GRIN - Krispy Kreme Business Case Study (2024)

Index of contents

1 Krispy Kreme’s Strategy

2 Krispy Kreme’s Financial Performance

3 The Incident of

4 Accounting Tactics

5 SWOT Analysis Conclusion

6 Krispy Kreme’s Competitive Strengths and Weaknesses

7 Recommendations for Krispy Kreme’s Comeback

Bibliography

1 Krispy Kreme’s Strategy

Krispy Kreme Doughnuts (KKD) projects an image as “the Stradivarius of doughnuts,” creating a unique enriching experience that increasingly gains customer enthusiasm and loyalty. Krispy Kreme’s melt-in-your-mouth, hot, sugar-glazed doughnuts, the “doughnut theater,” and the “HOT DOUGHNUTS NOW” feature are clearly a few of the differentiating factors it attempts to make itself identified with. Fortunately, this appeals to a broad base of buyers; demographically, buyers come from all walks of life: all genders and ages, from skilled to blue-collar, high-income to low-income workers.

KKD’s strategy provides the company three sources of revenue: (1) Sales at company-owned stores; (2) Royalties from franchised stores and franchise fees from new stores; and (3) Sales of doughnut mixes, customized doughnut-making equipment, and coffees to franchised stores. KKD shifted in focus from a wholesale bakery to a specialty retail bakery to promote and increase sales at the company’s own retail outlets. The company emphasized the “HOT DOUGHNUTS NOW” feature as a response to customer feedback as well as a form of local advertising. The company was able to boost its store sales-volume by combining on-premise sales at its stores to capture customer base and then to secure off-premise sales at supermarket and convenience stores for packaged sales.

Futhermore, KKD gave reliance on franchising “associate” stores and opened a few new company-owned stores as a means of expanding nationally and internationally. However, franchise licenses were granted only to candidates who have experience in multi-unit food establishments and who possess adequate capital to finance the opening of new stores in their assigned territory. It is remarkable how the company built a vertically-integrated value chain that supplies both company-owned and franchised stores proprietary doughnut-making equipment as well as doughnut mixes.

Additionally, another important strategic step was the acquisition of Digital Coffee as another vertical integration step that not only provides additional source of revenue, but also improves the caliber and appeal of the company’s on-premise coffee and beverage product^[1].

2 Krispy Kreme’s Financial Performance

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Figure 1: Comparison and Development

KKD’s strategies have successfully exploited its business model’s revenue sources. As a measure of its success, KKD’s total revenues from fiscal year 1997 – 2003 shows a compound average growth rate (CAGR) of 24.4%, which is above average when compared to industry standards. The net income growth rate of 54.86% is exceptionally attractive and clearly shows the profitability of the strategies. The increase in the number of stores is quite lagging and this is an indication of KKD’s expansion potential.

The net profit margin at Krispy Kreme grew from below 10 to nearly 20 per cent between 2000 and 2003, but tumbled in early 2004. Revenues grew from 2000-03 because of company store and franchise expansion, increasing volume, deployment of more space-effective equipment, and a growing number of two-income households in the U.S. The company’s increasing margins were due in large part to significant operating leverage. In 2001, operating expenses accounted for 83.4% of revenues; by February 2004, this amount was reduced to only 76.2% of revenues because of increased volume. The company was operating efficiently through 2003, with a persistently high 8.5% net profit margin, compared to the 5.6% margin at Starbucks Coffee, an industry leader and competitor; however, recent quarterly data makes the company’s operating leverage all too evident. A declining revenue base during the first six months of 2004 caused operating expenses to rise to 85.5% of revenues. In the six months ended August 2004, Krispy Kreme shows a net loss of $18 million, which compares very poorly with last year’s net income of $26 million.

A large part of this loss results from the divestiture of Krispy Kreme’s failed acquisition, Montana Mills Bread Company. The company wrote off nearly $35 million on impaired goodwill and store closings. Nonrecurring expenses aside, income from continuing operations of $16 million is still lower than the $26 million the company earned in the first six months of fiscal 2003^[2].

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^[1] Kaufmann, Patrick: Krispy Kreme Doughnuts, Inc., An Analysis, 2004 Boston

^[2] Flannery, Mary: Krispy Kreme Case Study, 2006 Santa Cruz