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University of the Philippines Cebu College
Management Division
Lahug, Cebu City

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Mgt 190 Case Analysis # 1
Krispy Kreme Doughnut ± 2008
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Date Due: December 16, 2010
Date Submitted: December 16, 2010

Submitted to:

Professor Jesus C. Cinco, Jr.

Submitted by:

Group 2

Krystel Kaye Lee ± Team Leader

Regie May Berou
Anya Camille Gabucan
Bea Marie Jaen
Glorabelle Resma
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Krispy Kreme envisions itself to become one of the world¶s best and well-known doughnut companies.
To reach this, they have to capitalize on their key strengths to combat the changes in the
macroenvironment. Competition in the industry is fierce with dominating players and their ability to
respond to the growth opportunity in the international scene. The U.S. market is also rapidly trending
toward healthier food products which Krispy Kreme does not currently offer.

For the past years, they have been incurring net losses despite their turnaround strategy. Total
revenues for the company stores and supply chain have been decreasing since 2005. Becausethey
failed to update their Uniform Franchise Offering Circular, they are suffering from opportunity losses in
domestic franchisees. Their current production capacity is also underutilized because of a larger
number of factory stores over satellite stores.

After the internal and external factor evaluation, its best move is to hold and maintain. This will be
achieved by implementing the market penetration strategy which focuses on aggressive marketing and
increasing franchisees in the existing markets. This is the best strategy because it entails the least cost
for Krispy Kreme and they can utilize their current resources for implementation. However, in this fast-
growing industry and fierce competition, they may be left behind. The company will utilize a mix of 25%
debt and 75% equity.

The generic strategy of the firm is Focused Best-Value provider. This will encompass the market
penetration strategy for a fully-effective implementation.
 
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Table of Contents

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List of Appendices
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lhat would be the best strategy for Krispy Kreme to pursue in order to increase revenues and recover
from financial losses?
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To be one of the world¶s best and well-known doughnut companies.
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Œn Krispy Kreme,
ôc le bake mouthwatering doughnuts that appeal to the taste of the children and young adults all
over the world.
ôc lith our special doughnut-making equipment and doughnut-making theaters, we regularly
produce one-of-a-kind doughnuts that are always sought after by our customers.
ôc le commit to deliver increasing value to our stakeholders by producing better-than-average
returns and taking advantage of the opportunities that come our way.
ôc le will continue to develop, motivate and reward our employees for their job security and
career growth.
ôc le will continuously give back to the community by helping out organizations and launching
different activities for their benefit.
ôc le capitalize on integrity and trust to achieve success for the whole organization.
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ôc To have a positive and increasing return on equity targeting at least 10% increase annually.
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ôc To increase the frequency of customer walk-ins by at least 15% annually and have improved
customer feedback.
ôc To increase the number of franchises and satellite stores by putting up at least two stores per
month annually in both domestic and foreign markets.
ôc To get at least 10% of the area population as website members annually.
ôc To launch at least one advertising campaign per quarter.
ôc To employ team building activities for employees at least once a year.

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A total ŒFE score of 2.77 indicates that Krispy Kreme is relatively internally strong with significant
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competitive strengths that can be used to address its response ability to the changes in the external
environment. Their doughnut-making equipment and process which give them a large capacity to
produce doughnuts is one of their distinctive competencies, along with their one-of-a-kind taste, special
flavor offerings for certain seasons, and a unique franchise program. Customers can also enjoy
watching the entire doughnut-making process through their store theaters. As core competencies,
Krispy Kreme offers a variety of doughnuts and beverages to go with them. Also, they have access to
many different distribution channels in both domestic and international markets. However, Krispy
Kreme has not succeeded in their turnaround strategy where they failed to generate income and a
positive return on equity (ROE).

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From the computation of Krispy Kreme¶s ratios, they are performing relatively well mainly because of
their massive cost-cutting. However, they are still unable to reach optimal financial performance
because of failure to attain positive figures.

Krispy Kreme¶s current ratio increased from 95.52% in 2006 to 97.74% in 2007. Their quick ratio also
increased from 68.24% to 78.34% in 2007. This shows that they are able to cover their short-term debts
and obligations with the use of their liquid assets such as cash. This is also supported by the decrease
of 15% and 10% respectively, in their short-term and long-term debts from 2005 to 2007. However,
another important note is that Krispy Kreme had an increasing amount of cash from 2005 to 2007 that is
not proportionate to their decreasing total revenues. This shows that they are tying up so much cash in
working capital.

Krsipy Kreme¶s inventories have decreased 8% from 2005 to 2007, showing that they have been saving
on storage costs for doughnuts. However, they are not able to sell these quickly as shown in the
decrease of their inventory turnover from 27 days to 32 days in inventory. This may be the cause of the
company¶s decision to increase its cash in working capital because inventories are not moving quickly.
Fixed asset turnover increased from 2.11 times to 2.46 times in 2007 which means they are utilizing their
fixed assets effectively to generate sales. This is also the result of closing poor performing stores. Total
asset turnover remained relatively the same at 1.21 times. This can be improved when sales are
increasing and when some underutilized assets are disposed, or both actions are done.

Their debt ratio has increased from 73.55% in 2006 to 77.41% in 2007. Although potential creditors do
not prefer high debt ratios, stockholders want more leverage from debt because it increases expected
earnings. Times-interest-earned ratio has increased to -0.98 times which shows that the company has
now more capability to pay its annual interest charges. However, it still needs to improve this
performance to achieve a positive figure; otherwise, Krispy Kreme will face difficulties when it decides
to borrow additional funds in the future.

Their gross profit margin has increased to 15.77% from 12.66% in 2006, and their basic earning power
also went up to -4.30% which is a significant increase from -21.38% in 2006. Net profit margin has also
increased to -8.98% wherein the company¶s net income became less negative. These significant
improvements are mainly the results of their effective cost-cutting practices as shown in the 84.43%
decrease in their cost of revenues from 2005 to 2007. The company¶s return on assets also increased

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from -29.50% to -10.89%. The bottom-line ratio, return on equity, significantly increased from -75.18% to
-44.12% which can be a result of their cost-cutting and debt leverage.


 

 


On the primary activities of the value chain, Krispy Kreme has notable considerations in their P
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operations, specifically production and store count, and in marketing and sales.

Their current production capacity is at 4,000 to 10,000 dozens daily per factory store. Although factory
stores are reducing in number since fiscal 2005, the increase in satellite stores is not yet enough to take
advantage of this production. Factory stores still comprise 74.9% of the total number of stores
systemwide. Œt is good to note that satellite stores by area developers increased to 286.4% from 2005
because not only can the company save itself from the development and operations costs, but also area
developers are contractually required to develop a certain number of stores. Similar in the international
scene, there has been an increasing number of area developers which can offer the company better
results and more stores to operate.

As for the secondary activities, the general management of Krispy Kreme is relatively efficient. Their
structure complements their strategy with different executive heads for each important function.
However, issues in the human resources department may have been one of the number of factors that
caused the failure of their turnaround strategy. Employees may still have been demoralized after the
recent layoff of employees by 31.8% and the retirement savings dispute back in 2005. Employer brand
image may have decreased significantly.

One of their distinctive competencies is their automated doughnut-making equipment which gives them
the capacity to produce up to 10,000 dozens daily. This technological innovation has given them the
opportunity for notable economies of scale.

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Krispy Kreme has an EFE rating of 2.22 which means that they are relatively externally weak. They are
not able to take advantage of opportunities well and are not able to avoid significant threats. The
company has a great opportunity to enter the international market, especially in Asia and the Middle
East. However, many companies are also expanding to favorable foreign countries which can lessen
Krispy Kreme¶s success in these markets and hinder its potential growth. The U.S. population, which
was the primary market of the company, now prefers healthy food products and this decreases the
customer base of Krispy Kreme doughnuts.
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The socio-cultural changes in Krispy Kreme¶s international environment contribute a better capability to
increase ROE than the domestic environment. The availability of favorable foreign countries allows the
company to decrease its marketing costs because of acceptability and increase its revenues because of
their love for sweets. However, they will encounter problems in succeeding in the European market,
especially in Britain, because of cultural differences. The domestic market is now becoming relatively
unfavorable because of the growing trend for healthier food choices.

Demographics in the U.S. show that the number of working Americans are increasing thus, it gives rise
to the number of people eating out. Nonetheless, this market is shifting toward healthier choices with
the rate of overweight and potential obesity, and the preference for casual dining. This change can

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lower the company¶s ROE because of decreasing revenues. The global market is now intensified with
the global presence of a growing number of fast-food companies which lowers the company¶s ability to
generate better-than-average ROE.

Only the economic trends are in favor of Krispy Kreme. Not only is the industry¶s stock performance
improving but also the food product price inflation is leading to an increase in ROŒ.
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The doughnut industry is currently highly unattractive in general. The competition among firms is fierce
with a few dominating players who are playing in a slow-growing industry. Plus, because of the nature
of its product, storage costs are significantly high which increases the fierceness of competition. These
players are also considering entering the international market which is now getting crowded with many
participants. Œn addition, end consumers have low switching costs since they can choose from many
brands but still get the same product ± doughnut. Also, there is a growing trend of substitutes to snack
products as the U.S. market poses a trend toward healthy choices and the British, among others, are
accustomed to their own choices.

The industry remains unattractive in the next 3-5 years. Once the domestic market hits its saturation
point, the players will be more aggressive to stay in the industry to protect their market share. Plus,
there will be a surge in the number of companies competing in the international market. Low-calorie and
low-sugar substitutes will also be strongly marketed and preferred as the need for healthier products
increase. lith this trend, calorie-packed doughnuts will be forced to go out of business or shift to
developing healthy foods.


  
 




Dunkin¶ Donuts is the leader among the four dominating players in the doughnut market while Krispy
Kreme comes in third. Œn terms of U.S. presence, Dunkin¶ Donuts and Starbucks rank first with
thousands of stores across the country. Krispy Kreme and Tim Hortons only have approximately 200 to
300. Krispy Kreme also has the lowest variety of product offerings compared to the other three because
they only sell doughnuts and beverages while Dunkin¶ Donuts and Tim Hortons offer breakfast and
lunch choices, respectively. Tim Hortons is rated the weakest in global presence as they are only
crowding one area which is Canada. Krispy Kreme, compared to Dunkin¶ Donuts and Starbucks, has a
significantly lower number of stores as the two giants have thousands in different foreign countries.


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The chosen generic strategy is Focused Strategy with Best Value. lith this generic strategy, the
following are several alternatives for Krispy Kreme.

Alternative # 1: Market Penetration focusing on increased market share through greater marketing effort
and opening of satellite stores in current geographical areas

The main source of Krispy Kreme¶s advantage is their distinctive product that invited generations of
loyal customers for its one-of-a-kind taste and its special flavor offerings. Considering their financial
status, stability would be an intensive strategy for Krispy Kreme since they are incurring net losses for
the past several years. Marketing efforts would allow the product to be pushed to the market

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aggressively. Moreover, more stores will be opened in their existing domestic and international areas.
lith the increasing food product price inflation in the U.S., development costs are being pulled down to
improve return on investment. Also, there is an increasing number of two-income households that
increases doughnut consumption. The international market, especially Asia and the Middle East, also
poses a great opportunity because they are both fond of sweet snacks and openness to lestern brands
which is what Krispy Kreme is.
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The drawback with this alternative is that competitors are fast growing and becoming rapidly global in
scope. Krispy Kreme might be left behind since greater opportunity for further growth and profitability
are seen in the untapped international market.

For this alternative, Krispy Kreme should invite more franchisees to increase its satellite stores in both
of its current domestic and international markets. They must update their UFOC regularly to attract
these franchisees in the U.S. market. Since they already have future stores opening from their
development agreement with six countries mainly found in Asia, they can easily push these area
developers to open more satellite stores than factory stores. This strategy provides KKD to have a
major competitive advantage among others through increasing economies of scale. Œt takes advantage
of the present capacity of the Krispy Kreme factories of 4,000 to 10,000 dozens daily, which can be sold
at numerous satellite stores. Œntensive advertising and strong marketing campaigns to its existing
markets, especially in the unsaturated international market, will give the product the exposure it needs.
This will be a defensive strategy toward the U.S. casual dining sector which is growing more rapidly
than the quick-service industry. This would later on relate to a significant increase in market share and
total revenues once effectively implemented.

Alternative # 2: Product Development in the U.S. market, creating a healthier doughnut line

lith the improving stock prices in the quick-service industry, Krispy Kreme can better serve the U.S.
market by providing a new, healthier doughnut menu. The U.S. market is also moving toward healthy
food choices. lith lower calorie content of Dunkin¶ Donuts, Krispy Kreme needs to reduce their calorie
content to match or beat its major competitor. They can also increase the variety of their current
doughnuts. Through this, Krispy Kreme doughnuts will be comparable with Dunkin¶ Donuts¶ and
consumers will be forced to think twice on which brand is of more value.

The main drawback for this alternative is the high cost to be incurred on the research and testing of the
appropriate mix and the new taste of the product. Moreover, the company will face more costs in
changing the process of doughnut-making and introducing this concept to their employees who might
resist this change.

lith their existing presence in the domestic market where they have thousands of retail outlets
including off-premise channels, it will be much easier for Krispy Kreme to introduce and sell this new
line. Moreover, Krispy Kreme already has a vertically integrated structure. Thus, they do not need to
create another supply chain for this new line.

Alternative # 3: Related Diversification focusing on adding new food products such as sandwiches,
bagels, lunches, and more beverages

As the casual-dining sector is gaining share from fast-food chains, it has posed a threat to Krispy
Kreme. The doughnut company should opt to diversify their product offerings. They can add new
related products such as sandwiches, bagels, lunches, and more beverages to their menu as what their
competitors Dunkin¶ Donuts and Tim Hortons are doing.

Krispy Kreme has made a name in the doughnut industry and they could use this to their advantage
where loyal customers no longer need to go to other restaurants. At the same time, Krispy Kreme can

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attract more customers with their diversified menu. These new products can significantly improve the
sales performance of the company.

The drawback of this alternative is that Krispy Kreme would have to exert more effort to effectively
market this new menu. Training cost for employees is also very high because they will have to orient
them to the diversified menu. They also have to hire professionals who will recommend the products
and recipes to prepare. There is also a small possibility of cannibalization where they may lose their P
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image as a doughnut company.

Alternative # 4: Market Development in the international market focused on introducing present

products into new geographical areas

This alternative is developed from the opportunities in the international scene. As their U.S. market is
going toward the saturation point, Krispy Kreme will face difficulties in achieving growth relative to their
competitors. The existence and demand from the international markets, especially in Asia, gives the
company the growth opportunity it needs. They are currently serving 10 foreign countries, five of which
are in Asia. Therefore, there are still many untapped geographical markets that may lead to increased
market share and revenues. The total capacity of their production will be fully utilized once they open
new factory stores and a proportionate number of satellite stores in untapped countries.

Through market development, the company will be able to introduce their one-of-a-kind doughnut to
new markets specifically those areas where they have not entered yet. UK, Germany, and Spain are also
favorable markets that can offer growth and profitability to the company. Countries such as China are
favorable in terms of its population and fondness of sweets. Not only sales will increase with their
population, but exposure and market share will also go up. High-income countries such as Singapore
will also be a favorable market because people have the financial capacity to spend on products such
as snack foods.

The major drawback of this alternative is the high expenses to be incurred for expansion. There will be
significant costs for marketing, licensing, and building new stores in totally new geographical areas, to
name a few. Given the company¶s current financial position, the company will have many challenges
and difficulties in getting the funds for implementing the strategy. lith their increasing debt-to-asset
ratio, they are not very attractive to creditors. Moreover, the risk is high because of the differing
economic conditions of the countries to be tapped.

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Due to consistent losses that KKD had incurred for the past three years, the company is placed in a
weak financial position. lith that, a rating of one is given to alternative four since entering a new
market will require higher investment. On the other hand, a rating of four is given to alternative one
since marketing the same product to the existing markets would not be that costly relative to the other
alternatives. Alternative two is rated as three because cost would be incurred for research and
development. lhile alternative three is rated as two because aside from research and development,
training would also be given to employees in order to produce such new products entailing additional
cost.

For the feasibility of human resource, alternative one is rated as four since KKD would not require much
hiring and training of new employees and they could readily utilize their existing human resource.
Alternative four is rated as three because KKD has already gone through different processes required to
enter a new market. Alternative two is given a rating of two since KKD would need a professional to
make the new product menu. Alternative three is rated as one because the current human resource has
no experience yet of producing and selling the new products.

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For technology feasibility, Alternative one is rated as five because they no longer need to acquire new
technology to implement the strategy. Alternative four is given a four because KKD has the existing
technology to enter new markets. Alternative two and three is rated as one because this would require
additional technology to produce the new products.

Œn terms of long-term profitability, Alternative three and four has the highest rating since it has the best P
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potential for maximizing returns in a fast-growing industry. Also, having a diverse product offering
would generate more revenues for the company. lhile Alternative one and two is rated as three since
these alternatives may only be good for a specific period of time. Œntense marketing efforts may not
necessarily mean long-term sales growth and developing a new product in the domestic market would
not maximize their returns in the future because they are known for selling sweet doughnuts. Moreover,
these alternatives cut their potential for growth since they are tied up with their existing market knowing
the greater potential in the international market.

Œn terms of competitive advantage, alternative one ranks the highest since it uses their existing
competence in providing doughnuts with one-of-a-kind taste. Alternative four is rated as four since the
culture and taste preference of new geographic markets may not match the products they offer.
Alternative two and three is rated as one because it would not capitalize on their competitive advantage.

Alternative two and four is rated three to consonance or response ability. This is due to the growing
number of health-conscious individuals which alternative two can address and the fast-growing
doughnut industry for alternative four. On the other hand, alternative one and three is rated as two
because both alternatives do not directly respond to the changes in the environment.

Œn terms of consistency, Alternative four has the highest rating which is four because it is in line with
Krispy Kreme¶s vision. This alternative is a stepping stone for Krispy Kreme to reach its vision while
upholding its mission. Alternative two has been rated as four because even if it is just for the domestic
market, it is still in line with the company¶s mission. Alternative one has been rated three because it still
upholds its mission in producing distinctive doughnuts but its scope is not that large to be one of the
world¶s best and well-known doughnut makers. Alternative three is rated as two since this alternative
does not focus on the core product that KKD offers.

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To support the activities in Alternative 1, Krispy Kreme will utilize 25% debt and 75% equity. The
company shall undertake the following actions to improve its over-all performance:

ôc Strengthening Brand Name through Marketing

KKD should strengthen and broaden its brand name by being more visible in their existing
markets domestically and internationally. Advertising through billboards, posters and other
aggressive print advertising using the different leading publications within those areas, word of
mouth and sponsorship of events are powerful tools for driving top-of-mind awareness of
Krispy Kreme products. The company will have to complete one advertising campaign per
quarter.

Billboard and Posters

KKD should put up billboards in populated areas like city capitals of their existing markets
countries. These advertisements will be placed outside major malls and popular places like
parks and arcades or gaming centers where families and young adults frequent to relax and to
have fun. These advertisements should highlight the distinctive taste of its doughnuts and the
areas where they can be bought.

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Print Advertising
For KKD to save on advertisement costs, the company should consider print advertisements
rather than TV advertisements where they will place their ads in newspapers or magazines
available nationwide for each of their geographic markets. This will be much affordable than
advertising on regional or international publications.
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lord of Mouth
To further save on advertisement costs, the company must capitalize on the power of word of
mouth and the six degrees of separation. lith their continuous improvement of processes and
customer relations, KKD customers will turn into loyal customers and promote Krispy Kreme to
their social circles. The theory of six degrees of separation explains ³that a very small number
of people are linked to everyone else in a few steps, and the rest of us are linked to the world
through those special few (Gladwell, 2000).´ lord of mouth will help significantly increase the
number of customer visits and repeat transactions.

Krispy Kreme can boost customer experience and satisfaction by providing free newspapers,
magazines, and other reading materials to dining customers. They will also introduce mobile
feedback systems where customers can send their feedbacks, comments, and suggestions
through their mobile phone or event through telephone. This can provide convenience to the
customers since they do not have to spend time filling up forms and can also benefit the
company with cost savings for printing papers.

Moreover, employing team building activities at least once a year for employees will help boost
their morale and at the same time, update their employees with the current business processes
and policies. The employees are considered to be the first customer circle of the company;
therefore, once the inner circle is improved and empowered, they can easily create and
strengthen relationships with end consumers ± the outer circle. This will make all customers ±
employees and end consumers ± feel that they are being valued by the company and can
spread a great experience that other doughnut companies could not provide.

Sponsorship of events

KKD will sponsor events especially those that are related to their target market such as parties
and launchings. This will enhance the company¶s exposure to reach a larger customer base
thus increasing total revenues. Œn addition, Krispy Kreme will also co-sponsor events with
businesses that are rapidly growing. This way, they can share the costs of pushing their
products and at the same time, they will be able to use the partner company¶s image to
increase Krispy Kreme¶s own image.

ôc Using e-commerce to increase brand popularity and possibly increase Market Share

The company can gain more sales and popularity through venturing into internet marketing and
selling. They can use the power of e-commerce which is available anytime, anywhere and
removes geographical boundaries to reach a significant number of customers at very low cost
and shortest time. Krispy Kreme can create a website that advertises and sells their products
online to be done through automatic and free membership registration. The company will aim
to acquire memberships of at least 10% of each area population in the U.S. and in foreign
countries. Members with bulk orders who are located within an estimated kilometer radius can
enjoy free delivery. Otherwise, they can simply order online and pick their orders up at the
nearest stores without the hassle of lining up, waiting for orders, and the possibility of stock-
outs for their favorite flavors. lith this convenience, more people are being pulled to Krispy
Kreme.

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To attain this, Krispy Kreme will have the web design and web development outsourced to
attain greater value (benefit over cost). But they will still have to train their staff and crew in
using computer software and tools to access and manage this online venture within two
months prior to the launching of the website.

ôc Œncrease franchise stores in existing markets P
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To improve the company¶s presence in the market they are currently serving, KKD will increase
the number of franchise stores, preferably satellite stores targeting at least two stores per
month in a year for both domestic and international areas. This increase in franchise stores will
enable the company to increase their revenues. Expanding in their existing markets will entail
lesser cost than expanding to other countries because they have already established their
name and have already done their research and analysis in the macroenvironment of these
countries. More stores also mean convenience for customers in seeking and purchasing Krispy
Kreme doughnuts which can increase customer satisfaction and revenues.

Procedures for Assessing Strategy:

ôc Checking, analyzing, and taking actions according to customer feedback.

ôc Annual systemwide meetings to debrief the past fiscal year and to brief the entire
workforce for the coming fiscal year. Quarterly systemwide meetings to address key
changes. Monthly systemwide meetings to make sure the company¶s goals are met. leekly
company meetings to monitor operational activities. lith these regular meetings, they can
be more effective in addressing key changes and create strategies around these changes.
ôc Check financial reports quarterly to determine financial progress.

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Appendix 1: Vertical Analysis of Œncome Statements

Œncome Statement - Vertical Analysis

fiscal 2007 fiscal 2006 fiscal 2005
Total Revenues 461,195.00 543,361.00 707,766.00
Cost of Revenue 389,379.00 84.43% 474,591.00 87.34% 597,110.00 84.37%
Gross Profit 71,816.00 15.57% 68,770.00 12.66% 110,656.00 15.63% P
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Operating Expenses
Research & Development - - -
Selling & Administrative 48,860.00 10.59% 67,727.00 12.46% 56,472.00 7.98%
Non-recurring 28,491.00 6.18% 90,895.00 16.73% 161,847.00 22.87%
Others 21,046.00 4.56% 28,920.00 5.32% 31,934.00 4.51%
Total Operating Expenses 98,397.00 21.34% 187,542.00 34.52% 250,253.00 35.36%
Operating Œncome (26,581.00) -5.76% (118,772.00) -21.86% (139,597.00) -19.72%
Œncome from Continuing
Operations
Total Other
6,732.00 1.46% 2,603.00 0.48% (7,157.00)
Œncome/Expenses Net -1.01%
EBŒT (19,849.00) (116,169.00) (146,754.00)
Œnterest Expense 20,334.00 4.41% 20,211.00 3.72% 6,875.00 0.97%
EBT (40,183.00) (136,380.00) (153,629.00)
Tax Expense 1,211.00 0.26% (776.00) -0.14% 9,674.00 1.37%
Minority Œnterest - 0.00% 4,181.00 0.77% 6,249.00 0.88%
Net Œncome from Continuing
(41,394.00) (131,423.00) (157,054.00)
Op.
Non-Recurring
Discontinued Operations - 0.00% - 0.00% (40,054.00) -5.66%
Extraordinary Œtem - 0.00% - 0.00% - 0.00%
Effect of Accounting
- 0.00% - 0.00% (1,231.00)
Changes -0.17%
Other Œtems - 0.00% - 0.00% - 0.00%
Net Œncome (41,394.00) (131,423.00) (198,339.00)
Preferred Stock - - -
NŒAC (41,394.00) -8.98% (131,423.00) -24.19% (198,339.00) -28.02%
c

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Appendix 2: Horizontal Analysis of Œncome Statements

Œncome Statement - Horizontal Analysis

fiscal 2007 fiscal 2006 fiscal 2005
Total Revenues 461,195.00 -34.84% 543,361.00 -23.23% 707,766.00
Cost of Revenue 389,379.00 -34.79% 474,591.00 -20.52% 597,110.00
Gross Profit 71,816.00 -35.10% 68,770.00 -37.85% 110,656.00 P
cc c
Operating Expenses
Research & Development - - -
Selling & Administration 48,860.00 -13.48% 67,727.00 19.93% 56,472.00
Non-recurring 28,491.00 -82.40% 90,895.00 -43.84% 161,847.00
Others 21,046.00 -34.10% 28,920.00 -9.44% 31,934.00
Total Operating Expenses 98,397.00 -60.68% 187,542.00 -25.06% 250,253.00
Operating Œncome (26,581.00) -80.96% (118,772.00) -14.92% (139,597.00)
Œncome from Continuing Operations
Total Other Œncome/Expenses Net 6,732.00 -194.06% 2,603.00 -136.37% (7,157.00)
EBŒT (19,849.00) -86.47% (116,169.00) -20.84% (146,754.00)
Œnterest Expense 20,334.00 195.77% 20,211.00 193.98% 6,875.00
EBT (40,183.00) -73.84% (136,380.00) -11.23% (153,629.00)
Tax Expense 1,211.00 -87.48% (776.00) -108.02% 9,674.00
Minority Œnterest - 4,181.00 -33.09% 6,249.00
Net Œncome from Continuing Op. (41,394.00) -73.64% (131,423.00) -11.00% (157,054.00)
Non-Recurring
Discontinued Operations - - -100.00% (40,054.00)
Extraordinary Œtem - - 0.00% -
Effect of Accounting Changes - - -100.00% (1,231.00)
Other Œtems - - 0.00% -
Net Œncome (41,394.00) -79.13% (131,423.00) -29.52% (198,339.00)
Preferred Stock - - -
NŒAC (41,394.00) -79.13% (131,423.00) -29.52% (198,339.00)
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Appendix 3: Horizontal Analysis of Balance Sheets

Balance Sheet ± Horizontal Analysis

fiscal 2007 fiscal 2006 fiscal 2005
ASSETS
Current Assets
Cash 36,242 30.90% 16,980 -38.67% 27,686 P
cc c
Short-term Œnvestments - - -
Net Accounts Receivable 64,227 29.44% 83,546 68.37% 49,621
Œnventory 26,162 -8.50% 41,985 46.85% 28,591
Others 5,187 -61.48% 4,514 -66.48% 13,465
Total Current Assets 131,818 10.43% 147,025 23.17% 119,363
Long-term Œnvestments 4,261 -55.70% 14,734 53.19% 9,618
Plant, Property, Equipment 168,654 -45.46% 205,579 -33.52% 309,214
Goodwill 28,094 -14.06% 29,181 -10.74% 32,692
Œntangible Asset 1,900 -54.88% 2,925 -30.54% 4,211
Accumulated Amortization - - -
Other Assets 9,226 128.71% 3,584 -11.16% 4,034
Deferred Long-term Asset Charges 5,539 383.33% 7,827 582.98% 1,146
TOTAL ASSETS 349,492 -27.23% 410,855 -14.45% 480,278
LŒABŒLŒTŒES
Current Liabilities
Accounts Payable 133,140 118.05% 149,373 144.64% 61,058
Current Debt 1,730 -96.40% 4,486 -90.67% 48,097
Others - -100.00% 60 -99.29% 8,480
Total Current Liabilities 134,870 14.65% 153,919 30.84% 117,635
Long-term Debt 105,966 -9.74% 147,417 25.57% 117,397
Other Liabilities 25,656 - -
Deferred Long-term Liabilities Charges 4,038 3.19% 848 -78.33% 3,913
Minority Œnterest - -100.00% - -100.00% 390
Negative Goodwill - - -
TOTAL LŒAB 270,530 13.03% 302,184 26.26% 239,335
SHAREHOLDERS¶ EQUŒTY
Misc Stocks - - -
Redeemable Preferred - - -
Preferred Stock - - -
Common Stock 310,942 5.19% 298,255 0.89% 295,611
Retained Earnings (233,246) 322.16% (191,010) 245.72% (55,250)
Treasury Stock - - -
Capital Surplus - - -
Other Shareholders¶ Equity 1,266 117.53% 1,426 145.02% 582
TOTAL SHAREHOLDERS¶ EQUŒTY 78,962 -67.23% 108,671 -54.90% 240,943
TOTAL LŒABŒLŒTŒES & SHAREHOLDERS¶ EQUŒTY 349,492 -27.23% 410,855 -14.45% 480,278
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Appendix 4: Key Financial Ratios and Their Trends

Ratios 2007 2006 2005

LŒQUŒDŒTY
Current Ratio 97.74% 95.52% 101.47%
Quick Ratio 78.34% 68.24% 77.16%
P
cc c
DEBT MANAGEMENT
Debt-to-Asset Ratio 77.41% 73.55% 49.83%
Debt-to-Equity Ratio 342.61% 278.07% 99.33%
Long-term Debt- to-Equity Ratio 134.20% 135.65% 48.72%
Times Œnterest Earned -0.98x -5.75x -21.35x

ASSET MANAGEMENT
Œnventory Turnover 11.43x 13.45x
Fixed Asset Turnover 2.46x 2.11x
Total Asset Turnover 1.21x 1.22x

PROFŒTABŒLŒTY
Gross Profit Margin 15.57% 12.66% 15.63%
Operating Profit Margin -4.30% -21.38% -20.73%
Net Profit Margin -8.98% -24.19% -28.02%
Return on Asset -10.89% -29.50%
Return on Equity -44.12% -75.18%
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Appendix 5: HA/VA of Store Count

Horizontal Analysis
2007 2006 2005
By Owner:
Company Store 113 -13.7% 118 -9.9% 131 P
cc c
Consolidated Franchisees 0 -100.0% 15 -72.2% 54
Associates - Franchisees 52 -11.9% 57 -3.4% 59
Area Developers - Franchisees 230 21.7% 212 12.2% 189
Systemwide Total 395 -8.8% 402 -7.2% 433

By Type:
Factory Stores - Company 108 -12.9% 113 -8.9% 124
Factory Stores - Consolidated 0 -100.0% 15 -70.6% 51
Factory Stores - Associates 43 -20.4% 47 -13.0% 54
Factory Stores - Area Developers 145 -13.2% 148 -11.4% 167
Satellites - Company 5 -28.6% 5 -28.6% 7
Satellites - Consolidated 0 -100.0% 0 -100.0% 3
Satellites - Associates 9 80.0% 10 100.0% 5
Satellites - Area Developers 85 286.4% 64 190.9% 22
Systemwide Total 395 -8.8% 402 -7.2% 433

By Location:
Domestic - Company 107 -18.3% 112 -14.5% 131
Domestic - Consolidated 0 -100.0% 15 -63.4% 41
Domestic - Associates 52 -11.9% 57 -3.4% 59
Domestic - Area Developers 113 -31.5% 150 -9.1% 165
Œnternational - Company 6 6 0
Œnternational - Consolidated 0 -100.0% 0 -100.0% 13
Œnternational - Associates 0 0 0
Œnternational - Area Developers 117 387.5% 62 158.3% 24
Systemwide Total 395 -8.8% 402 -7.2% 433
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Vertical Analysis
2007 2006 2005
By Owner:
Company Store 113 28.6% 118 29.4% 131 30.3%
Consolidated Franchisees 0 0.0% 15 3.7% 54 12.5% P
cc #c
Associates - Franchisees 52 13.2% 57 14.2% 59 13.6%
Area Developers - Franchisees 230 58.2% 212 52.7% 189 43.6%
Systemwide Total 395 402 433

By Type:
Factory Stores - Company 108 27.3% 113 28.1% 124 28.6%
Factory Stores - Consolidated 0 0.0% 15 3.7% 51 11.8%
Factory Stores - Associates 43 10.9% 47 11.7% 54 12.5%
Factory Stores - Area Developers 145 36.7% 148 36.8% 167 38.6%
Satellites - Company 5 1.3% 5 1.2% 7 1.6%
Satellites - Consolidated 0 0.0% 0 0.0% 3 0.7%
Satellites - Associates 9 2.3% 10 2.5% 5 1.2%
Satellites - Area Developers 85 21.5% 64 15.9% 22 5.1%
Systemwide Total 395 402 433

By Location:
Domestic - Company 107 27.1% 112 27.9% 131 30.3%
Domestic - Consolidated 0 0.0% 15 3.7% 41 9.5%
Domestic - Associates 52 13.2% 57 14.2% 59 13.6%
Domestic - Area Developers 113 28.6% 150 37.3% 165 38.1%
Œnternational - Company 6 1.5% 6 1.5% 0 0.0%
Œnternational - Consolidated 0 0.0% 0 0.0% 13 3.0%
Œnternational - Associates 0 0.0% 0 0.0% 0 0.0%
Œnternational - Area Developers 117 29.6% 62 15.4% 24 5.5%
Systemwide Total 395 402 433
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Appendix 6: ŒFE Matrix

leight Rating leighted Score

STRENGTHS
1.c KKD products can be found at thousands of retail
outlets 0.05 4 0.20
2.c Stock price rebounded to over $8 a share 0.03 3 0.09 P
cc &c
3.c Œncreasing number of franchises in the international
scene brought more revenues to KKD, and a 26%
increase in sales in equipment, furniture, fixtures, and
similar items to the KKD Supply Chain 0.08 4 0.32
4.c KKD is vertically integrated in three segments, giving
them the control over quality 0.03 3 0.09
5.c Strong marketing and CSR efforts for community
fundraising projects and for opening off-premise
channels to gain more exposure and sales 0.03 3 0.09
6.c KKD has a distinctive product that invited generations
of loyal customers for its ³one-of-a-kind taste´ and its
special flavor offerings 0.12 4 0.48
7.c Exposure in 10 foreign countries with an on-going
development of 200 additional stores in the Middle
East, Hong Kong, Macau, Tokyo, the Philippines and
Œndonesia 0.07 4 0.28
8.c Effective cost-cutting practices including closing of
poor performing stores, improving Net Œncome 0.1 4 0.40
9.c Automatic doughnut-making equipment that gives
them the capacity of 4,000 dozens to 10,000 dozens per
factory store daily 0.05 4 0.20
lEAKNESSES
1.c Despite their turnaround strategy, KKD still incurred a
net loss for the second quarter of fiscal 2008 0.15 1 0.15
2.c Company brand image greatly suffered from legal
issues back in 2005 0.02 2 0.04
3.c Failure to update registered Uniform Franchise
Offering Circular in the U.S. 0.04 1 0.04
4.c Revenues for company stores and supply chain
decreased 0.06 2 0.12
5.c Reduction of labor force of 31.83% in two years which
further lowered their employer brand image 0.07 1 0.07
6.c KKD doughnuts have higher calorie content compared
to its major competitors 0.04 2 0.08
7.c Œnventory turnover decreased to 11.43 times. 0.06 2 0.12
Total 1 2.77
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Appendix 7: Tabulation of Key Trends/Changes in the Macroenvironment

Œmpact on the Firm¶s Ability to

Classification Nature of Trend/Change in the Macroenvironment Generate Better-than-Average
Returns (ROE)
Œncreased Net Profit from lower
marketing costs because of P
cc )c
high acceptability. Œncrease in
lestern brands in Asia and in the Middle East are
revenues from a larger
popular.
customer base. Œncreased Net
Profit and revenues will lead to
increased ROE.
Lower revenues since
Europeans are accustomed to
their own taste of doughnuts.
Europeans are loyal to their own doughnut brands Œt also lowers Net Profit as
and have different eating habits than the American there will be a need to develop
market. new doughnut lines and strong
Socio-Cultural
marketing efforts to cater to
this region. Thus, it lowers the
ROE.
The Asian population is known for their fondness of Higher revenues that will
sweets. contribute to higher ROE.
Decreased revenues because
customers are now going into
the healthy substitutes, which
will lower ROE. Œt will also
There is a trend for healthier food choices in the U.S.
lower Net Profit as there is a
possibility of developing a
healthier product menu, which
also lowers ROE.
More Americans are now working and with it is an Œncreased revenues that will
Demographics
increasing number of people eating out. increase ROE.
Lower revenues as customers
33.3% of American adults are overweight. tend to shift to healthier foods
thus, lower ROE.
The ³older, wealthier population´ in the U.S. market Decreased revenues will lower
prefers casual dining ROE.
Attractiveness of the industry
stocks is improving which can
Economic Stock prices in the QSR industry are improving.
attract more stockholders,
increasing ROE.
Food product price inflation is still increasing thus
Œncrease in ROŒ will lead to an
pushing companies to decrease their development
increase in ROE.
costs.
Decreases revenues and Net
A number of fast-food companies are considering Profit as KKD has to compete
Global
international expansion as a growth opportunity. in an intensified global market.
Thus, it lowers their ROE.

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Appendix 8A: Œndustry Analysis (Current)

Nature of
General Œmpact in
Competitive Force Competitive Supporting Case Details
Attractiveness
Force
Œntensity of Rivalry ôcFew dominating players with a
among Competing significant number of stores in P
cc ,c
Firms the domestic and international
scene
ôcSlow industry growth as
determined by stable same-
High Highly Unattractive
store sales growth in the
domestic market
ôcHigh strategic stakes in the
U.S. market
ôcHigh storage costs due to the
industry¶s perishable offerings
Threat of New Entrants ôcAll major Europeans and
American doughnut chains are
slowly entering the Asian
market thus, this segment is
Low Highly Attractive
becoming crowded
ôcHigh entry barrier because of
strong retaliation from
domestic players
Threat of Substitutes ôcŒncreasing trend of Americans
being overweight which leads
to consumers seeking for
healthier or low-calorie food
High Highly Unattractive
products
ôcBritish market have biscuits as
substitutes for other snack
products
Bargaining Power of ôcLow switching cost for end
High Highly Unattractive
Buyers consumers
Bargaining Power of ôcRaw materials are
Suppliers Low commodities so companies Highly Attractive
face low switching cost
Overall Assessment Highly Unattractive
c

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Appendix 8B: Œndustry Analysis (Next 3-5 Years)

Nature of
General Œmpact in
Competitive Force Competitive Supporting Case Details
Attractiveness
Force
Œntensity of Rivalry ôcDomestic market will reach its
among Competing saturation point P
cc 2c
High Highly Unattractive
Firms ôcŒncreased number of players in
the international market
Threat of New Entrants Low ôcHigh entry barrier Highly Attractive
Threat of Substitutes ôcŒncreasing number of healthy,
High low-calorie, and low-sugar Highly Unattractive
substitutes
Bargaining Power of ôcBargaining power of buyers in
Buyers the domestic market does not
change significantly
High Highly Unattractive
ôcBuyers can choose from a
variety of brands so switching
cost is low
Bargaining Power of ôcNo change
Low Highly Attractive
Suppliers
Overall Assessment Highly Unattractive
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Appendix 9: Competitor Analysis

Tim Hortons Dunkin¶ Donuts Starbucks Krispy Kreme

Critical
leighted leighted leighted leighted
Success leight Rating Rating Rating Rating
Score Score Score Score
Factors
US P
ccc
0.25 2 0.50 4 1.00 4 1.00 2 0.50
Stores
Product
Offers 0.35 4 1.40 4 1.40 3 1.05 2 0.70
(Variety)
Global
0.40 1 0.40 4 1.60 4 1.60 2 0.80
Presence
Total 1.00 2.3 4.0 3.65 2.0
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Appendix 10: EFE Matrix

leight Rating leighted Score

OPPORTUNŒTŒES
1.c Asia and the ME are favorable markets for KKD
offerings, along with UK, Germany, and Spain. 0.15 3 0.45
2.c Œndustry stock prices are improving 0.05 4 0.20 P
cc c
3.c Growth in two-income households that will lead
to an increase in snack-food consumption and
doughnut sales growth 0.15 2 0.30
4.c Since 2004, development costs has been
decreasing in the U.S. 0.08 4 0.32
THREATS
1.c Casual-dining sector is gaining share from fast-
food chains and it is expected to grow 0.12 1 0.12
2.c Healthy food choice is the growing trend 0.15 1 0.15
3.c Fast expansion of competitors (e.g. Dunkin¶
Donuts) in the domestic and international market 0.15 3 0.45
4.c Cultural differences among countries make
operations and doughnut consumption varied,
which makes things difficult to control 0.06 2 0.12
5.c Europeans and American doughnut chains are
expanding in the international market, especially
Asia 0.09 3 0.27
Total 1 2.38
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Appendix 11: Strategy Formulation Matrix Π(SlOT Matrix)

STRENGTHS lEAKNESSES
1.c KKD products can be 1.c Despite their
found at thousands of turnaround strategy,
retail outlets KKD still incurred a
2.c Stock price net loss for the P
ccc
rebounded to over $8 second quarter of
a share fiscal 2008
3.c Œncreasing number of 2.c Company brand
franchises in the image greatly
international scene suffered from legal
brought more issues back in 2005
revenues to KKD, and 3.c Failure to update
a 26% increase in registered Uniform
sales in equipment, Franchise Offering
furniture, fixtures, Circular in the U.S.
and similar items to 4.c Revenues for supply
the KKD Supply chain decreased
Chain because of local
4.c KKD is vertically merchants serving
integrated in three their international
segments, giving stores
them the control over 5.c Reduction of labor
quality force of 31.83% in two
5.c Strong marketing and years which further
CSR efforts for lowered their
community employer brand
fundraising projects image
and for opening off- 6.c KKD doughnuts have
premise channels to higher calorie content
gain more exposure compared to its major
and sales competitors
6.c KKD has a distinctive
product that invited
generations of loyal
customers for its
³one-of-a-kind taste´
and its special flavor
offerings
7.c Exposure in 10
foreign countries with
an on-going
development of 200
additional stores in
the Middle East, Hong
Kong, Macau, Tokyo,
the Philippines and
Œndonesia
8.c Effective cost-cutting
practices including
closing of poor
performing stores

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cc
c
9.c Automatic doughnut-
making equipment
that gives them the
capacity of 4,000
dozens to 10,000
dozens per factory
store daily P
ccc
OPPORTUNŒTŒES S-O STRATEGŒES l-O STRATEGŒES
1.c Asia and the ME are Market penetration in the U.S. Update UFOC to increase the
favorable markets for market focusing on advertising number of franchised satellites
KKD offerings, along efforts and increasing the in the U.S. (l3-4,l7, O3)
with UK, Germany, number of franchised satellites
and Spain. (S1-2, S8-9, O2-4) Market penetration in the Asian
2.c Œndustry stock prices market focusing on store
are improving Œncrease stores in the openings (l6, O1)
3.c Growth in two-income international market, especially
households that will Asia (S3, S6-7, S9, O1)
lead to an increase in
snack-food
consumption and
doughnut sales
growth
4.c Decreasing
development costs in
the U.S.
THREATS S-T STRATEGŒES l-T STRATEGŒES
1.c Casual-dining sector Check the feasibility of product Market penetration in the U.S.
is gaining share from development in the U.S. market market focusing on aggressive
fast-food chains and focusing on creating a healthier advertising and close poor-
it is expected to grow doughnut line (S1, S4-5, T3) performing stores (l1-2, T1, T4)
2.c Since 2004, there has
been an increasing Œncrease number of stores Conduct feasibility study on
trend of food product current in the foreign countries other foreign countries that are
price inflation being served (S1, S6, T4, T6) not currently being served to
3.c Healthy food choice identify the most favorable to
is the growing trend Related diversification offering serve (l1, l3, T4, T6)
4.c Fast expansion of sandwiches, bagels, etc. (S1, T1)
competitors (e.g.
Dunkin¶ Donuts) in
the domestic and
international market
5.c Cultural differences
among countries
make operations and
doughnut
consumption varied,
which makes things
difficult to control
6.c Europeans and
American doughnut
chains are expanding
in the international
market, especially

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Appendix 13: Strategy Evaluation Matrix

Alternative 1 Alternative 2 Alternative 3 Alternative 4

% Raw ltd Raw ltd Raw ltd Raw ltd.
Criteria
leight Sc. Sc. Sc. Sc. Sc. Sc. Sc. Sc.
Œ. Feasibility
a. Financial P
cc&c
condition 0.1 4.0 0.4 3.0 0.3 2.0 0.2 1.0 0.1
b. Human
resources 0.1 4.0 0.4 2.0 0.2 1.0 0.1 3.0 0.3
c. Technology 0.1 5.0 0.5 1.0 0.1 1.0 0.1 4.0 0.4
ŒŒ. Long-term
Profitability 0.2 3.0 0.6 3.0 0.6 4.0 0.8 4.0 0.8
ŒŒŒ. Advantage 0.2 5.0 1.0 1.0 0.2 1.0 0.2 4.0 0.8
ŒV. Consonance 0.2 2.0 0.4 3.0 0.6 2.0 0.4 3.0 0.6
V. Consistency 0.1 3.0 0.3 4.0 0.4 2.0 0.2 5.0 0.5
Totals 1.0 3.6 2.4 2.0 3.5
Alternative 1 Market Penetration
Alternative 2 Product Development
Alternative 3 Related Diversification
Alternative 4 Market Development
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Appendix 14: Balanced Scorecard

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