7TH APRIL,2011

TRM 472.01 BUSINESS STRATEGY CASE ANALYSIS: Krispy Kreme Doughnuts (KKD) -2009

STUDENT:

NE E ROMAN

STUDENT ID: 2006104603 INSTRUCTOR: MARIA DOLORES ALVAREZ

Introduction

Krispy Kreme Doughnuts origins are in Louisiana and Kentucky. First shop opened in Winston Salem, North Carolina in 1937 by Vernon Randolph. After the initial success in selling doughnuts to local grocery stores in North Carolina, KKD expanded throughout the Southeast. The doughnuts making process was transformed into mechanized process with t he introduction of an automatic dough cutter and extrusion process replaced cutting. In 1976, KKD became subsidiary of Beatrice Food but a group of franchisees purchased it from The Beatrice Food. During 1980s, KKD tried to expand and strength it position in southeastern United States. In 2000, Krispy Kreme was successful in raising significant capital with its initial public offering. Its stock price quadrupled, the growth of opportunities looked endless. But in 2004 a period of steep declined began for K rispy Kreme. Company blamed the low carbohydrate Atkins diet for their loss. Because their sugar glazed Krispy Kreme has too many calories and carbohydrates and public became more health conscious. For the last three years, KKD posted operating loss and to day their sales still declining.

External Environment
Trends in the Industry: y y y

Due to economic reasons franchisees left the company. The Convenience store chain, Sheez, decided to open its own kitchen. Health conscious public does not want to consume glazed doughnuts, because of the high calories and high carbohydrates in it.

Coffeehouses and ice-creamshops started to sell doughnuts.

Competition

One of the doughnut competitors of the company is Dunkin Donuts. It has the largest number of stores in the industry. Dunkin Donuts 60% of sales come from beverages and coffee. The rest of the sales come baked goods. Their target market is working people who want a cup of coffee and quick bite to eat. Another doughnut co mpetitor is a Canadian company, Tim Hortons.It has over 3400 stores in Canada and more than 500 stores in US. With the growth of coffee houses such as Starbucks , Caribou CoffeeJava city and some ice cream shops started to sell doughnuts and other baked ite ms. Like Dunkin Donuts, Starbucks has strong brand loyalty toward its quality products. Starbucks has less food offering then Dunkin Donuts but they focus on creating Starbucks experience which means providing an atmosphere to drink coffee and rewarding the customers through their Starbuck Reward Program. Krispy Kreme also sells its doughnuts in major retail outlets. So, KKD also competing with any firm selling goods in supermarkets, convenience stores, mass merchants and other retail establishments. Dolly Madison, Entremanns Hostess and regional brands are competitors of Krispy Kreme in this marketing channel. Exhibit 1 shows doughnut sales for calendar year 2007 for Krispy Kreme and competitors.

Exhibit 1: Doughnut Sales for Calendar Year 2007

Doughnuts 2007
Top 10 Brands of Donuts (forthe 52 weeksendingNovember 4, 2007)

Brand Name Krispy Kreme PrivateLabel Entenmanns HostessDonettes EntenmannsSoftees LittleDebbie Entenmanns Extreme Popems Hostess Merita Blue Bird

DollarSales

UnitSales

$130,409,808 $88,304,008 $85,233,104 $83,839,496 $33,668,032 $30,860,856 $17,163,728 $17,089,810 $13,363,270 $11,534,341

42,774,572 38,358,984 25,656,796 36,445,068 10,643,769 24,837,084 5,244,544 5,745,155 6,303,118 8,092,483

Internal Environment

Divisions and Operations

There are 2 types of KKD stores. The first one is the Factory Store which contains a doughnut- making production line in addition to a retail establishment. Factory stores support other sales channels to better penetrate into the market. Some of the factory stores which are mainly focused on serving the other sales channels are called
commissaries Commissaries have higher production capacities.

The second one of KKD store is the Satellite Store which has two formats. One of them is Hot Shop which has heating equipment and allows customers to have hot doughnut experience. The other one is Kiosk Format. Both formats of the satellite stores are smaller than the factory stores.

Marketing
Krispy Kreme offers 20 different doughnut products and the key product is hot glazed doughnut. Not only selling doughnuts, KKD sells the eating KKDs doughnut is a unique experience. This experience enhanced by providing customers the seeing the doughnuts produced in many stores. KKD stores whether owned by KKD or franchisee has same requirements and design. These requirements and design includes products, appropriate sales channels, packaging, signage, use of logos and trademark s, marketing and advertising, and the furniture and fixtures. The places o products in convenience and supermarkets, on shelves or on specifically designed display units or cases.

Finance
KKD revenues comes from 3 main sources which are company stores, franchise fees and royalties from franchisees, vertically integrated supply chain .

Company stores ; revenue is generated through on premises and off premises sales.

On premises sales means customers comes to factory or satellite stores, off premises means the sale of the product is done in convenience and supermarkets.
Franchise; franchise fees and royalties form franchisees.

KK Supply Chain; It produces doughnut mixes and doughnut making equipment for

manufacturers which all sores are required to buy.

Financial Ratios The Current Ratio :CurrentAssets / CurrentLiabilities =

75.806 / 39.616 = 1.91 As thecurrentratio is equal 1 ormorethan 1 meansthecompanydoes not haveanyliquidityproblems. KKDsratioseemslikethere is no problem in terms of liquidity.

Quick Ratio:

Current assets Inventory / Current Liabilities= 75.806 15.587 / 39.616 = 1.52

Current ratio overestimates the companies short term financial strength because it includes the inventory which can not be easily converted to cash. The KKD quick ratio looks looks good in terms of short time liquidity.

Debt Ratio:

Total Debt / Total Assets = 137.171 / 194.926 = 0.71

As KKDs debt ratio indicates, the companies 71% of assets are financed with debt. It is a high ratio.

Times Interest Earned:

EBIT / Interest Charges = 4.761 / 10.679= 0.4

KKD Times Interest Earned ratios shows that the company could not cover even the interest charges. KKD is borrowing money to paying interest charges.

Average Collection Period:

Account Receivable / Average Sales Per Day (360) = 20.770 / (383.984 / 360) = 19.5 days

Company collects money approximately in 19.5 days. It is not a long time of period.

Inventory Turnover:

Cost of Goods Sold / Inventory = 345.007 / 15.583 = 22.1

To decide the ratio is good or bad, industry averages should be taken into consideration. High turnover can be strong sales or ineffective buying, low turnover can be poor sales and excess inventory. 360/22.1 = 16.28 days means the average turnaround of the turnover.

Fixed Asset Utilization:

Sales / Net Fixed Assets = 383.984 / 85.075= 4.5

The fixed asset utilization ratio indicates that 1$ of assets creates 4.5$ interms of sales.

Profit Margin:

Net Income / Sales = -4.061 / 383.984 = -0.01

KKD Profit Margin signals the loss. Every dollar of the sales, the company loses 0,01 cents.

ROA:

Net Income / Total Assets = -4.061 / 194.926 = -0.02

ROA gives the clue of how effectively the company is converting money it has to invest into net income. The higher the ratio is better because it means the company is earning more money on less investment. But in the case of KKDs ratio, it is too low.
ROE:

Net income / Common Equity = -4.061 / 57.755 =

-0.10

ROE shows the companys profitability by revealing how much profi t it generates with the money shareholders have invested. KKD ROEs show that there is no profit, the equity is losing money.
Distrubution Channels

KK Supply has 4 business units.

1.Mix Manufacturing: All doughnuts mixes are produces in Winston Salem. For

international operations, a concentrate is produced in Winston Salem, shipped internationally and mixed with local sources of supply.
2. Equipment: KKD manufactures its doughnut making equipment but smaller

machines such as tunnel ovens used in hotshops are sold by the company but manufactured by others.
3. Beverage Program: KKD beverages purchased from third parties.

4. Distribution Centers: Krispy Kreme Doughnuts have two distribution centers

which are located in Winston Salem and Los Angeles area. These centers supply domestic stores and provide supplies for some international operations.

MIS
KKD has two IT systems. One of them is the Point of Sale (POS) system which helps the company to manage on premises sales and provides headquarters and permits stores to communicate. Headquarters can get the sales information from the POS system and the stores can easily download the price changes of the products. The second IT system is Enterprise Resource Planning (ERP) system that supports the financial and operating needs of the company.
Mission

KKD has a focused on the unique and distinctive product of the company. It is a specific mission. In the values part, they mentioned the customers, employees, product and services, self-concept and the public image of the firm.
Vision

In the vision of the company, they emphasize on the doughnuts product and their expansion strategy.
SWOT Strengths y y

Western Brand Manufacturing own mixes and equipment.

Weaknesses y y y

Having only 2 distribution centers Beverages are outsourced. The supply chain problems, the freshness of the product.

Opportunities y

Markets outside US can be good source of growth (Especially Middle East and Asia)

Threats y y

Atkin Diet- more health conscious public. The rapid growth of coffee houses which sells doughnuts.

Main Problem:

With the changing consumer demands, KKD faced wit h loss

Possible Alternative Strategies:

Product Development and Backward Integration

Implementation

From my point of view, KKD should create a new product which targets the health conscious people. For instance, they can produce light doughnuts, with low calories and carbohydrates. My second suggestion is that they should make backward integration to reduce the risk in beverages. They can produce their own beverages or they can buy the supplier of beverages to reduce the dependency of them. As mentioned in the case, they can focus on more Middle East and Asia, their brand has a value in those regions and people are not conscious as the American People.