Krispy Kreme.pdf

Krispy Kreme Case Study: Adapting to the Changing Needs of Consumers

By: Andrea Slonecker, Jessica Curtin, Mike Hurlbut, & Keith Anderson

Table of Contents Executive Summary............................................. ................................................................................................. .................................................... ........................... 1 Introduction ...................................................................................................................................... 2

Company History ....................................................................................................................................... 2 Current Situation ....................................................................................................................................... 4 External Environment Analysis .................................... ........................................................ ............... 6

General Environment ................................................................................................................................ 6 Industry Environment ............................................................................................................................. 10 Competitive Environment ....................................................................................................................... 12 Internal Environment Analysis .............................................. .................................................................................................... ...................................................... ...... 17

Peformance ............................................................................................................................................. 20 Krispy Kreme’s Efficiency  Efficiency   ........................................................................................................................ 21 Risks Facing Krispy Kreme ...................................................... .................................................... ...... 23

Competition ............................................................................................................................................ 23 Costs ........................................................................................................................................................ 23 Expansion ................................................................................................................................................ 25 Economic Risk ......................................................................................................................................... 26 Changing Consumer Preferences ............................................................................................................ 27 Key Problem .................................................................................................................................... 27 Recommendations .............................................. .................................................................................................. .................................................... ......................... 28

Implementation Plan............................................................................................................................... 30 Appendix ................................................... ......................................................................................................... ...................................................... ................................ 32

Table of Contents Executive Summary............................................. ................................................................................................. .................................................... ........................... 1 Introduction ...................................................................................................................................... 2

Company History ....................................................................................................................................... 2 Current Situation ....................................................................................................................................... 4 External Environment Analysis .................................... ........................................................ ............... 6

General Environment ................................................................................................................................ 6 Industry Environment ............................................................................................................................. 10 Competitive Environment ....................................................................................................................... 12 Internal Environment Analysis .............................................. .................................................................................................... ...................................................... ...... 17

Peformance ............................................................................................................................................. 20 Krispy Kreme’s Efficiency  Efficiency   ........................................................................................................................ 21 Risks Facing Krispy Kreme ...................................................... .................................................... ...... 23

Competition ............................................................................................................................................ 23 Costs ........................................................................................................................................................ 23 Expansion ................................................................................................................................................ 25 Economic Risk ......................................................................................................................................... 26 Changing Consumer Preferences ............................................................................................................ 27 Key Problem .................................................................................................................................... 27 Recommendations .............................................. .................................................................................................. .................................................... ......................... 28

Implementation Plan............................................................................................................................... 30 Appendix ................................................... ......................................................................................................... ...................................................... ................................ 32

 Executive Summary Summary Krispy Kreme is a doughnut manufacturer and retailer that was founded over 70 years ago and has since expanded ex panded into a global firm. After several structural changes, the company  began to expand rapidly in the mid 1990’s and early 2000’s. A few years later after realizing they over expanded and several questionable accounting practices came to light, the company’s stock  prices plummeted. New management has slowly been trying to rebuild their reputation and decrease costs which are severely hurting the company. Competition is increasingly becoming an issue based on the changing needs of o f consumers who are looking for healthier products, convenience conv enience of store locations, and low price. Krispy Kreme competes in both the quick-service quick -service restaurant sector and the U.S. bread production industry and as a result their competitors vary greatly. The top three competitors they currently face are Dunkin’ Donuts, Starbucks Coffee Inc., and Hostess who each have their own strengths

and weaknesses. While internally the company’s new management is mak ing smart decisions by  building smaller factory stores in more locations, locations, rather than traditional large stores in fewer areas which has allowed them to reach more customers and somewhat reduce costs, they are still facing a lot of store closures. Despite these financial improvements, the company is drawing in comparatively smaller revenues and still has higher costs than its com petitors in the present market. Krispy Kreme needs to focus on cutting costs and expanding their customer base even further to bring in higher revenues. This can be done by implementing new, healthy lunch options to their menu. While it will change the company’s co mpany’s traditional menu of doughnuts and sugary treats, it will help them adapt to the changing needs of consumers; without meeting the needs of their consumers they may face eventual bankruptcy.

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 Introduction Krispy Kreme is a doughnut retailer in the quick-service restaurant sector. As of January 31, 2010 they operated 582 stores in 20 countries across the world including The United States, Australia, Mexico, Saudi Arabia, and Qatar.1 In addition to their famous Original Glazed® doughnuts, they also offer other options such as doughnut holes and jell-filled doughnuts, and coffee and espresso drinks that complement their featured product. They have also recently started to offer a product called Kool Kreme® which is a homemade ice-cream that they make doughnut sundaes and other dessert items with. The quick-service restaurant sector of the economy is very competitive. Going against giants like McDonalds and Burger King, Krispy Kreme is having a tough time matching what these monster chains can offer customers. These competitors are encroaching into the breakfast market and Krispy Kreme is in danger of losing its advantage and position in the market. Unlike these other quick-service restaurants, Krispy Kreme is having trouble bringing in customers for meals after breakfast because they offer only doughnuts, coffee, and sweet treats. Based on their recent menu additions and the company’s vision statement, ―To be the worldwide leader in

sharing delicious tastes and creating joyful memories,‖2 Krispy Kreme obviously feels that they need to be more than just an average doughnut shop that sells doughnuts in the morning. Company History

Krispy Kreme was started July 13, 1937 in Winston-Salem, North Carolina. Founder Vernon Rudolph purchased a secret doughnut recipe used to produce the treats that he then sold to grocery stores in the area. However, as pedestrians walked by the factory in the morning they were enticed by the smell of fresh doughnuts and inquired if they could purchase them straight from the factory while they were still hot. Rudolph created an accessible section in the factory to 2|Page

sell doughnuts to customers walking by on the street and the first Krispy Kreme doughnut shop was born.3 With the success of the store in North Carolina, Krispy Kreme de cided that it should expand its stores in the South; this created additional revenues for the company and gave them  better name recognition as everyone wanted to get their hands on a Krispy Kreme doughnut. Unfortunately, with expansion came problems as well, and consistency from store to store was lackluster - some used too much flour and some made them too small. To solve this problem the factory created a dry mix that would be distributed to all of the stores. This helped standardize the taste of the doughnuts, but it didn’t solve the problem of shape/size. An answer to this  problem was created in uniform machines that would produce the doughnuts evenly and at a faster pace than the previous style could produce. With this new technology stores could make 500 dozen doughnuts per hour!4 When Vernon Rudolph died in 1973 the company was sold to Beatrice Foods Company and became a subsidiary of the company. Krispy Kreme’s business model was tinkered with and changed from what its core competency was - creating fresh, superior doughnuts to sell to the  public and grocery stores to one based on gaining short-term profits and not caring about the long-term health of the company as a whole. A group of franchise owners purchased the company back from Beatrice Foods in 1982 with the intent of going back to the old ways of the company; however, after the buyback, Krispy Kreme had debts that needed to be paid off and the company was stalled for some time until the mid 1990’s when they went through a huge period of expansion. Their main focus during the expansion was to sell their main product, the hot Original Glazed®. To promote this they created the famous sign that lights up to alert passerby’s that fresh doughnuts just rolled off the line. With this strategy in mind they expanded out of the

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South and moved north, moving first into Indiana and then to most places between North Carolina and New York City. They targeted markets where they felt they could come in and take a huge portion of the market share. By the end of the decade they had successfully expanded west into Texas, Nevada and California and were a national chain.5 Current Situation

Krispy Kreme is going through a tough stretch right now. Their aggressive expansion in the 1990’s and early 2000’s have come back to hit them hard. Net income has been negative

since 2003 and the company has been on the verge of bankruptcy several times throughout the  past seven years. However, 2010 is forecasted to have a positive net income based on quarterly earnings for the year. Current leadership has done a great job recreating the company’s image and getting back to the basics of the classic doughnut shop, but there is still a lot of work to do. The current situation Krispy Kreme finds itself in is based on the actions of former CEO Scott Livengood. The company was sued by shareholders after releasing its first profit-warning in May of 2004 and was accused of fudging earnings to meet expectations and receive huge  bonuses. The Securities Exchange Commission formally filled an investigation into the company and the stock price had fallen 50% in 2004.6 As the following graph shows, 2004 was the first year that Krispy Kreme reported a loss. In 2005 the company failed to file audited financial statements and Livengood resigned as CEO. It is impossible to know what the real numbers would have been had Krispy Kreme been following the guidelines from 2000-2004, but it is safe to assume that they were losing money during that time. The actions of past management have  put the current management under serious pressure to save the company.

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Compared with its largest competitors, Dunkin’ Donuts and Starbucks, Krispy Kreme’s revenues are drastically lower. Posting revenues of 6.90 and 10.29 billion respectfully, its competitors dwarfed Krispy Kreme’s revenue of 350.42 million in 2009. Low revenues have caused major problems for the company. High startup costs, coupled with falling sales, have stressed Krispy Kreme’s stores. In the period from 2004-2009 over 240 domestic stores were shut down by the company and franchisees.7 Additionally, on November 10, 2010 they announced they will be shutting down 21 of their 51 stores in Australia.8 Competition from these companies, as well as changes in consumer taste and poor expansion strategy, has put Krispy Kreme in a difficult position. A shift in consumer demand to want healthier fast-food options has hit the industry hard. Dunkin’ Donuts and Starbucks have combated this shift by offering healthier menu items,

something Krispy Kreme has failed to do. Dunkin’ Donuts offers healthy breakfast sandwiches and a variety of flatbread sandwiches that are based on both morning and lunch styles.9 5|Page

Starbucks is even more impressive when it comes to variety on its menu as they offer pastries, muffins, fruit plates, salads, oatmeal, yogurt, and breakfast sandwiches to complement their main  product, coffee.10 Even with a forecasted profit for 2010, how Krispy Kreme addresses and answers the health craze in the upcoming years will define the company’s future. The magnitude of growth in the late 1990’s and locations chosen for expansion have not worked as well as Krispy Kreme had hoped. These seemed like solid investments when the management was participating in unethical accounting methods. Why are these franchises now failing and have they been failing since they opened? Almost all new locations have competition in the form of multiple options for consumers to choose from, putting Krispy Kreme at a disadvantage. For example, ―Many of the new Krispy Kreme outlets were located within the food courts of major shopping centers, where rents are high and consumers can immediately compare retail offerings‖11. Other quick-service restaurants can offer more selection than Krispy

Kreme can and this makes them more appealing. As primarily a doughnut shop, Krispy Kreme is viewed as a snack and not a full meal which is leading to the aforementioned store closures.

 External Environment Analysis General Environment 

Krispy Kreme competes in the Bread Production in the United States industry, NAICS code 31181. This includes everything from the production for wholesale or retail of breads, pies, doughnuts, cakes and other bakery items. It’s in the mature stage of the life cycle with annu al revenues of $36.5 billion, and roughly 8,495 small to medium sized firms competing. 12 The two major players are Sara Lee Corporation (7.0%) and Flowers Foods, Inc. (6.0%), which together make up thirteen percent market share of the industry.13 The other eighty seven percent is made

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up of smaller, yet still highly competitive firms like Hostess Brands (4.5%), Bimbo Bakeries USA (4.5%), and Krispy Kreme (