Krispy Kreme Doughnuts, Inc Marketing Case Analysis Course: MBA 524 Instructor: Mary A. Higby Date: April 22, 2008 Presented by: Jack Szczepaniuk Chun-Chiang Chan

Summary Introduction to Krispy Kreme Krispy Kreme Downturn Krispy Kreme Finances S.W.O.T. What is the Problem? Critical Issues Alternatives Our Recommendation

Introduction to Krispy Kreme

Krispy Kreme Downturn

Krispy Kreme Finances

S.W.O.T.

What is the Problem?

Critical Issues

Alternatives

Our Recommendation

Introduction to Krispy Kreme Founded by Vernon Carver Rudolph in 1933 First donut shop (partnered) was in Paducah, KY Operations were moved to Nashville, TN Focused on selling to grocery stores Rudolph opened his own shop in Winton-Salem,NC in 1937 with $25 dollars and a 1936 Pontiac

Founded by Vernon Carver Rudolph in 1933

First donut shop (partnered) was in Paducah, KY

Operations were moved to Nashville, TN

Focused on selling to grocery stores

Rudolph opened his own shop in Winton-Salem,NC in 1937 with $25 dollars and a 1936 Pontiac

Introduction to Krispy Kreme Out the door Around the corner Down the block

Out the door

Around the corner

Down the block

Introduction to Krispy Kreme Automatic doughnut cutting machine Air-pressure doughnut pourer Donut “hole” does not exist Entire process is automated “ Hot Original Glazed” The Red Light

Automatic doughnut cutting machine

Air-pressure doughnut pourer

Donut “hole” does not exist

Entire process is automated

“ Hot Original Glazed”

The Red Light

Krispy Kreme U.S.

Krispy Kreme Worldwide

Krispy Kreme Stock Opened on the NASDAQ on April 5, 2000 (KREM) Bought Digital Java Coffee Company in April 2001 Moved up to the NYSE on May 17, 2001 (KKD)

Opened on the NASDAQ on April 5, 2000 (KREM)

Bought Digital Java Coffee Company in April 2001

Moved up to the NYSE on May 17, 2001 (KKD)

Krispy Kreme Downturn Low-carb, low-sugar doughnuts Increase cost in ingredients Too many stores in too little time Lack of advertising has caught up with KK

Low-carb, low-sugar doughnuts

Increase cost in ingredients

Too many stores in too little time

Lack of advertising has caught up with KK

Krispy Kreme Finance Iss 4/6/2000: $9.60 12/28/2001: $45.75 1/31/2003: $30.41 8/18/2003: $49.37 11/5/2003: $44.31 5/5/2004: $32.37 5/10/2004: $20.30 10/27/2005: $4.05 1/16/2007: $11.42 1/16/2008: $2.23 4/18/2008: $3.11

Iss 4/6/2000: $9.60

12/28/2001: $45.75

1/31/2003: $30.41

8/18/2003: $49.37

11/5/2003: $44.31

5/5/2004: $32.37

5/10/2004: $20.30

10/27/2005: $4.05

1/16/2007: $11.42

1/16/2008: $2.23

4/18/2008: $3.11

Krispy Kreme Finance–Income Statement 31.06 48.56 -198.34 -135.76 -42.24 Net Income 0 -1.28 -40.05 0 0 Discontinued Operations 0 0 -1.23 0 0 Accounting Change 0 -1.28 -41.29 0 0 Total Extraordinary Items 31.06 49.85 -157.05 -135.76 -42.24 Income After Tax 19.72 33.15 9.67 -0.78 1.21 Income Tax - Total 50.78 82.99 -147.38 -136.54 -41.03 Income Before Tax -3.47 0.16 -0.06 5.67 5.11 Other, Net -2.01 -5.85 -7.72 -23.44 -19.55 Interest Income (Expense), Net Non-Operating 56.26 88.68 -139.6 -118.77 -26.58 Operating Income 9.08 -0.53 161.85 90.9 28.49 Unusual Expense (Income) 14.68 22.31 31.93 28.92 21.05 Depreciation/Amortization 30.07 45.23 55.3 67.73 48.86 Selling/General/Administrative Expenses, Total 110.08 155.7 109.49 68.77 71.82 Gross Profit 380.64 493.65 598.28 474.59 389.38 Cost of Revenue, Total 490.73 649.35 707.77 543.36 461.2 Total Revenue 490.73 649.35 707.77 543.36 461.2 Revenue 2003 2004 2005 2006 2007

KK Finance–Balance Sheet (Asset) 410.49 656.6 480.28 410.86 349.49 Total Assets 0 0 0 0 0 Other Assets, Total 5.23 13.31 9.23 19.32 16.86 Other Long Term Assets, Total 1 6.56 2.12 0.04 0 Note Receivable - Long Term 11.22 14.58 5.97 8.6 3.22 Long Term Investments 49.15 0 1.69 1.11 0.84 Intangibles, Net 0.2 197.16 32.69 29.18 28.09 Goodwill, Net 202.56 287.49 309.21 205.58 168.65 Property/Plant/Equipment, Total - Net 141.13 137.5 119.36 147.03 131.82 Total Current Assets 9.82 14.83 17.38 32.49 12 Other Current Assets, Total 3.48 0 0 0 0 Prepaid Expenses 24.37 29.82 28.59 23.76 21.01 Total Inventory 2.85 7.97 0 34.97 34.97 Receivables - Other 0 0.75 0.94 1.15 0 Notes Receivable - Short Term -1.45 -1.27 -11.38 -13.66 -2.75 Provision for Doubtful Accounts 35.83 46.09 40.64 39.18 29.51 Accounts Receivable - Trade, Gross 45.44 63.09 44.77 37.68 27.6 Accounts Receivable - Trade, Net 48.28 71.82 45.71 73.8 62.57 Total Receivables, Net 22.98 0 0 0 0 Short Term Investments 32.2 21.03 27.69 16.98 36.24 Cash & Equivalents 55.18 21.03 27.69 16.98 36.24 Cash and Short Term Investments Assets 2003 2004 2005 2006 2007

KK Finance – Balance Sheet (L+S) 410.49 656.6 480.28 410.86 349.49 Total Liabilities & Shareholders’ Equity 273.35 436.41 240.94 108.67 78.96 Total Equity -1.61 -0.77 0.78 1.43 1.27 Other Equity, Total 102.4 143.09 -55.25 -191.01 -233.25 Retained Earnings (Accumulated Deficit) -0.56 -0.38 -0.2 0 0 Additional Paid-In Capital 173.11 294.48 295.61 298.26 310.94 Common Stock 0 0 0 0 0 Preferred Stock - Non Redeemable, Net 0 0 0 0 0 Redeemable Preferred Stock 137.14 220.19 239.34 302.18 270.53 Total Liabilities 5.22 22.26 26.45 29.18 29.69 Other Liabilities, Total 5.19 2.15 0.39 0 0 Minority Interest 9.85 0 3.91 0.85 0 Deferred Income Tax 57.19 137.11 90.95 118.24 105.97 Long Term Debt 57.19 137.11 90.95 118.24 105.97 Total Long Term Debt 59.69 58.67 117.64 153.92 134.87 Total Current Liabilities 9.08 0 0 0 0.02 Other Current Liabilities, Total 3.3 8.14 48.1 4.43 1.73 Current Port. of LT Debt/Capital Leases 12.28 8.12 8.48 0.11 0 Notes Payable/Short Term Debt 20.98 23.3 43.62 140.48 125.25 Accrued Expenses 14.06 19.11 17.44 8.9 7.87 Accounts Payable Liabilities and Shareholders' Equity 2003 2004 2005 2006 2007

KK Finance – Cash Flow 51.91 82.67 84.92 1.87 22.11 Cash from Operating Activities -0.41 4.32 2.65 2.28 2.8 Other Liabilities 0.57 1.03 7.97 0 0 Taxes Payable 0.74 -7.12 8.28 0.44 -9.05 Payable/Accrued -0.33 -0.97 -4.06 -2.97 6.85 Other Assets -8.52 -4.07 2.14 4.12 2.56 Inventories -6.98 -18.73 10.98 3.86 0.5 Accounts Receivable -14.92 -25.53 27.97 7.73 3.66 Changes in Working Capital 18.01 37.14 11.8 10.77 17.6 Other Non-Cash Items 2.09 2.24 1.62 4.34 -6.47 Equity in Net Earnings (Loss) 0.93 0.94 198.54 87.76 28.52 Unusual Items 0 0 1.23 0 0 Accounting Change 21.03 40.32 213.2 102.87 39.65 Non-Cash Items 0.06 -3.49 10.12 -1.89 -0.01 Deferred Taxes 14.68 22.81 31.98 28.92 21.05 Depreciation/Depletion 31.06 48.56 -198.34 -135.76 -42.24 Net Income/Starting Line 2003 2004 2005 2006 2007

Krispy Kreme Finance – Cash Flow 32.2 21.03 27.69 16.98 36.24 Net Cash - Ending Balance 21.9 32.2 21.03 27.69 16.98 Net Cash - Beginning Balance 10.3 -11.17 6.66 -10.71 19.26 Net Change in Cash 0 0 0.34 -0.01 0 Foreign Exchange Effects 50.03 76.11 -34.21 0.14 -15.48 Cash from Financing Activities 41.5 58.55 -35.21 1.55 -15.05 Issuance (Retirement) of Debt, Net 7.14 19.52 1.18 0.15 0 Issuance (Retirement) of Stock, Net 0 0 0 0 0 Total Cash Dividends Paid 1.4 -1.96 -0.18 -1.57 -0.43 Other Financing Cash Flow 1.4 -1.96 -0.18 -1.57 -0.43 Financing Cash Flow Items -91.64 -169.95 -44.39 -12.7 12.63 Cash from Investing Activities 0.93 -2.87 8.35 -0.4 -1.4 Other Investing Cash Flow -41.14 -13.96 -3.47 -12.22 -0.82 Purchase of Investments 33.1 33.14 0 0 9.59 Sale/Maturity of Investment 2.14 0.46 28.66 7.33 9.66 Sale of Fixed Assets 0 0 0 2.54 2.5 Sale of Business -4.97 -108.4 -3.62 0.43 -2.9 Acquisition of Business -9.94 -91.63 29.92 -2.32 16.64 Other Investing Cash Flow Items, Total -81.7 -78.32 -74.31 -10.38 -4.01 Purchase of Fixed Assets -81.7 -78.32 -74.31 -10.38 -4.01 Capital Expenditures 2003 2004 2005 2006 2007

Krispy Kreme Finance 1.21 0.54 0.20 3.45 1.31 0.47 P/S (ttm): 1.21 1.10 N/A 1.47 1 N/A PEG (5 yr expected): 23.91 19.92 N/A 24.22 19.89 N/A P/E (ttm): N/A 0.59 -1.586 1.400 0.888 -0.944 EPS (ttm): -22.36K 8.81M -30.66M 264.34M 675.74M -59.65M Net Income (ttm): 1.14% 5.72% -3.47% 20.42% 9.72% 0.10% Oper Margins (ttm): 147.18M 41.75M 25.57M 461.55M 1.47B 19.00M EBITDA (ttm): 32.41% 28.56% 16.13% 26.82% 57.24% 11.21% Gross Margin (ttm): 1.07B 402.90M 256.83M 1.86B 9.82B 430.56M Revenue (ttm): 20.90% 7.10% 5.20% 10.50% 17.50% -11.70% Qtrly Rev Growth (yoy) : 759 4.70K 1,603 525 172,000 3,875 Employ­ees: 1.29B 204.46M 53.85M 6.29B 12.81B 201.84M Market Cap: Specialty Eateries Industry Restaurants Industry Caribou Tim Horton’s Starbucks Krispy Kreme Doughnuts

Strengths of Krispy Kreme Signature hot Original Glazed doughnut People know Krispy Kreme Hot light January 28,2007, 395 Store worldwide, of which 113 were owned, 282 were owned by franchisees

Signature hot Original Glazed doughnut

People know Krispy Kreme

Hot light

January 28,2007, 395 Store worldwide, of which 113 were owned, 282 were owned by franchisees

Weaknesses of Krispy Kreme Not flexible – difficulties reordering when non-Hot light stores are sold out Franchisees close stores No other standout products (weak menu) Bad relations with franchisees (cost of equipment, packaging, ingredients, etc) Corporate Structure (CEO retired)

Not flexible – difficulties reordering when non-Hot light stores are sold out

Franchisees close stores

No other standout products (weak menu)

Bad relations with franchisees (cost of equipment, packaging, ingredients, etc)

Corporate Structure (CEO retired)

Opportunities for Krispy Kreme Reputation –Fundraising program has helped non-profit organizations raise millions of dollars in needed funds Worldwide sales May steal back customers Untouched domestic locations

Reputation –Fundraising program has helped non-profit organizations raise millions of dollars in needed funds

Worldwide sales

May steal back customers

Untouched domestic locations

Threats to Krispy Kreme Dunkin’ Donuts, Tim Horton’s, Starbucks, and other National Chains/Specialty Eateries KK stores went up too fast Store locations too scattered Increasing cost of ingredients Increasing utility and fuel costs

Dunkin’ Donuts, Tim Horton’s, Starbucks, and other National Chains/Specialty Eateries

KK stores went up too fast

Store locations too scattered

Increasing cost of ingredients

Increasing utility and fuel costs

What is the Problem? How will Krispy Kreme return to profitability? Competitiveness Efficiency Franchisee relations

How will Krispy Kreme return to profitability?

Competitiveness

Efficiency

Franchisee relations

Critical Issues Banks saved KK in 4/08 extending life of loan agreement (interest rate higher) New CEO in fiscal 2008 Highly competitive w/ Dunkin Donuts, Tim Horton’s and Starbuck’s Focus on marketing Closing of Franchises Globalizing Krispy Kreme

Banks saved KK in 4/08 extending life of loan agreement (interest rate higher)

New CEO in fiscal 2008

Highly competitive w/ Dunkin Donuts, Tim Horton’s and Starbuck’s

Focus on marketing

Closing of Franchises

Globalizing Krispy Kreme

Alternative 1 Close unprofitable stores, and focus on other domestic areas and global market

Close unprofitable stores, and focus on other domestic areas and global market

A1 – Advantages and Disadvantages Advantages Increase capital from sold locations and properties Decrease loss Develop new market Disadvantages Lose domestic locations Lose foothold in certain regions Risk for international locations Increase cost for new locations

Advantages

Increase capital from sold locations and properties

Decrease loss

Develop new market

Disadvantages

Lose domestic locations

Lose foothold in certain regions

Risk for international locations

Increase cost for new locations

Alternative 2 Diversify and expand product mix Develop culturally oriented products Redesign current product names and descriptions Redesign packaging (cups, wrappers, bags, etc.)

Diversify and expand product mix

Develop culturally oriented products

Redesign current product names and descriptions

Redesign packaging (cups, wrappers, bags, etc.)

A2 – Advantages and Disadvantages Advantages Attracts new customers Attractive to the international market More Competitive with the market May keep existing customers May increase items sold per purchase More efficient More cost effective in the long run Disadvantages New development and packaging costs New ideas may discomfort old customers Risk of not selling

Advantages

Attracts new customers

Attractive to the international market

More Competitive with the market

May keep existing customers

May increase items sold per purchase

More efficient

More cost effective in the long run

Disadvantages

New development and packaging costs

New ideas may discomfort old customers

Risk of not selling

Alternative 3 Themed doughnuts Holiday doughnuts Special order birthday doughnuts Special event catering (wedding, etc.) Krispy Kreme Club w/ emails, games, coupons, events

Themed doughnuts

Holiday doughnuts

Special order birthday doughnuts

Special event catering (wedding, etc.)

Krispy Kreme Club w/ emails, games, coupons, events

A3 – Advantages and Disadvantages Advantages Attractive young ages Increase the holidays' sale Loyal customers will increase Increase the customers' database Disadvantages Remodel the production line Increase the website setup cost Need to find more workforce to support new activities

Advantages

Attractive young ages

Increase the holidays' sale

Loyal customers will increase

Increase the customers' database

Disadvantages

Remodel the production line

Increase the website setup cost

Need to find more workforce to support new activities

Alternative 4 Develop Krispy Kreme Mascot Formulate marketing strategy for mascot and 2008 Beijing Olympics Begin advertisements on TV and Radio

Develop Krispy Kreme Mascot

Formulate marketing strategy for mascot and 2008 Beijing Olympics

Begin advertisements on TV and Radio

A4 – Advantages and Disadvantages Advantages Increase the visibility on market Increase sales Increase celebrity/icon marketing possibilities More helpful on increasing the international market Disadvantages A huge cost of advertising expense KK visibility is too low, it may not have big help May be too late to plan for Olympics Olympic sponsors and partners were chosen years ago

Advantages

Increase the visibility on market

Increase sales

Increase celebrity/icon marketing possibilities

More helpful on increasing the international market

Disadvantages

A huge cost of advertising expense

KK visibility is too low, it may not have big help

May be too late to plan for Olympics

Olympic sponsors and partners were chosen years ago

Our Recommendation Alternative 1 Unprofitability must be realized Back to the basics Avoid being greedy again Grow slowly Other alternatives may be implemented in the future

Alternative 1

Unprofitability must be realized

Back to the basics

Avoid being greedy again

Grow slowly

Other alternatives may be implemented in the future

Krispy Kreme Doughnuts, Inc Marketing Case Analysis Course: MBA 524 Instructor: Mary A. Higby Date: April 22, 2008 Presented by: Jack Szczepaniuk Chun-Chiang Chan Sources Krispy Kreme website www.krispykreme.com The Triangle Business Journal www.bizjournals.com Investopedia www.investopedia.com

Krispy Kreme Doughnuts, Inc

Marketing Case Analysis

Course: MBA 524

Instructor: Mary A. Higby

Date: April 22, 2008

Presented by: Jack Szczepaniuk

Chun-Chiang Chan

Sources

Krispy Kreme website www.krispykreme.com

The Triangle Business Journal www.bizjournals.com

Investopedia www.investopedia.com