Krispy cream case study finalDocument Transcript

1. 1 Group Members Wajahat Ali Muhammad Qaswar Ata Makhdoom

Mudasser Iqbal Tanveer Ahmad

2. 2Krispy kreme.Krispy Kreme is an international chain of doughnut stores

that was founded by VernonRudolph in 1937 in Winston-Salem, North

Carolina, United States. The parent company isKrispy Kreme Doughnuts,

Inc. (NYSE: KKD), which is based in Winston-Salem.While selling assorted

types of doughnuts, Krispy Kremes signature item is a glazed doughnutthat

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 inAustralia carry Krispy Kreme. In the United Kingdom

Tesco supermarkets, Tesco Extra andmost service stations carry Krispy

Kreme products.The companys growth was steady prior to its initial public

offering but profits have decreased inrecent quarters. However, new

branches have opened in downtown Philadelphia and

otherlocations.HistoryKrispy Kremes founder Vernon Rudolph and his

uncle purchased Joseph LeBeoufs donut shopon Broad Street in Paducah,

Kentucky along with a secret recipe for yeast-raised doughnuts in1933

acquired from a Buffalo, New York businessman. Rudolph began selling

the yeastdoughnuts 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 hisinterest in the

Nashville store in 1937 and opened a doughnut shop in Winston-Salem,

NorthCarolina selling to grocery stores and then directly to individual

customers. The first store inNorth Carolina was located in a rented building

on South Main Street in Winston-Salem in whatis now called historic Old

Salem. The Krispy Kreme logo was designed by Benny Dinkins, alocal

architect.Expansion occurred in the 1950s, including an early store in

Savannah, Georgia, and elsewherein the South. By the 1960s, Krispy

Kreme was known throughout theSoutheast, and it began toexpand into

other areas. In 1976, Krispy Kreme Doughnut Corporation became a

whollyowned subsidiary of Beatrice Foods of Chicago, Illinois. The

headquarters for Krispy Kremeremained in Winston-Salem.A group of

franchisees purchased the corporation back from Beatrice Foods in

1982.GrowthKrispy Kreme began another phase of rapid expansion in the

1990s, opening stores outside thesoutheastern 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,

justoutside Toronto. Since 2004, Krispy Kreme has rapidly expanded its

international operations.IPO and accounting scandalsOn April 5, 2000, the

corporation went public on the NASDAQ at $21 using the tickersymbol

KREM. On May 17, 2001, Krispy Kreme switched to the New York Stock

Exchange,

3. 3with the ticker symbol KKD, which is its current symbol. The stock

reached what would be itsall-time high of $50 on the New York Stock

Exchange in August 2003, a gain of 235 percentfrom 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

(includinginternational locations). The market initially considered the

company as having "solidfundamentals, adding stores at a rapid clip and

showing steadily increasing sales andearnings." Since then it has since

lost 75-80% of its value by 2005, amid earnings declines, aswell as an

SEC investigation over the companys alleged improper accounting

practices.In May 2004, the company missed quarterly estimates for the first

time and suffered its first lossas 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

theAtkins diet for disappointing earnings carried a whiff of desperation". It

also must be noted thatrival donut chain Dunkin Donuts has not suffered

from the low-carb trend over the samecompared periodThe 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 couldmake its numbers".Krispy Kreme was

also dogged by questionable transactions and self-dealingaccusations over

the buybacks of franchisees, including those operated by company

insiders. Areport 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 committedintentional

fraudManagement shuffleOn January 18, 2005, Krispy Kreme announced

Stephen Cooper, chairman of financialconsulting group Kroll Zolfo Cooper

LLC, as interim CEO, succeeding Scott Livengood whoretired as chairman,

president, CEO and a director. The company also named Steven Panagos,

amanaging director of Kroll Zolfo, as president and COO.A turnaround plan

in December 2005 aimed to close unprofitable stores in order to

avoidbankruptcyNew offeringsAlthough based on informal advertising such

as word-of-mouth, in 2006, Krispy Kreme movedinto television and radio

advertisements, beginning with its "Share the Love" campaign withheart-

shaped doughnuts.On February 19, 2007, Krispy Kreme began selling the

Whole Wheat Glazed doughnut in anattempt to appeal to the health

conscious. The doughnut has 83.736 kJ (20 kilocalories in mostcountries,

or 20Calories in the US) fewer than the original glazed (754 kJ vs. 837 kJ)

andcontains more fiber (2 grams vs. 0.5 grams). As of January 2008, the

trans fat content of allKrispy Kreme doughnuts was reduced to 0.5 of a

gram or less. The U.S. Food and DrugAdministration, in its guidelines,

allows companies to round down to 0 g in its nutrition factslabel even if the

food contains as much as 0.5 of a gram per serving. Krispy Kreme

benefitedfrom this regulatory rule in its subsequent advertising campaign,

touting its doughnuts as "transfat 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 doughnutsproved so popular the

Salisbury, North Carolina Krispy Kreme location, in the town

whereCheerwine is made, sold them as well,and after July 31, this was the

only place to get them.TheCheerwine Kreme doughnut returned for July

2011 and made its debutin Tennessee and Roanoke, Virginia.Also in 2010,

Krispy Kreme Express, a delivery service for businesses, began testing at

theBattleground Avenue location in Greensboro, North

CarolinaInternational operationsThe 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

countryHowever as of November 1, 2010 the entire Australian division

went into voluntaryadministration, with media reports attributing this to poor

sales.They have since come out ofadministration as of December 2010,

and continued trading, with fewer stores. Besides the storesthat Krispy

Kreme operate in the United States and Canada, there are also locations in

the UnitedKingdom, Australia, Lebanon, Turkey, Dominican Republic,

Kuwait, Mexico, PuertoRico, South Korea, Malaysia, Thailand, Indonesia,

the Philippines, Japan, China, the UnitedArab Emirates, Qatar, Saudi

Arabia, Bahrain,Hong Kong (2006–2008), andEthiopia.In August 2011,

Krispy Kremes Japan operation planned to increase the number of stores

from21 to 94, and its Mexico operation announced the number of stores

would increase from 58 to128 in five years.In the United Kingdom Krispy

Kreme continues its expansion and has plans and funding in placeto open

further stores in 2012.Franchisee expansion and reductionNew englandIn

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 aKrispy 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

KrispyKreme 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 inthe region, closed after a

long decline in patronage. Some say that Krispy Kremes coffee "leftmany

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

closedafter receiving initial fanfare. This may be due to dominance of

Dunkin Donuts in the stateArizonaKrispy 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

Rigelclosed it in 2006. The new franchise owner, Dan Brinton, plans to

eventually open four to five

5. 5factory 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.TexasIn 2002, Krispy Kreme opened a restaurant style

store in the Amarillo area in Texas. Manythought that the local doughnut

store was the reason the national chain closed, but this was notthe case.

The Amarillo Krispy Kreme closed on July 17, 2005. Another Krispy Kreme

closed inRound Rock in 2009. However shop 251 in Grapevine is still

open, as well as two shops in ElPaso. Most recently Krispy Kreme closed

the Corpus Christi location.CaliforniaIn 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 GreatCircle, culminating in their

September lawsuit filed against Krispy Kreme. The lawsuit wassettled in

July 2006 and led to the reinstatement of Great Circles license.On August

22, 2007, Great Circle Family Foods and some of its wholly owned

subsidiaries filedfor Bankruptcy. Great Circle emerged from on July 6,

2009, and currently operates 11 stores inSouthern California.NevadaAfter

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 "weapologize for any inconvenience." Rising fuel

costs were cited as the primary reason for theclosure.Puerto RicoOn May

6, 2008, the first store in Puerto Rico opened, followed by two additional

locations in2010 and one additional location in 2011.CanadaThe 18 stores

which opened in Canada, out of 32 planned, have been reduced to four.

Two ofthose exist in Quebec (in Longueuil and Quebec City) while the

other two stores arein Mississauga, Ontario andDelta, British Columbia. A

small seasonal store was recently openedin Wasaga Beach, Ontario.The

Wasaga Beach location receives its doughnuts from theMississauga store

every morning. Another small store recently opened on November 3, 2010

inToronto at Bathurst and Harbord Streets in the citys Harbord Village

neighborhood. This storereceives shipments from the Mississauga store.

Krispy Kremes Canadian assets were put up forsale in 2005 seven weeks

after the U.S.-based doughnut company had the firm that owns

andoperates stores in Canada placed under bankruptcy protection. The

Canadian operations aremanaged under the franchisee Krispy K Canada

Company of Mississauga, Ontario.PhilippinesIn November 2006, Krispy

Kreme opened the flagship store in the Philippines. These stores

arefranchise owned like many others.The development deal for the

franchise is awarded to the RealAmerican Donut Company, Inc., a

company owned and operated by the principals of MaxsRestaurant. The

original franchise agreement is for 30 stores over the next five years.

6. 6The flagship store was officially opened on November 30, 2006, at the

Bonifacio High Street inFort Bonifacio, Taguig City. The second store was

opened on December 21, 2006 at SMMegamall in Mandaluyong City. The

third store was opened on June 28, 2007 at GreenhillsShopping Center in

San Juan City, it is the first Krispy Kreme drive-thru outlet in Asia and

thefirst free-standing store in the Philippines. Branches in SM Mall of Asia

and Trinoma openedOctober 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 openedin Gateway Mall,

Araneta Center, and a 10th in Glorietta 4, Makati City. There are also

fourbranches 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 SMCity Davao, Davao

City.JapanKrispy Kreme Doughnuts Japan operates 27 shops throughout

the country.Business OperationsWe generate revenues from three distinct

sources: stores we operate, which we refer to asCompany Stores;

development and franchise fees and royalties from our franchise stores,

whichwe refer to as Franchise; and a vertically integrated supply chain,

which we refer to as KKSupply Chain. Company Stores, Franchise and KK

Supply Chain comprise our three reportablesegments under generally

accepted accounting principles (―GAAP‖).Company Stores. The principal

source of revenue for our stores is the sale of doughnuts. Many of our

factorystores are both retail outlets and wholesale producers of our

doughnuts and, as a result, can selltheir 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

communityorganizations 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 andbeverages, 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 ourstores, which we refer to as off-premises

sales. Off-premises sales consist of sales of freshdoughnuts and packaged

sweets, primarily on a branded basis (i.e.bearing the Krispy Kremebrand

name), to a variety of retail customers, such as convenience stores,

grocery stores/massmerchants and other food service and institutional

accounts. Doughnuts are sold to thesecustomers on trays for display and

sale in glass-enclosed cases and in packages for display andsale on both

stand-alone display units and on our customers’ shelves. These sales

channels are designed to generate incremental sales, increase market

penetrationand brand awareness, increase consumer convenience and

optimize utilization of our stores’

7. 7production 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. Ourroute drivers are capable of taking customer

orders and delivering products directly to ourcustomers’ retail locations,

where they are typically merchandised from Krispy Kreme

brandeddisplays. We have also developed national account relationships

and implemented electronicinvoicing and payment systems with many

large DSD customers.Franchise.Through our Franchise segment, we

generate revenues through the collection of developmentand franchise

fees and royalties. Royalties from franchisees are payable based upon a

percentageof franchise store sales and, as a result, our royalty revenues

are dependent on level of sales byour franchisees. Most of our domestic

franchisees sell doughnuts and other products throughboth 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 adistribution center that

provides Krispy Kreme stores with supplies for the critical areas of

theirbusiness. KK Supply Chain generates revenues on sales of doughnut

mixes, supplies, ingredientsand equipment to franchisees. It supports both

Company and franchisee stores by providingproduct knowledge and

technical skills, controlling critical production and distribution processesand

collective purchasing of certain materials. The primary ingredients used in

our products are flour, sugar and shortening. We routinelyobtain

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 forour glaze flavoring — a key

ingredient in many of our doughnuts — we currently utilize a solesource 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 UnitedStates and to

provide doughnut mix production in the event of a disruption of business at

ourWinston-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 ourstandard operating procedures, produces

doughnuts with uniform consistency and quality.Our line of doughnut-

making machines includes machines that produce doughnuts at rates

ofapproximately 65, 150, 270, 600 and 1,000 dozen doughnuts per hour.

The largest of thesemachines (the 600 and 1,000 dozen per hour

machines) are used primarily in a subset of ourfactory stores called

commissaries, which are production facilities used principally to serve off-

premises customers domestically and to supplement factory stores focused

on on-premises salesinternationally.We also sell smaller machines, which

we refer to as tunnel ovens and which areused in hot shops, that are

manufactured by others and that complete the final steps of theproduction

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

andvarious other items to domestic stores in the Eastern United States and

to certain internationalfranchise stores. In May 2008, we subcontracted

with an independent distributor to supply thedomestic stores not supplied

from Winston-Salem, which generally consist of stores west of

theMississippi River. These stores previously were supplied from a

distribution center in SouthernCalifornia, which we closed in August

2008.We provide many of the beverages offered in our stores, substantially

all of which are purchasedfrom third parties. Our beverage program

includes drip coffees, both coffee-based andnoncoffee-based frozen

drinks, packaged and fountain beverages and, in many of our shops,

acomplete line of espresso-based coffees including flavors. See ―—

Products — Beverages.‖Most of our domestic franchisees have agreed

contractually through our Supply Chain AllianceProgram to purchase all of

their requirements for the critical areas of their business from KKSupply

Chain. We believe that our ability to distribute supplies to our operators

produces severaladvantages, including: Economies of scale.We are able

to purchase key supplies at volume discount prices, which may be lower

than thosethat would be available to our operators individually. In addition,

we are selective in choosing

9. 9our 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 necessaryfor store

operation. We believe this strategy of having one ordering and delivery

system for storeoperations 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 withmany 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 threadthat binds generations of our loyal

customers. Our doughnuts are made based on a secret recipethat has

been in our Company since 1937. We use premium ingredients, which are

blended byour custom equipment in accordance with our standard

operating procedures, to create thisunique and very special product.

Doughnut theater.Our factory stores typically showcase our Doughnut

theater, which is designed to produce amulti-sensory customer experience

and establish a brand identity. Our goal is to provide ourcustomers with an

entertainment experience and to reinforce our commitment to quality

andfreshness 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 hotOriginal Glazed

doughnuts are being made. The Hot Krispy Kreme Original Glazed Now

sign isan impulse purchase generator and an integral contributor to our

brand. Our hot Original Glazeddoughnuts are made for several hours every

morning and evening, and at other times during theday. Community

relationships.We are committed to local community relationships. Our store

operators support their localcommunities through fundraising programs and

the sponsorship of charitable events. Many ofour loyal customers have

memories of selling Krispy Kreme doughnuts to raise money for

theirschools, clubs and community organizations.Products Doughnuts

and Related Products. We currently make and sell over 20 varieties of

high-quality doughnuts, including our hotOriginal Glazed doughnut.

Generally a product is first tested in our Company stores and thenrolled out

to our franchise stores. We have introduced doughnuts in non-traditional

shapes and

10. 10packaged doughnut snacks, as well as non-traditional packaging

offerings, for distributionthrough convenience stores. Complementary

products.In fiscal 2009, we began testing of a new soft serve menu of

traditional cones, shakes andsundaes paired with a variety of toppings. In

fiscal 2010, we will be expanding our testing of theconcept, 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 ofconsumer 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

fountainbeverages. 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.MarketingKrispy Kreme’s approach to marketing is

a natural extension of our brand equity, brandattributes, relationship with

our customers and our values. To build our brand and drive our salesin a

manner aligned with our brand values, we have focused our marketing

activities in thefollowing areas:Store Experience.Our factory stores and hot

shops are where most customers first experience a hot Original

Glazeddoughnut. Customers know that when our Hot Krispy Kreme

Original Glazed Now sign in thestore window is illuminated, they can see

our doughnuts being made and enjoy a hot OriginalGlazed doughnut within

seconds after it is made. We believe this begins our relationship withour

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 customerand community

relevancy by developing relationships with our constituents — consumers,

localnon-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. 11Public Relations.We utilize media relations, product placement and

event marketing as vehicles to generate brandawareness and trial

usagefor our products. Our public relations activity creates opportunities

formedia 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

marketingstrategy has not historically employed traditional advertising, we

occasionally utilize free-standing newspaper inserts, direct mail, radio,

television and/or sales promotions to generateawareness and usage of our

products. Advertising and sales promotion activity center around

ourheritage 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 requirethese

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, asdo some associate franchisees.In

fiscal 2009, the Company reduced the contribution from itsassociate and

domestic area developer franchisees to 0.75%. Proceeds from the Brand

Fund areutilized 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 ourproducts and

stores. In fiscal 2009, we and our franchisees contributed approximately

$2.6million to the Brand Fund.

12. 12 Case studyHistory and GrowthThe founder, Vernon Rudolph,

worked for his uncle, Ishmael Armstrong, who purchased a secretrecipe for

yeast-raised doughnuts and a shop on Broad Street in Paducah, Kentucky,

from JosephLeBeouf of Lake Charles, Louisiana. Rudolph began selling

the yeast doughnuts in Paducah anddelivered them on his bicycle. The

operation was moved to Nashville, Tennessee, and otherfamily members

joined to meet the customer demand. The first store in the nation with

theKrispy-Kreme name opened on Charlotte Pike in 1933. Rudolph sold his

interest in the Nashvillestore and in 1938 opened a doughnut shop in

Winston-Salem, and began selling to groceries andthen directly to

individual customers. The first store in North Carolina was located in a

rentedbuilding on South Main Street in Winston-Salem in what is now

called historic Old Salem. TheKrispy Kreme logo was designed by Benny

Dinkins, a local architect.By the 1960s, Krispy Kreme was known

throughout the southeastern United States, and it beganto expand into

other areas. In 1976, Krispy Kreme Doughnut Corporation became a

whollyowned subsidiary of Beatrice Foods of Chicago, Illinois. The

headquarters for Krispy Kremeremained in Winston-Salem. In 2003, a pilot

project in Mountain View, California, to selldoughnuts 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 anattempt to appeal to the health conscious. The doughnut

has twenty Calories fewer than theoriginal glazed (180 vs. 200) and

contains more fiber (2 grams vs. 0.5 grams). As of January2008, 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 gin its nutrition facts label even if the food

contains as much as 0.5 of a gram per serving. KrispyKreme benefited

from this regulatory loophole in its subsequent advertising campaign,

touting itsdoughnuts as "trans- fat free" and having "0 grams trans-fat!

‖Krispy Kreme began another phase of rapid expansion in the 1990s,

opening stores outside thesoutheastern 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, justoutside

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 tickersymbol KKD, which is its

current symbol.

13. 13Vision and ValuesOur 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 commitmentsWe must coach our team to ever-

better resultsMission statementWe create the tastes for good times and

warm memories for everyone, everywhere. With ourOriginal Glazed

doughnut as our signature and standard, we will continually improve

ourcustomers experience through: Innovative ideas Highest quality, and

Caring serviceOn January 18, 2005, Krispy Kreme announced Stephen

Cooper, chairman of financialconsulting 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

alsonamed Steven Panagos, a managing director of Kroll Zolfo, as

president and COO. Althoughbased on informal advertising such as word-

of-mouth, in 2006, Krispy Kreme moved intotelevision and radio

advertisements, beginning with its "Share the Love" campaign with heart-

shaped doughnuts.

14. 14 Financial/ business performance

15. 15Situational Analysis EnvironmentKrispy 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

primarilyfor 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 expansionplans that Krispy Kreme had

projected had to be scaled back due to falling sales. Consumerinterest in

reduced carbohydrate consumption, including ,but not limited to, the

interest in andpopularity of low carbohydrate diets, such as the ―Atkins‖

and ―South Beach‖ diet plans havebeen blamed for declining sales in pre-

packaged (grocery store) donuts. Industry AnalysisTheir 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 ―TimHortons‖, 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 salesmore than its donut sales. Their drive-thru

service makes it convenient for patrons to pick up acup of coffee on the go,

and maybe while they’re there, pick up a donut, too! They also havedonuts

with ―better‖ nutritional value, i.e., are lower in calories, fat and sugar.

One of their majorstrengths 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‖

isviewed by many patrons as more modern and more convenient because

of their drive throughwindows. ―Tom Horton‖, on the other hand, while

well-known in Canada is not as recognizablein the United States as

―Dunkin Donuts‖, although it does seem to have gained a foot-hold

instates along the border, such as Maine, New York , Ohio, etc., and other

select locations in theeastern U.S..There are constant threats of new

competitors in this industry. In addition to coffee retailers andcafes, such as

―Starbucks‖, ―Seattle’s Best‖ and other distributors, competition from

otherbakery retailers, such as ―Winchell’s Donut House‖ and ―LaMar’s

Donuts‖ appear to be the chiefnew threats. However, current expansion

plans for those firms appear to have fallen short ofprojections, 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 donutsare popular and/or are easier to

eat on the go. Specialty drinks, both hot and cold, particularlyhigh-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 impacton 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

franchisedstores. However, the ―KK Manufacturing and Distribution‖

segment of the company, as it’sknown, generates a substantial portion of

the company’s earnings.

16. 16 The OrganizationKrispy Kreme’s vision statement, as shown on

their website, is ―To be the global leader indoughnuts and complementary

products, while creating magic moments worldwide.‖ KrispyKreme’s

business strategy is focused on revenue from their company-owned stores,

royalties andfranchises fees , and sales of the mixes, specialty coffees and

donut making equipment. Theirorganizational structure was simple. They

felt strongly that the franchising was the best way togo, as it involved little

risk for them, provided income, and at the same time, put more of

theresponsibility on the franchise holders. In 2001, cash flow return on

equity investment for franchises was at 91%, so attractingfranchises was

not a problem. In 2003, the company’s business strategy was to add

enough newstores and increase sales enough to achieve 20% annual

revenue growth and 25% annual growthin earnings per share. However,

they failed to invest in product development beyond the ―let’stry that‖

stage. By all appearances, strategies do not appear to be capable of

maintaining acompetitive advantage for very long, as their products were

easy to replicate sufficiently for mostcustomers.As a matter of fact, many of

their competitors considered it an advantage when Krispy Kremecame to

town, as it brought attention to donuts, which resulted in increasing their

own sales! InJuly of 2004, the company announced that the SEC was

―launching an inquiry into thecompany’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 StrategyIt is difficult to

determine where the marketing department resides within the organization,

asvery little evidence of market research exists. Krispy Kreme’s marketing

plan seems simple onthe surface; they don’t appear to have put much

effort into marketing their product. Thecompany spent very little on

advertising, depending largely on word of mouth, and localpublicity. Store

openings were popular events in the communities, so often newspapers

and othermedia provided free publicity for the events.This strategy seems

to still work well for new store openings, but would not be sufficient

togenerate continuing business. This is evidenced by the fact that even

while new stores areopening, older stores within the same market are

having to close. In short, the company’smarketing strategy appeared to

consist merely of allowing its product to sell itself. The product’ssuperior

reputation, the firm’s operational techniques, i.e., their training, facilities

managementand 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 ―verticalintegration supply

chain to control costs. They felt that this would ensure quality and

consistency in the product. When Krispy Kremepurchased the Montana

Mills Bread Company, there seemed to be a sense that this was just

alogical next step. In fact, the CEO considered this acquisition as the

―natural outgrowth‖ in thecontinuing 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. 17patterns in the general public. As a result, Krispy Kreme acquired a

company in 2003 that by theend of fiscal year 2004, had lost $2 million

dollars.Environmental analysisInternal 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

locationsExternal 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 AnalysisStrengths

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 yearsOpportunities 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 treatsThreats 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

theirannual 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 revenuesfor the year ending February 1,

2009. This means that each business segment represented thefollowing

percentage in revenues: Company Stores (69.2%), Franchise (6.7%), and

KrispyKreme 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 KremeSupply

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 Chainhas 3% of

the market share and -7% growth rate.

24. 24 Problems Found in Situational, Environmental AnalysisThe primary,

and most critical, problem area is the lack of a cohesive marketing

structure withinor a strategic marketing plan for the organization. Flawed or

absent marketing research hasresulted in store closings and or expansions

that were not backed up by market data or evidencethat this investment

would be feasible.The company spent very little on advertising, depending

largely on word of mouth, and localpublicity. Store openings were popular

events in the communities, so often newspapers and othermedia provided

free publicity for the events. This strategy seems to still work well for new

storeopenings, but would not be sufficient to generate continuing business.

As a result, Krispy Kremeacquired 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 themixes and

the proprietary doughnut-making equipment, as well supplying the coffee

for use intheir stores. While this KK Manufacturing and Distribution division

of Krispy Kreme generallyprovided substantial revenues and earnings to

the business, this too, began to slip along withother revenues, and also

contributed to Krispy Kreme’s lack of current market data. Analysis

ofrevenues for fiscal year ending February 1, 2007, showed KK

Manufacturing and Distributionrevenues at $461195. Revenues by

feb,3,2008 had dropped to $429319Another, perhaps incidental side-effect

of this dependence on internal supply chain could be thatthe ―isolation‖

from outside suppliers prevented an additional source of market

information.ConclusionThe food industry has been affected by a recent

trend toward healthier eating habits. KrispyKreme 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 ahigh quality product. Future growth opportunities include

expanding franchises as well aspenetrating alternate distribution channels.

As Krispy Kreme analyzes potential growthopportunities within alternate

distribution channels such as convenience stores and grocerychains, 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. Asanalysis has shown, Krispy Kreme’s success

has come from factors other than the servingtemperature of its products. I

believe that Krispy Kreme can be successful in launching itsproduct in new

markets without establishing physical locations. Alternative channel

distributionwill help bring the Krispy Kreme product to millions of potential

customers who have yet toexperience the taste of America’s best

doughnut.

25. 25 Recommendations1- Reduce operating expenses(down-size

individual stores)I. Change entire manufacturing and distribution strategy –

Implement par bakedmanufacturing 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

operation2- 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

development4- Strengthen CompetitiveAdvantage• 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