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Thursday, May 31, 2012

Krispy Kreme

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Vernon Rudolph bought a doughnut shop in 1 from Joe LeBeau. Rudolph’s purchased included the rights to the Krispy Kreme name, the secrete doughnut recipe, and all company assets. Rudolph moved the doughnut shop from Paducah, Kentucky to Nashville, Tennessee looking for larger markets when his family joined the operations and opened other shops in West Virginia, and Georgia. The doughnut shops produced, marketed, and delivered fresh doughnuts to local grocery stores. Rudolph became dissatisfied with the slow growing business conditions, so he closed up all shops and moved to N. Carolina and opened the first Krispy Kreme. At this time they still delivered doughnuts to local stores but not directly to customers. The people of Salem, N. Carolina love Krispy Kreme doughnuts so much that they started stopping by to purchase doughnuts. With so many requests Rudolph built a dirve through window for retail customers. By the late 150’s Krispy Kreme was located in 1 states with about doughnut shops and soon started standardizing the shops through the exterior and the production process.


In 16 Krispy Kreme started implementing a repositioning strategy for the company because of increased competition. Krispy Kreme is being pushed to keep up with other competitors in the market place. Krispy Kreme is trying to keep up with their competitors with out losing the current market share in the U.S.


Strategic Profile (Shaye)


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Krispy Kreme wants to better compete in the market place to gain more of the market by 0%. Through increasing their product lines to have more than just doughnuts like fritters, muffins, bagels and turnovers and variety of each one of these categories would better match the competitor offerings. The variety of products offered would bring a wider range of people who would buy from Krispy Kreme. Adding a variety of beverages to their menu would also bring in customers who would have not normally stopped at Krispy Kreme.


Krispy Kreme is a Broad Differentiated Company by the way they allow the public to watch the doughnuts being made in the stores from beginning to end. Some of their competitors also offer this but never advertise it to consumers therefore a majority of people don’t know that they can watch the process. Another way they differentiate is the red sign that tells the public that they have fresh doughnuts ready to sell. The red neon sign is a distinction that the public also recognizes. This process of watching the doughnuts being made and the red neon sign flashing “Fresh Doughnuts” has created a recognizable brand image for Krispy Kreme.


The special recipe of Krispy Kreme has been kept secrete for many years and way they have kept it within the Company is by being vertically integrated. KK Manufacturing and Distribution manufactures the machinery and produces the doughnut mixes that the franchisees use in their stores. One reason they manufacture the machines is so that they can be ensured that each machine will perform the same operation so there is no difference between the doughnut making process. They also produce the mixes for the doughnuts to keep a “consistent recipe quality” throughout the Company and franchisees. They control the production process very well through making sure that each batch of mix is correct by making doughnuts from the mix they just produced, before they ship out the package mix to their franchisees. The other reason Krispy Kreme manufactures and produces their own machines and mixes is to make the franchisees purchase everything from them, which is another means of bringing in profits. In 17 KK Manufacturing and Distribution was the second largest contributor to Krispy Kreme’s over all operating income.


External Analysis (Russell)


Krispy Kreme Doughnuts has many customers that rave they are the best Donut producer in the U.S. However the case gives good examples of customers belonging to Krispy Kreme’s competitors that say LaMars, Tim Horton’s, and Winchell’s Donuts are the best donut producers. LaMar’s donuts won the countries favorite donut award given by Gourmet Magazine. These competitors are important because they are growing very rapidly along with Krispy Kreme, and they seem to be concentrating in similar market regions.


Dunkin Donuts is probably Krispy Kreme’s largest competitor. Dunkin Donuts is so large they want the competition from Krispy Kreme, they say there customers are so loyal that Krispy Kreme’s advertising will increase sales for Dunkin Donuts. The Mom and Pop shops are confident in themselves as well, they say the market is so large that Krispy Kreme will not hurt their sales. Donuts are an affordable indulgences therefore the market is large enough to support many donut/coffee/deli variety shops.


Krispy Kreme is going to have to go global if they want to take the largest share of the donut market, Dunkin Donuts, LaMars, and Tim Horton’s are prospering in several countries. Krispy Kreme does have an advantage on their competition with their secret yeast recipe that gives the donuts a large and lightweight appeal that the customers really seem to like. Krispy Kreme is vertically integrated which helps them control the quality the franchises are putting out as does their testing laboratories. Krispy Kreme wholesaling their product to supermarkets is a good way to up production in effect lowering the overall cost of each donut produced, it is also a good way to get their name out there and to get more unaware consumers to try their product. Many of Krispy Kreme’s competitors mass produce donuts for wholesale purposes, so it is important for them to strategies on being a quality direct sales franchise and wholesale distributor. Vertical integration plays a key roll in allowing this to happen


Krispy Kreme and Dunkin Donut chains are in a high velocity industry, where highly vigorous growth is important. The IPO in April of 000 is of great benefit to Krispy Kreme as it will help raise needed capital for growth and their name being traded on the stock exchange will help its image throughout the U.S. Overseas growth is very important. Many foreign countries are much more health conscious than the U.S., however Krispy Kreme donuts have a lower fat and calorie content than most of their major competitors in most all their varieties of donuts. Donuts are also an inexpensive way to indulge in a sweet treat or pick me up and donuts are usually an impulse purchase and people do not weigh the health issues against them as much as they might for a dinner or larger meal.


External Assessment (Georganne)


Dunkin Donuts is the industry leader in doughnut sales. They held 45% of the market share in 001 and 77% in 1. Dunkin Donuts places more emphasis on coffee and convenience than Krispy Kreme. Dunkin Donuts has been able to keep its leadership position by providing a wide variety of products to include coffee (their #1 seller) and other drinks, adding a low-fat muffins, bagels, etc., and making their doughnuts smaller so that the nutritional value is slightly lower in calories and fat.


Internal Assessment (Lakendra)


Krispy Kreme offers its yeast-raising donuts and coffee, but its competitors offer a variety of foods such as bagels, muffins, cookies, tarts, etc.; broadening customer appeal. My analysis shows that in order for Krispy Kreme to expand the market, it has to keep up with its competitors and give customers what they want. Krispy Kreme developed a vertically integrated supply chain used to manufacture the mixes for its donuts and its donut-making equipment. My analysis shows that vertical integration increases its capital investment and increases the cash used for the financing activities which is not good, but it, in turn, produces both revenue and earnings from the mixes and equipment. Vertical integration can cause Krispy Kreme to lock into its own supplies instead of branching out and building alliances which, in turn, can cause it to lose buyer demand. Krispy Kreme can use its own supplies by outsourcing its donut mixes to stores. This analysis can improve flexibility and brand recognition, but it can also cause a risk to the company as well. The donut mix can easily be copied by competitors, which may create major problems for the company in the future.


Krispy Kreme has a problem with lack of advertising. It relies on newspapers, media, and word of mouth. My analysis shows that if the company advertises, not just in the same vicinity as the Krispy Kreme stores but nationwide, it can increase name recognition. Advertising may also help increase the profit margin, and it could possibly help the company expand in the foreign market. Re-opening in areas of 100,000+ homes may also increase revenue and improve brand recognition.


My analysis also shows that the company-owned revenue is much greater than the franchised revenue as well as the operating expenses and the operating income. An increase in the royalty fees for the franchises may increase their revenues. Krispy Kreme has multiple activities going on at one time which can get confusing. The company should decide if it wants to concentrate on being a donut store or a wholesaler. Donuts are popular in grocery stores due to convenience; the customers do not have to make a special trip to the donut store to purchase Krispy Kreme donuts. They are also popular due to the store being unavailable in that city or state. Having a Krispy Kreme donut store is popular as well due to the regular commuters and neighborhood residents. My analysis shows that the donut store is doing relatively well opposed to just selling wholesale. Krispy Kreme has estimated store revenue of $,600,000, cash flow of $60,000, cash flow margin of 7%, and a cash flow return on equity investment of 1%. In 001, the operating expenses totaled $50,60 which was high, but it yield a net income of $14,75. Overall, Krispy Kreme is in good financial standings, but it could create a better outcome after it produces a variety of products that customers want, it decides what specific thing it wants to focus on as far as a store or wholesaler, start advertising, and increase royalty fees. After Krispy Kreme focuses on these particular assessments, it has the potential to sustain a competitive advantage.


Internal Assessment (Georganne)


The current ration for 001 is 177%. This means Krispy Kreme has plently of money available to pay current liabilities.


Krispy Kreme offered stock for sale in January 1 and January 001 and each time the sale increased their cash flows and in 16 and 1 Krispy Kreme set aside funding for restructuring. For 001 dividends paid increased approximately .5 times more than previous years.


From 17 Revenue increased approximately $0,000 million each year until the year 000 when it doubled and in the year of 001 it tripled.


Sales of donut mixes and customized doughnut-making equipment amounted to 6% of revenues and company store revenues were 71% and franchise operations revenues were %. During our analysis, we were amazed to discover the amount of revenue generated by company owned stores considering they only make up 6% of total stores.


In 001, Krispy Kreme had 6% of company-owned stores and 64% were franchised stores out of a total of 174 stores. Franchised stores make up 64% of total stores yet revenues earned by Krispy Kreme from franchises only make up % of total revenues. Might want to create new strategy to increase these revenues.


Krispy Kreme has vertically integrated by providing the only source for all donut mixes and customized doughnut-making equipment needed in all its stores and its franchises. The doughnut-making equipment is one-of-a-kind in that in each store you can watch the doughnut making process from start to finish.


Recommendations (Patrick )


(need to add financials for royalties to show what % net profit each store makes so you can see haw much royalties could be charged while franchises still make a healthy profit.)


Krispy Kreme needs to raise the royalties that are paid by the franchises as well raise the initial franchise fee. In 001 there were 86 franchises and 58 company owned stores. Revenues from Krispy Kreme franchises made up only percent of total revenues, while the 58 company owned stores made up 71 percent of total revenues. For the number of franchises that there are and the amount average profit that each store makes the revenues from franchises should be substantially greater than they are. The current franchise royalty fee is only 4.5 percent which needs to be to around 10 percent. The franchise fee of $0,000 to $40,000 needs to also be raised. This fee is earned back in a matter of weeks with the sales that an average Krispy Kreme makes.


Krispy Kreme needs to develop the national market more before it ventures out into the international market. The U.S market has not reached it fullest potential yet. Although they are not allowing anymore franchises in the U.S, they need to receive more royalties from the current franchises before allowing anymore to be sold. The applications that they are accepting for international franchises are a good hold for the future but they need to wait a few years before they develop into these markets. The international markets are not the same as the national markets. Health factors are a much bigger issues in the international markets. Donuts are horrible for your health and in these more health conscious parts of the world, Krispy Kreme will not succeed with there current product line. Before entering these markets Krispy Kreme needs to broaden its product line like many of their main competitors have done to things such as bagels and muffins. Also the amount of disposable income is not as great as it is in the U.S. Canada will be a good international market for Krispy Kreme to begin selling franchises in, but it needs to hold off on selling any franchises in other countries.


Krispy Kreme also needs a little more definition to each of its stores. The stores are currently performing to many functions. There should one main store in each region dedicated to producing goods for the sale to grocery stores and fund rasing activities. The companies’ goal is to provide Hot and Fresh donuts to the customers. This is not as easily attainable when you are trying to make donuts for these customers as well as for the other locations. The retail Krispy Kremes should only focus on, on premise sales and all other sales should be done through a new distribution type center. This would also increase sales since franchises where only paying 1 percent royalties off of sales of this nature.


Alternatives (Hussain)


Since Krispy Kreme is a constantly growing, the franchise fee can be increased. This will generate the much needed funds for the internal growth of the company. Currently Krispy Kreme has 181 stores in 8 states by the year 000. This can be easily expanded to all 50 states and the number of stores can be easily doubled by the end of this year. A good example to follow would be Dunkin Doughnuts. They have expanded not only taking the doughnut market but also have succeeded in outselling bagels in the bagel dominating society.


Another good alternative could be selling of franchise for distribution center instead of individual stores. This would help the company to reach more stores, greater number of people and will definitely generate more income. Selling distribution franchise will also reduce the company overhead cost since they will be dealing with less people on day to day basis. This will insure product availability and will also ensure easily accessible to he consumers.


Recommendation


On the basis of my study of this case, there are few recommendations we would like to make. First of all, Krispy Kreme needs to expand their product line and consideration for inclusion of beverages should also be taken into account. This will ensure equal competition with Dunkin Donuts on similar platform. Krispy Kreme may have better line of doughnuts, but because its main competitors have things other than doughnuts it can easily outsell it. To tackle this issue Krispy Kreme must include new line of product including but not limited to bagels, drinks and muffins.


Another recommendation would be to carefully consider the international market before launching its product. Krispy Kreme also needs to expand within United States more and get a firm hold in the US market before considering launching international franchisee. A good example to follow would be of its main competitor. The best place to launch would be the area where Dunkin Donuts has been successful.


Some people also think that an easy way to acquire more market is to go to places with its product where no one has ever been. This might mean to go into rural areas and places other competitors have not reached yet.


Another way to acquire greater market share would be through aggressive advertisement campaign. This will lead to greater sale and increased market share.








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