1 Group Members Wajahat Ali Muhammad Qaswar Ata Makhdoom Mudasser Iqbal Tanveer Ahmad
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,
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 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
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.
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’
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 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
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
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.
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 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.
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.
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 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
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 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 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
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 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 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‖.