Krispy Kreme

Doughnuts, Inc.

Yaniv Mizrachi – Case Analysis

April 01, 2008
Krispy Kreme Doughnuts, Inc.
 Issues
• Financial Strategy –
Sales volume cannot justify high costs per store

• Franchise program

• No marketing strategy in place

(for advertising/promo and market research /R&D)

• Competitive advantage is no longer strong enough

to support Krispy Kreme’s mission.

Krispy Kreme Doughnuts, Inc.

 Porter’s 5 Forces for the Doughnut Industry

• Bargaining Threat of New Entrants

Power of (Moderate)
Suppliers • Large retailers have a large
market share Bargaining
(Weak) • High start up cost Power of
• ↑Suppliers
• ↓Suppliers’ Buyers
bargaining (Strong)
power • Consumers
Rivalry Among Existing H
• Retailers
Industry Firms
L
• Growing industry
• Numerous competitors
• Rivals diversified themselves
L/H

Threat of Substitute Products

(Strong)
• Other sweet treats/products
 Critical Success Factors

• Efficient Production/Distribution Channels

• Unique Differentiation Strategy –

“Hot Doughnuts Now”

• Minimal Cost of Raw Materials

Krispy Kreme Doughnuts, Inc.

 Emerging Trends
• Health Food Craze and Low Carbohydrate Diets.

• 24 hour/ 7-days per week in food service.

• Increasing cost of start up to Franchisees.

Krispy Kreme Doughnuts, Inc.

 Competitors
• Primary Competitors
Dunkin Donuts
Tim Horton's

• Secondary Competitors
Starbuck’s
McDonalds

Krispy Kreme Doughnuts, Inc.

 Competitor Analysis
• What drives competitors?

Increase % market shares

Develop Brand Recognition

• Competitors’ Current Strategy

Differentiation

Krispy Kreme Doughnuts, Inc.

 Financial Analysis
• Profit Growth • Operating Income by
o 2000-2001 147% Business Segment
o 2001-2002 79% o Company Stores 59%
o 2002-2003 27% o Franchises 13%
o 2003-2004 71% o KK Manufacturing 28%

• Net Working Capital • Current Ratio (2004) 2.59

Turnover .048

Krispy Kreme Doughnuts, Inc.

 Profit Growth (%)

Krispy Kreme Doughnuts, Inc.

 Income Statement
  FEB. 3, FEB. 2, FEB. 1,

YEAR ENDED 2002 2003 2004

STATEMENT OF OPERATIONS DATA:

Total revenues 100.0% 100.0% 100.0%

Operating expenses 80.40 77.60 76.20

General and administrative expenses 7.00 5.90 5.60

Depreciation and amortization expenses 2.00 2.50 3.00

Arbitration award 1.80 (0.10)

Income from operations 10.60 12.20 15.30

Interest and other expense (income), net (0.20) 1.10 1.10

Income before income taxes 10.80 11.10 14.20

Provision for income taxes 4.10 4.30 5.60

Net income 6.7% 6.8% 8.6%

Krispy Kreme Doughnuts, Inc.

Krispy Kreme Doughnuts, Inc.
 STRENGTHS WEAKNESSES
• Differentiation strategy • Accounting Errors

• Franchise has strong appeal • Lack of advertising

• Appeals across all demographics • Single product concept

• Loyal customers • Lack of support to franchises

• New Manufacturing and distribution facility • Poor location of older stores

-High volume production capability - company
supplies itself • Reduced employment

• New Additions to Product Line

OPPORTUNITIES THREATS
• International markets • Competitors have aggressive differentiation
strategies
• Fast Food
• Fastest growing dining category in the country • Change in consumer lifestyles

• Wholesale (fundraising and supermarkets) • Changing cost of supplies

• Multi-channel market penetration strategy

Krispy Kreme Doughnuts, Inc.

 Recommendations
1- Reduce operating expenses
(down-size individual stores)

Lower Costs of Doing Business

- reduce operating costs per individual store by
changing average size of stores from 2500-4500 sq ft
range to 1500-2000 sq ft. Potential for 30 – 50 %
decrease in operating cost on a cost per square foot
basis.

Krispy Kreme Doughnuts, Inc.

 Recommendations
1- Reduce operating expenses
(down-size individual stores)

I. Change entire manufacturing and distribution

strategy –Implement par baked manufacturing
operation
o to allow individual stores to decrease in size, thus lowering per
store operating costs to a more appropriate level for sales
volume
o Increased efficiency – smaller workforce per store, par-bake
allows for minimal waste – inventory as needed (important b/c
fresh goods – low shelf life
o Par bake will allow for “hot doughnuts now” all of the time.

Krispy Kreme Doughnuts, Inc.

 Recommendations
1- Reduce operating expenses
(down-size individual stores)

• 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, doughnuts still to be

fried and glazed on site.

Krispy Kreme Doughnuts, Inc.

 Recommendations
1- Reduce operating expenses
(down-size individual stores)

II. Sale of Plant and Equipment -sell Effingham plant

• Potential buyers are large scale baked-goods
manufacturers
o Sara Lee Corporation
o Entenmann’s (George Weston Bakeries Distribution)
o Harlan Bakeries, Inc.
• Estimated value of 10.5 – 12 million.

III. Remove “doughnut theater” from 95% of locations,

doughnut theater can be part of a select few Flagship
locations only. (3 – 5 Stores)

Krispy Kreme Doughnuts, Inc.

 Recommendations
2- Develop stronger relations and
control of franchisees
I. Short-term period of one year – postpone new
franchise agreements/new store openings

II. Implement Franchise Support Systems

• Communication – between corporate and franchisees
• Support – training, advertising
• Utilize recommendation #1 in order to lower operating
expenses for franchisees.

Krispy Kreme Doughnuts, Inc.

 Recommendations
3- Implement Marketing
Strategies
I. Advertising – national television and radio advertising
campaign based on “hot doughnuts now”.

II. Marketing research – periodic research to stay

abreast of trends.

III. R&D – product development

Krispy Kreme Doughnuts, Inc.

 Recommendations
4- Strengthen Competitive
Advantage
• Strengthen Competitive Advantage through
differentiation in products and services.

I. Continue to utilize “hot doughnuts now”

II. Expand product line

o Account with A&S “New York” Bagels (par-baked). Par baked
will allow for “Hot Bagels Now”.

Krispy Kreme Doughnuts, Inc.

 Projections
• Year ending 2006 – Significant increase in overall
profitability.
o Individual stores will realize greater profit margins
(increased productivity) due to more efficient use of
square-footage, equipment, and labor force.

• Year ending 2007 – Increase in market share (retail

industry), increase total store sales revenues.
o Completion of revisions made to franchise
agreements.
o Investment capital now available to launch marketing
strategies for television and radio advertising plan of
“hot doughnuts now”.

Krispy Kreme Doughnuts, Inc.

 Projections
• Year ending 2008 –
o Investment capital now available to launch marketing
strategies for periodic R&D regarding consumer data
and continued product development and testing.
o Restoration of brand image and strong brand
recognition.

Krispy Kreme Doughnuts, Inc.

 What to Expect
• Increase customer base in existing stores
• Regain novelty and authenticity
• Lower costs
• Increase in profits
• Regain investor confidence

Krispy Kreme Doughnuts, Inc.