreme at the Prudential Center in Boston, Massachusetts, which opened on April 15, 2004 and closed sixteen months later. Initially fueled by hype surrounding the opening of Krispy Kreme in New England, this regional expansion was followed by the closing of all but one store, at the Mohegan Sun casino in Uncasville. In January 2010 the Milford store, the first to open in the region, closed after a long decline in patronage. Some say that Krispy Kreme's coffee "left many locals unimpressed, a mortal sin in the joe-loving . Krispy Kreme also opened one store in Cranston, Rhode Island in May 2003. It is now closed after receiving initial fanfare. This may be due to dominance of Dunkin' Donuts in the state Arizona Krispy Kreme reentered the Arizona market when a new franchise reopened its East Mesa, Arizona, location on May 13, 2008. This location was purchased by Krispy Kreme after Rigel closed it in 2006. The new franchise owner, Dan Brinton, plans to eventually open four to five
- 5. 5 factory stores in the Phoenix market. These stores are planned to support 10 to 15 smaller non- factory stores that will only sell doughnuts and other products. Texas In 2002, Krispy Kreme opened a restaurant style store in the Amarillo area in Texas. Many thought that the local doughnut store was the reason the national chain closed, but this was not the case. The Amarillo Krispy Kreme closed on July 17, 2005. Another Krispy Kreme closed in Round Rock in 2009. However shop 251 in Grapevine is still open, as well as two shops in El Paso. Most recently Krispy Kreme closed the Corpus Christi location. California In January 2006, Krispy Kreme terminated the donut license of Great Circle Family Foods LLC, alleging non-payment of required fees. At the time, they were one of the largest franchisees, operating 28 stores in Southern California. Preceding this action was a financial dispute by Great Circle, culminating in their September lawsuit filed against Krispy Kreme. The lawsuit was settled in July 2006 and led to the reinstatement of Great Circle's license. On August 22, 2007, Great Circle Family Foods and some of its wholly owned subsidiaries filed for Bankruptcy. Great Circle emerged from on July 6, 2009, and currently operates 11 stores in Southern California. Nevada After opening to great hype in 2000, the franchise in Reno closed suddenly on May 15, 2008. Without warning, employees were greeted with a sign on the door that morning saying "we apologize for any inconvenience." Rising fuel costs were cited as the primary reason for the closure. Puerto Rico On May 6, 2008, the first store in Puerto Rico opened, followed by two additional locations in 2010 and one additional location in 2011. Canada The 18 stores which opened in Canada, out of 32 planned, have been reduced to four. Two of those exist in Quebec (in Longueuil and Quebec City) while the other two stores are in Mississauga, Ontario andDelta, British Columbia. A small seasonal store was recently opened in Wasaga Beach, Ontario.The Wasaga Beach location receives its doughnuts from the Mississauga store every morning. Another small store recently opened on November 3, 2010 in Toronto at Bathurst and Harbord Streets in the city's Harbord Village neighborhood. This store receives shipments from the Mississauga store. Krispy Kreme's Canadian assets were put up for sale in 2005 seven weeks after the U.S.-based doughnut company had the firm that owns and operates stores in Canada placed under bankruptcy protection. The Canadian operations are managed under the franchisee Krispy K Canada Company of Mississauga, Ontario. Philippines In November 2006, Krispy Kreme opened the flagship store in the Philippines. These stores are franchise owned like many others.The development deal for the franchise is awarded to the Real American Donut Company, Inc., a company owned and operated by the principals of Max's Restaurant. The original franchise agreement is for 30 stores over the next five years.
- 6. 6 The flagship store was officially opened on November 30, 2006, at the Bonifacio High Street in Fort Bonifacio, Taguig City. The second store was opened on December 21, 2006 at SM Megamall in Mandaluyong City. The third store was opened on June 28, 2007 at Greenhills Shopping Center in San Juan City, it is the first Krispy Kreme drive-thru outlet in Asia and the first free-standing store in the Philippines. Branches in SM Mall of Asia and Trinoma opened October 2007. Three more branches opened in 2008 at Robinsons Galleria in Quezon City. Another factory and drive-thru store in SM Mall of Asia in Pasay City, the 9th store opened in Gateway Mall, Araneta Center, and a 10th in Glorietta 4, Makati City. There are also four branches located in the provinces with one branch at Marquee Mall in Angeles City, Pampanga, two branches atAyala Center Cebu and Asiatown IT Park in Cebu City, and one branch at SM City Davao, Davao City. Japan Krispy Kreme Doughnuts Japan operates 27 shops throughout the country. Business Operations We generate revenues from three distinct sources: stores we operate, which we refer to as Company Stores; development and franchise fees and royalties from our franchise stores, which we refer to as Franchise; and a vertically integrated supply chain, which we refer to as KK Supply Chain. Company Stores, Franchise and KK Supply Chain comprise our three reportable segments under generally accepted accounting principles (―GAAP‖). Company Stores. The principal source of revenue for our stores is the sale of doughnuts. Many of our factory stores are both retail outlets and wholesale producers of our doughnuts and, as a result, can sell their products through multiple channels. On-premises sales. On-premises sales consist of sales to customers visiting our factory and satellite stores, including sales made through drive-through windows, along with discounted sales to community organizations that in turn sell doughnuts for fundraising purposes. Each of our stores generally offers at least 15 of our more than 20 varieties of doughnuts, including our signature Original Glazed doughnut. We also sell complementary products and beverages, including drip coffees, espresso-based coffees, both coffee-based and noncoffee- based frozen drinks and packaged and fountain beverages. Off-premises sales. In addition to on-premises sales, we have developed multiple channels of sales outside our stores, which we refer to as off-premises sales. Off-premises sales consist of sales of fresh doughnuts and packaged sweets, primarily on a branded basis (i.e.bearing the Krispy Kreme brand name), to a variety of retail customers, such as convenience stores, grocery stores/mass merchants and other food service and institutional accounts. Doughnuts are sold to these customers on trays for display and sale in glass-enclosed cases and in packages for display and sale on both stand-alone display units and on our customers’ shelves. These sales channels are designed to generate incremental sales, increase market penetration and brand awareness, increase consumer convenience and optimize utilization of our stores’
- 7. 7 production capacity. We accomplish off-premises sales through our direct store delivery system, or DSD, through which we deliver fresh doughnuts, both packaged and unpackaged, to our off- premises customers. Our off-premises customers include Amerada Hess, BiLo/Bruno’s, Exxon/Mobil, Food Lion, Kroger, Speedway SuperAmerica, Wal-Mart and Wilco/Hess. Our route drivers are capable of taking customer orders and delivering products directly to our customers’ retail locations, where they are typically merchandised from Krispy Kreme branded displays. We have also developed national account relationships and implemented electronic invoicing and payment systems with many large DSD customers. Franchise. Through our Franchise segment, we generate revenues through the collection of development and franchise fees and royalties. Royalties from franchisees are payable based upon a percentage of franchise store sales and, as a result, our royalty revenues are dependent on level of sales by our franchisees. Most of our domestic franchisees sell doughnuts and other products through both the on-premises and off-premises channels discussed above under ―— Company Stores,‖ while substantially all sales by franchisees outside the United States are made through the on- premises channel. KK Supply Chain. KK Supply Chain produces doughnut mixes and manufactures our doughnut-making equipment, which all franchisees are required to purchase. Additionally, KK Supply Chain operates a distribution center that provides Krispy Kreme stores with supplies for the critical areas of their business. KK Supply Chain generates revenues on sales of doughnut mixes, supplies, ingredients and equipment to franchisees. It supports both Company and franchisee stores by providing product knowledge and technical skills, controlling critical production and distribution processes and collective purchasing of certain materials. The primary ingredients used in our products are flour, sugar and shortening. We routinely obtain ingredients under forward purchase agreements and in the commodity spot markets; market risks associated with our purchases of ingredients are discussed in Item 7A, ―Quantitative and Qualitative Disclosures About Market Risk.‖ Although we own the recipe for our glaze flavoring — a key ingredient in many of our doughnuts — we currently utilize a sole source for our supply. KK Supply Chain has three business units: Mix manufacturing. We produce all of our proprietary doughnut mixes, which our franchisees are required to purchase, at our manufacturing facility in Winston-Salem, North Carolina, but have a backup source to manufacture our doughnut mixes in the event of the loss of our Winston- Salem facility. For certain international franchisees, we produce a concentrate which is shipped internationally where it is then combined with other ingredients sourced locally by contract mix manufacturers pursuant to the terms of agreements with us or with our franchisee. We control production of doughnut mixes and concentrate and monitor the performance of international contract manufacturers in order to ensure that our products meet our high quality standards, which include:
- 8. 8 Receiving truckloads of shipment of our main ingredients regularly; Testing each incoming shipment of key ingredients; and Testing each batch of mix. In February 2009, we entered into an agreement with BakeMark USA LLC of Pico Rivera, California, to manufacture certain doughnut mixes for regions outside the Southeastern United States and to provide doughnut mix production in the event of a disruption of business at our Winston-Salem, North Carolina facility. Equipment. We manufacture doughnut-making equipment, which our franchisees are required to purchase. Our equipment, when combined with our proprietary mixes and operated in accordance with our standard operating procedures, produces doughnuts with uniform consistency and quality. Our line of doughnut-making machines includes machines that produce doughnuts at rates of approximately 65, 150, 270, 600 and 1,000 dozen doughnuts per hour. The largest of these machines (the 600 and 1,000 dozen per hour machines) are used primarily in a subset of our factory stores called commissaries, which are production facilities used principally to serve off- premises customers domestically and to supplement factory stores focused on on-premises sales internationally.We also sell smaller machines, which we refer to as tunnel ovens and which are used in hot shops, that are manufactured by others and that complete the final steps of the production process by heating unglazed doughnuts to prepare them for the glazing process. Distribution. We operate a distribution center in Winston-Salem, North Carolina which supplies key supplies, including doughnut mixes,icings and fillings, other food ingredients, coffee, juices, uniforms and various other items to domestic stores in the Eastern United States and to certain international franchise stores. In May 2008, we subcontracted with an independent distributor to supply the domestic stores not supplied from Winston-Salem, which generally consist of stores west of the Mississippi River. These stores previously were supplied from a distribution center in Southern California, which we closed in August 2008. We provide many of the beverages offered in our stores, substantially all of which are purchased from third parties. Our beverage program includes drip coffees, both coffee-based and noncoffee-based frozen drinks, packaged and fountain beverages and, in many of our shops, a complete line of espresso-based coffees including flavors. See ―— Products — Beverages.‖ Most of our domestic franchisees have agreed contractually through our Supply Chain Alliance Program to purchase all of their requirements for the critical areas of their business from KK Supply Chain. We believe that our ability to distribute supplies to our operators produces several advantages, including: Economies of scale. We are able to purchase key supplies at volume discount prices, which may be lower than those that would be available to our operators individually. In addition, we are selective in choosing
- 9. 9 our suppliers and require that they meet certain standards with regard to quality and reliability. Also, inventory is managed on a systemwide basis rather than at the store level. Convenience. Our distribution center and our independent contract distributor carry the key items necessary for store operation. We believe this strategy of having one ordering and delivery system for store operations enables the store operators to focus their time and energies on running their stores, rather than managing multiple supplier and distribution relationships. Krispy Kreme Brand Elements. Krispy Kreme has several important brand elements which we believe have created a bond with many of our customers. The key elements are: One-of-a-kind taste. The taste experience of our doughnuts is the foundation of our concept and the common thread that binds generations of our loyal customers. Our doughnuts are made based on a secret recipe that has been in our Company since 1937. We use premium ingredients, which are blended by our custom equipment in accordance with our standard operating procedures, to create this unique and very special product. Doughnut theater. Our factory stores typically showcase our Doughnut theater, which is designed to produce a multi-sensory customer experience and establish a brand identity. Our goal is to provide our customers with an entertainment experience and to reinforce our commitment to quality and freshness by allowing them to see doughnuts being made. Hot Krispy Kreme Original Glazed Now sign. The Hot Krispy Kreme Original Glazed Now sign, when illuminated, is a signal that our hot Original Glazed doughnuts are being made. The Hot Krispy Kreme Original Glazed Now sign is an impulse purchase generator and an integral contributor to our brand. Our hot Original Glazed doughnuts are made for several hours every morning and evening, and at other times during the day. Community relationships. We are committed to local community relationships. Our store operators support their local communities through fundraising programs and the sponsorship of charitable events. Many of our loyal customers have memories of selling Krispy Kreme doughnuts to raise money for their schools, clubs and community organizations. Products Doughnuts and Related Products. We currently make and sell over 20 varieties of high-quality doughnuts, including our hot Original Glazed doughnut. Generally a product is first tested in our Company stores and then rolled out to our franchise stores. We have introduced doughnuts in non-traditional shapes and
- 10. 10 packaged doughnut snacks, as well as non-traditional packaging offerings, for distribution through convenience stores. Complementary products. In fiscal 2009, we began testing of a new soft serve menu of traditional cones, shakes and sundaes paired with a variety of toppings. In fiscal 2010, we will be expanding our testing of the concept, which we call Kool Kreme, into additional Company stores. Our Company store tests, combined with testing by two of our franchisees, will give us additional assessments of consumer acceptance on which to base a rollout decision. Beverages. We have implemented a complete beverage program which includes drip coffees, both coffee- based and noncoffee-based frozen drinks, juices, sodas, milks, water and packaged and fountain beverages. In addition, many of our stores offer a complete line of espresso-based coffees, including flavors. We continue to seek to improve our beverage program. Marketing Krispy Kreme’s approach to marketing is a natural extension of our brand equity, brand attributes, relationship with our customers and our values. To build our brand and drive our sales in a manner aligned with our brand values, we have focused our marketing activities in the following areas: Store Experience. Our factory stores and hot shops are where most customers first experience a hot Original Glazed doughnut. Customers know that when our Hot Krispy Kreme Original Glazed Now sign in the store window is illuminated, they can see our doughnuts being made and enjoy a hot Original Glazed doughnut within seconds after it is made. We believe this begins our relationship with our customers and forms the foundation of the Krispy Kreme experience. Relationship Marketing. Many of our brand-building activities are grassroots-based and focused on building customer and community relevancy by developing relationships with our constituents — consumers, local non-profit organizations and businesses. Specific initiatives include: Good neighbor product deliveries to create trial uses; Sponsorship of local events and nonprofit organizations; Friends of Krispy Kreme eNewsletters sent to customers registered to receive monthly updates about new products, promotions and store openings; Fundraising programs designed to assist local charitable organizations to raise money for their non-profit causes; and Digital marketing efforts including use of social media sites such as Facebook and Twitter to communicate product and promotional activity, new store openings and local store marketing programs.
- 11. 11 Public Relations. We utilize media relations, product placement and event marketing as vehicles to generate brand awareness and trial usagefor our products. Our public relations activity creates opportunities for media and consumers to interact with the Krispy Kreme brand. Our key messages are as follows: Krispy Kreme is the preferred doughnut of choice for people nationwide; Krispy Kreme is a trusted food retailer with a long history of providing superior, innovative products and delivering quality customer service; and Krispy Kreme encourages its customers to stay engaged with the Company and its promotions through its Friends of Krispy Kreme program. Advertising and Sales Promotions. Grass roots marketing has been central to building our brand awareness. Although our marketing strategy has not historically employed traditional advertising, we occasionally utilize free- standing newspaper inserts, direct mail, radio, television and/or sales promotions to generate awareness and usage of our products. Advertising and sales promotion activity center around our heritage events and shaped doughnut varieties, such as Valentine’s Day Hearts, Fall Footballs, Halloween Pumpkins and Holiday Snowmen. Brand Fund. We administer a public relations and advertising fund, which we refer to as the Brand Fund. Franchise agreements with domestic area developers and international area developers require these franchisees to contribute 1.0% and 0.25% of their sales, respectively, to the Brand Fund. Company stores contribute to the Brand Fund on the same basis as domestic area developers, as do some associate franchisees.In fiscal 2009, the Company reduced the contribution from its associate and domestic area developer franchisees to 0.75%. Proceeds from the Brand Fund are utilized to develop programs to increase sales and brand awareness and build brand affinity. Brand Fund proceeds are also utilized to measure consumer feedback and the performance of our products and stores. In fiscal 2009, we and our franchisees contributed approximately $2.6 million to the Brand Fund.
- 12. 12 Case study History and Growth The founder, Vernon Rudolph, worked for his uncle, Ishmael Armstrong, who purchased a secret recipe for yeast-raised doughnuts and a shop on Broad Street in Paducah, Kentucky, from Joseph LeBeouf of Lake Charles, Louisiana. Rudolph began selling the yeast doughnuts in Paducah and delivered them on his bicycle. The operation was moved to Nashville, Tennessee, and other family members joined to meet the customer demand. The first store in the nation with the Krispy-Kreme name opened on Charlotte Pike in 1933. Rudolph sold his interest in the Nashville store and in 1938 opened a doughnut shop in Winston-Salem, and began selling to groceries and then directly to individual customers. The first store in North Carolina was located in a rented building on South Main Street in Winston-Salem in what is now called historic Old Salem. The Krispy Kreme logo was designed by Benny Dinkins, a local architect. By the 1960s, Krispy Kreme was known throughout the southeastern United States, and it began to expand into other areas. In 1976, Krispy Kreme Doughnut Corporation became a wholly owned subsidiary of Beatrice Foods of Chicago, Illinois. The headquarters for Krispy Kreme remained in Winston-Salem. In 2003, a pilot project in Mountain View, California, to sell doughnuts through car windows and sunroofs at a busy intersection (with wireless payment) failed. On February 19, 2007, Krispy Kreme began selling the Whole Wheat Glazed doughnut in an attempt to appeal to the health conscious. The doughnut has twenty Calories fewer than the original glazed (180 vs. 200) and contains more fiber (2 grams vs. 0.5 grams). As of January 2008, the trans-fat content of all Krispy Kreme doughnuts was reduced to 0.5 of a gram or less. The U.S. Food and Drug Administration, in its guidelines, allow companies to round down to 0 g in its nutrition facts label even if the food contains as much as 0.5 of a gram per serving. Krispy Kreme benefited from this regulatory loophole in its subsequent advertising campaign, touting its doughnuts as "trans- fat free" and having "0 grams trans-fat!‖ Krispy Kreme began another phase of rapid expansion in the 1990s, opening stores outside the southeastern United States where most of their stores were located. Then, in December 2001, Krispy Kreme opened its first store outside the U.S. in Mississauga, Ontario, Canada, just outside Toronto. Since 2004, Krispy Kreme has rapidly expanded its international operations. On April 5, 2000, the corporation went public on the NASDAQ using the ticker symbol KREM. On May 17, 2001, Krispy Kreme switched to the New York Stock Exchange, with the ticker symbol KKD, which is its current symbol.
- 13. 13 Vision and Values Our Vision To be the global leader in doughnuts and complementary products, while creating magic moments worldwide. Our Values (with acknowledgement to Founder, Vernon Rudolph) we believe... Consumers are our lifeblood, the center of the doughnut There is no substitute for quality in our service to consumers Impeccable presentation is critical wherever Krispy Kreme is sold We must produce a collaborative team effort that is unexcelled We must cast the best possible image in all that we do We must never settle for "second best"; we deliver on our commitments We must coach our team to ever-better results Mission statement We create the tastes for good times and warm memories for everyone, everywhere. With our Original Glazed doughnut as our signature and standard, we will continually improve our customer's experience through: Innovative ideas Highest quality, and Caring service On January 18, 2005, Krispy Kreme announced Stephen Cooper, chairman of financial consulting group Kroll Zolfo Cooper LLC, as interim CEO. Cooper replaces Scott Livengood, who the company said has retired as chairman, president, CEO and a director. The company also named Steven Panagos, a managing director of Kroll Zolfo, as president and COO. Although based on informal advertising such as word-of-mouth, in 2006, Krispy Kreme moved into television and radio advertisements, beginning with its "Share the Love" campaign with heart- shaped doughnuts.
- 14. 14 Financial/ business performance
- 15. 15 Situational Analysis Environment Krispy Kreme Doughnuts, Inc. was founded in 1937 and is headquartered in Winston-Salem, North Carolina. Krispy Kreme is a major competitor in the restaurant industry, known primarily for its donuts. Near the end of 2004 and the beginning of 2005, the economy began to slow. Other business in competition with Krispy Kreme began to crowd into its market and expansion plans that Krispy Kreme had projected had to be scaled back due to falling sales. Consumer interest in reduced carbohydrate consumption, including ,but not limited to, the interest in and popularity of low carbohydrate diets, such as the ―Atkins‖ and ―South Beach‖ diet plans have been blamed for declining sales in pre-packaged (grocery store) donuts. Industry Analysis Their leading competitors are ―Dunkin Donuts‖, with worldwide sales of $2.7 billion (2002) 5200 outlets worldwide and a 45% market share based on dollar sales volume, and ―Tim Hortons‖, a Canadian-based company, which has expanded in the U.S. Markets. ―Tim Hortons‖ sales in 2002 in the U.S. (160 outlets) and Canada (2300 outlets) were a combined $651 million. A major strategy that ―Dunkin Donuts‖ has used successfully is to emphasize its coffee sales more than its donut sales. Their drive-thru service makes it convenient for patrons to pick up a cup of coffee on the go, and maybe while they’re there, pick up a donut, too! They also have donuts with ―better‖ nutritional value, i.e., are lower in calories, fat and sugar. One of their major strengths as a competitor is its name recognition and market saturation. Its ad campaign slogan of ―Time to make the donuts!‖ was very popular and made for memorable ads. ―Dunkin Donuts‖ is viewed by many patrons as more modern and more convenient because of their drive through windows. ―Tom Horton‖, on the other hand, while well-known in Canada is not as recognizable in the United States as ―Dunkin Donuts‖, although it does seem to have gained a foot-hold in states along the border, such as Maine, New York , Ohio, etc., and other select locations in the eastern U.S.. There are constant threats of new competitors in this industry. In addition to coffee retailers and cafes, such as ―Starbucks‖, ―Seattle’s Best‖ and other distributors, competition from other bakery retailers, such as ―Winchell’s Donut House‖ and ―LaMar’s Donuts‖ appear to be the chief new threats. However, current expansion plans for those firms appear to have fallen short of projections, perhaps due to over-saturation of the markets and the slowing economy. Competitors are always coming up with substitute products to attract customers. Specialty items, such as bagels, muffins, breakfast sandwiches and other items that may not be as sweet as donuts are popular and/or are easier to eat on the go. Specialty drinks, both hot and cold, particularly high-end coffees are always popular with customers and a threat to Krispy Kreme’s coffee, which has received mixed reviews from patrons. Outside suppliers have relatively little impact on the firm’s business as Krispy Kreme manufactures the mixes for the donuts, and the donut- making equipment, and is the coffee supplier for use in the company-owned and franchised stores. However, the ―KK Manufacturing and Distribution‖ segment of the company, as it’s known, generates a substantial portion of the company’s earnings.
- 16. 16 The Organization Krispy Kreme’s vision statement, as shown on their website, is ―To be the global leader in doughnuts and complementary products, while creating magic moments worldwide.‖ Krispy Kreme’s business strategy is focused on revenue from their company-owned stores, royalties and franchises fees , and sales of the mixes, specialty coffees and donut making equipment. Their organizational structure was simple. They felt strongly that the franchising was the best way to go, as it involved little risk for them, provided income, and at the same time, put more of the responsibility on the franchise holders. In 2001, cash flow return on equity investment for franchises was at 91%, so attracting franchises was not a problem. In 2003, the company’s business strategy was to add enough new stores and increase sales enough to achieve 20% annual revenue growth and 25% annual growth in earnings per share. However, they failed to invest in product development beyond the ―let’s try that‖ stage. By all appearances, strategies do not appear to be capable of maintaining a competitive advantage for very long, as their products were easy to replicate sufficiently for most customers. As a matter of fact, many of their competitors considered it an advantage when Krispy Kreme came to town, as it brought attention to donuts, which resulted in increasing their own sales! In July of 2004, the company announced that the SEC was ―launching an inquiry into the company’s accounting practices. Later that year, in December of 2004, they announced still more ―accounting errors‖ that could reduce the net income for FY 2004 anywhere from 2.7% to 8.6%. By then, their stock had fallen from $40 a share in March of 2004 down to $10-13 in December. The Marketing Strategy It is difficult to determine where the marketing department resides within the organization, as very little evidence of market research exists. Krispy Kreme’s marketing plan seems simple on the surface; they don’t appear to have put much effort into marketing their product. The company spent very little on advertising, depending largely on word of mouth, and local publicity. Store openings were popular events in the communities, so often newspapers and other media provided free publicity for the events. This strategy seems to still work well for new store openings, but would not be sufficient to generate continuing business. This is evidenced by the fact that even while new stores are opening, older stores within the same market are having to close. In short, the company’s marketing strategy appeared to consist merely of allowing its product to sell itself. The product’s superior reputation, the firm’s operational techniques, i.e., their training, facilities management and franchise management, appears to be appear to be the Krispy Kreme’s major strengths. When adding the coffee product to the organization, they also included it within the ―vertical integration supply chain to control costs. They felt that this would ensure quality and consistency in the product. When Krispy Kreme purchased the Montana Mills Bread Company, there seemed to be a sense that this was just a logical next step. In fact, the CEO considered this acquisition as the ―natural outgrowth‖ in the continuing process of vertically integrating an entire range of products and services for ―flour- based‖, short-shelf life products. Again, failure to do appropriate and effective market research, Krispy Kreme missed the identifying the new trends toward reduced carbohydrate consumption
- 17. 17 patterns in the general public. As a result, Krispy Kreme acquired a company in 2003 that by the end of fiscal year 2004, had lost $2 million dollars. Environmental analysis Internal factors Strong brand recognition and recall Wide appeal of signature glazed doughnuts Vertical integration Development in international markets Strong channel of distribution Quality of product Expanded assortment of offerings at KKD stores including beverages Doughnut machine technology. Perishability of product Limited product line (heavy reliance on doughnut sales) Overextended (i.e., Montana Mills acquisition) Lack of locations in some areas Pricing in some locations External factors Increasing popularity of coffee shops and bakery cafés Popularity of American foods and fashion in overseas markets Growth in two-income households Americans continue to experience time-starvation Entertaining opportunities moving from home to work environment Technological advancements (i.e., paperless ordering, predictive modeling software, hand held computers for delivery drivers) Channel expansion possibilities (i.e., Internet pre-ordering) Competitors like Dunkin Donuts and Starbucks Low-carb trend in eating preferences All-natural, organic, healthy eating trends Cultural differences in breakfast and snack foods Increase in eating at full-service restaurants combined with a decrease in the use of fast- food restaurants S.W.O.T Analysis Strengths Affordable, high-quality doughnuts with strong visual appeal and "one-of-a-kind" taste
- 18. 18 Neon "Hot Doughnuts Now" sign encourages people outside the store to make an impulse purchase Market research shows appeal extends to all major demographic groups including age and income Hot shop" stores save money while keeping KKD customer experience intact Vertical integration helps ensure high quality product Consistent expansion; now in 16 countries Product sold at thousands of supermarkets, convenience stores, and retail outlets through U.S. Weaknesses Return on equity, assets, and investments all negative in the trailing twelve months; skill of mgmt. is questionable Shareholders have not received dividends recently, and are not expected to in near future; stock price in state of flux Closing stores when stores should be opening globally at steady rate to keep up with competitors' growth Management states in recent 10-K that it is struggling with how to make stores profitable Product line slow to expand with nothing outside "sweet treats" to draw in health- conscious customers Advertising not aggressive enough to appeal to areas outside southeast of U.S. where most stores are Revenues down, net losses in each of past three years Opportunities Development into diversified product markets Detection of the problem occurring in the management of the business and thus the fall in business and profitability Develop the social outreach programs to promote the doughnuts and to promote the customer based objectives and mission of the organization. Reaching the market to really know what the customers want and then to develop the marketing and strategic policy in accordance to that. Asians love sweets and are open to trying foreign foods Starbucks lacks a diversified and distinctive pastry line Dunkin' Donuts does not have hot doughnuts to sell Many children love sweet treats Threats Tough competition and increasing global recognition of Starbucks and Dunkin Donuts. Global presence of the competitors More health conscious customer base Development of organic markets
- 19. 19 Starbucks has approximately 25 times the amount of stores worldwide that Krispy Kreme Donut has Restricted cash flow from banks and massive layoffs have stifled the world economy, decreasing discretionary income Europeans prefer their local brands of doughnuts Britons tend not to have cars, which inhibits drive-thru customers, and their eating habits and office etiquette differ from Americans Shareholders may sell KKD stock for lack of returns and dividends compared to other similar firms in the industry
- 20. 20 I.F.E
- 21. 21 E.F.E
- 22. 22 C.P.M
- 23. 23 Boston Consulting Group Matrix (BCG) Krispy Kreme Donuts has three business segments, and they are presented here along with their annual revenues per Form 10-K filed on April 17, 2009: Company Stores ($266M), Franchise ($26M) and Krispy Kreme Supply Chain ($93M), with approximately $384M in total revenues for the year ending February 1, 2009. This means that each business segment represented the following percentage in revenues: Company Stores (69.2%), Franchise (6.7%), and Krispy Kreme Supply Chain (24.1%). Profits for each business segment are as follows: Company Stores ($-2M); Franchise ($18M); and KK Supply Chain ($25M), for a total of $41M in profits. Therefore, Company Stores has 0% of the profits; Franchise has about 41%; and Krispy Kreme Supply Chain has about 59%. We’ll assume that Company Stores has 3% of the market share and a -13% growth rate; Franchise has 3% of the market share and a 10% growth rate; and Krispy Kreme Supply Chain has 3% of the market share and -7% growth rate.
- 24. 24 Problems Found in Situational, Environmental Analysis The primary, and most critical, problem area is the lack of a cohesive marketing structure within or a strategic marketing plan for the organization. Flawed or absent marketing research has resulted in store closings and or expansions that were not backed up by market data or evidence that this investment would be feasible. The company spent very little on advertising, depending largely on word of mouth, and local publicity. Store openings were popular events in the communities, so often newspapers and other media provided free publicity for the events. This strategy seems to still work well for new store openings, but would not be sufficient to generate continuing business. As a result, Krispy Kreme acquired a company in 2007 that by the end of fiscal year 2008, had lost $25 million dollars. The second problem is using a vertically integrated supply chain whereby it manufactured the mixes and the proprietary doughnut-making equipment, as well supplying the coffee for use in their stores. While this KK Manufacturing and Distribution division of Krispy Kreme generally provided substantial revenues and earnings to the business, this too, began to slip along with other revenues, and also contributed to Krispy Kreme’s lack of current market data. Analysis of revenues for fiscal year ending February 1, 2007, showed KK Manufacturing and Distribution revenues at $461195. Revenues by feb,3,2008 had dropped to $429319 Another, perhaps incidental side-effect of this dependence on internal supply chain could be that the ―isolation‖ from outside suppliers prevented an additional source of market information. Conclusion The food industry has been affected by a recent trend toward healthier eating habits. Krispy Kreme has capitalized on this trend by positioning doughnuts as a popular, on-the-go food. Krispy Kreme’s success has hinged on consistency throughout its locations and by delivering a high quality product. Future growth opportunities include expanding franchises as well as penetrating alternate distribution channels. As Krispy Kreme analyzes potential growth opportunities within alternate distribution channels such as convenience stores and grocery chains, it must determine whether doing so will sacrifice brand equity and product quality. Expanding beyond its own stores will require the marketing of the doughnut in a cold format. As analysis has shown, Krispy Kreme’s success has come from factors other than the serving temperature of its products. I believe that Krispy Kreme can be successful in launching its product in new markets without establishing physical locations. Alternative channel distribution will help bring the Krispy Kreme product to millions of potential customers who have yet to experience the taste of America’s best doughnut.
- 25. 25 Recommendations 1- Reduce operating expenses (down-size individual stores) I. Change entire manufacturing and distribution strategy –Implement par baked manufacturing operation to allow individual stores to decrease in size, thus lowering per store operating costs to a more appropriate level for sales volume Increased efficiency – smaller workforce per store, par-bake allows for minimal waste – inventory as needed (important b/c fresh goods – low shelf life Par bake will allow for ―hot doughnuts now‖ all of the time. Implications of transition to par bake operation New Plant Equipment – freezers, production equipment, freezer trucks for distribution/delivery. Store Equipment – freezers, oven for various par baked goods, fryers for doughnuts. R&D for unique par bake operation 2- Develop stronger relations and control of franchisees Short-term period of one year – postpone new franchise agreements/new store openings Implement Franchise Support Systems • Communication – between corporate and franchisees • Support – training, advertising • Utilize recommendation #1 in order to lower operating expenses for franchisees. 3- Implement Marketing Strategies Advertising – national television and radio advertising campaign based on ―hot doughnuts now‖. Marketing research – periodic research to stay abreast of trends. R&D – product development 4- Strengthen Competitive Advantage • Strengthen Competitive Advantage through differentiation in products and services. Continue to utilize ―hot doughnuts now‖ Expand product line Account with A&S ―New York‖ Bagels (par-baked). Par baked will allow for ―Hot Bagels Now‖.
- 26. 26 References www.krispykreme.com en.wikipedia.org/wiki/Krispy_Kreme www.krispykreme.co.uk/store-locator/ www.youtube.com/user/KrispyKremeDoughnuts Strategic management 13 edition