Case #3: Krispy Kreme Doughnuts- 2008Point of View: Steven A.

Lineberger, Senior VP Strategic

Growth

Problem: What strategic plan should Krispy Kreme Doughnuts (KKD) undertake to recover from its weak
performance and attain stability of operations?

Areas of Consideration:

Strengths:

1. The KKD operates globally with its company stores and franchise stores.
2. Both company stores and franchise stores are required to buy supplies and ingredients from the KK
Supply Chain. Through this the company avoids buying of costly supplies from other supplies. KK
Supply Chain is part of KKD that is why supplies and ingredients are offered at lower prices.
Moreover, it contributes to the total revenue of KKD.
3. Each KKD factory has the capacity to produce 4,000 dozens to 10,000 dozens of doughnuts daily.
4. KKD offers variety of flavours to its customers.
5. The company offers not only doughnuts but also espresso and frozen beverages, which adds to its
competitiveness in the industry.
6. Revenue from franchise stores is increasing.
7. The processes in its bakery are entirely automatic.
8. KKD is involved with fundraising projects in which products are offered at discounted price, which
may attract customers to buy.
9. Products are also distributed in grocery and convenience stores though off premise sales.
10. KKD entices customers with their doughnut making “theatres”.
11. The company has loyal customers.
Weaknesses:
1. KKD’s total sales decreased to approximately .5% in the 2 nd quarter fiscal year 2007. Also, revenues
in 2nd quarter fiscal year 2008 decreased compared to the last year’s revenue. There is also a
significant decrease in the KK Supply Chain’s revenue of 16.8%. As a result, the company has been
incurring losses for 4 years already. This is definitely a weakness and it questions the going concern
of the company.
2. The company may not have the ability to pay its short term debts with its available current assets due
to the low current ratio which is .9 in both 2008 and 2007. The ideal current ratio is 2 and the
company is far from this. Thus, the company is not solvent.
3. The company does not have an updated registered Uniform Franchise Offering Circular which
prevents it from offering franchises to new domestic franchisees.
4. The company’s marketing strategy is not an effective way to attract customers.
Opportunities:

1. There is a rising health consciousness in buying foods.

2. In Asia and Middle East, there is a growing demand for sweet treats and foreign brands are popular
in these countries; thus, initiating the idea of expanding to these locations paving way to more growth
for the company.
3. There is an increasing US population that dine out due to the fact that a lot of the population are busy
working which is believed to increase the snack food consumption and growth of doughnut sales.
Threats:
1. The food product price inflation has been increasing.
2. There is a strong competition in the quick service restaurant industry. KKD’s main competitions are
Starbucks (SBC) and Dunkin’ Donuts. Looking into the number of stores established by these two
SBC has approximately 12,000 stores, Dunkin’ Donuts has over 7, 000 stores while KKD only has
 395 stores. In addition, Dunkin’ Donuts offers healthier snacks. For instance, a doughnut Dunkin’
Donuts only has 180 calories while a KKD doughnut has 200 calories.
3. Fast food is said to be a major contributor to obesity.
4. Some international franchisees buys supplies from their domestic supplier instead of buying from the
KK Supply Chain, which reduced the income generated from this segment.

Alternative Courses of Action:

1. Open franchise stores in countries in Asia and Middle East
One of the company’s strengths is its franchises, which include factory stores and satellites, because it
generates the highest revenue for the company. Franchise revenue come from franchise fees and royalties as
based in the franchise program to associates and area developers. Moreover, the company’s income from
foreign operations is considered more profitable or better than its domestic operations. Using these two
strengths, KKD will establish itself more in foreign markets specifically in Asian countries and Middle East
countries where demand for sweet treats are high and where foreign brands are patronized more. Aside from
Hong Kong, Indonesia, Japan, the Philippines and South Korea, the company will target other Asian markets
such as China, Malaysia, Thailand and Middle East countries like Pakistan, Qatar, Saudi Arabia and UAE.
These are actually areas where its man competitors are. Opening its products to these places will increase the
income from franchises and a great way to increase market share of the company. Also, franchising will
improve opportunities for future financing.
However, the current marketing strategy of the company may not be enough to create a “buzz” over their
products. For instance, the on premise sales which include counter sales and window sales need the customer
to go to the store itself when in fact an effective marketing strategy is bringing the products to the customers.
KKD needs to its new customers in order to increase awareness of the products. Enticing the new markets
will entail additional costs for market research and feasibility. In addition, the company will need additional
capital and human resources to manage the expanded operations. To get the needed capital, KKD may resort
to debt financing or equity financing. Currently, its assets are financed by its borrowings with as debt ratio of
77% while equity ratio is only at 23%. But looking into its ability to pay short term debts, the company is not
solvent enough, this can cause for banks to be hesitant to lend money for this expansion. Also, with the net
loss for 3 years, it will be also difficult to ask the owners to finance considering that the return on their
investment is -14% in 2007 and -46% in 2006. But, if the shareholders demand higher returns, expansion has
the highest possibility of reviving the losses since franchise revenues generate the highest income for the
company. Lastly, franchising is the trend for almost all US companies, which is a forward integration
strategy. However, franchising may be a too aggressive strategy for the company because it is said that
integration strategy are more effective if there are excessive resources. In the case of KKD, there are not
enough resources to integrate as its short term financial position is weak as explained earlier.
2. To focus its operations domestically
One of the company’s weaknesses is the deteriorating domestic sales and revenues. Focusing on this
weakness and taking appropriate action such as monitoring movement of sales and costs to reduce the
amount of possible losses which will improve the company’s standing in the industry. It will be difficult to
revive the -18% revenue for company stores and the -10% change in revenue for KK Supply Chain; thus, the
management must have a good cost and expenses control team.

3. The company will offer healthy doughnuts and snacks to its customers.
One of the major concerns of KKD is its decreasing sales and revenue and in order to recover from this
negative trend, the company will improve and modify its doughnuts. This can be done through incorporating
healthy ingredients in the doughnuts or by offering healthier snacks. Since some of the customers are
becoming health conscious, offering something new and promoting a healthy lifestyle will entice new
customers to purchase. KKD products will also be attractive to the international market, since it is not only
the Americans who are health conscious, while keeping the existing customers. However, costs will be
incurred for the research and development, hiring experts on nutritious cooking and introducing it to the
market with a better marketing strategy will also be costly. But of course, cost and benefit analysis should be
done. The selling price must be enough to recover the costs incurred. But introducing it in a high price might
make customers hesitant to buy. Moreover, Changes in the menu may not click with some customers and
there is also a tendency that it wil not sell if not created to the preferences of a customer.

4. Continue costs reduction

With the weak financial status of the company, a defensive strategy may be wise to employ as compared
to the intensive ones. KKD has been reducing costs and in 2006 costs reduction for non-recurring showed a
decline of 68%. Moreover, the company sold some of its factory stores since 2005 in the hope of reversing
the negative bottom line figure. As seen in the income statement, their net losses are improving, if the
company continues with this, the KKD may experience a sudden increase to a profit. However, the strategist
will have to work with limited resources and face pressure from shareholders, and employees.

Action Plan:

In order for KKD to revive itself from the net losses, which originated from the accounting irregularities,
the company will face the competition with their strengths. KKD will open some more franchise stores both
factory stores and satellites in countries where demand for its products are high.

Objectives:
• To be able to raise revenue for the company
• To introduce Krispy Kreme doughnuts to the other side of the world
According to these objectives, the company should be able to find competent and confident to-be
franchisees that will manage the franchise according to the operational system of the franchisor (KKD).
KKD as the franchisor will provide training to the franchisees to ensure efficiency in its business operations.
Also, the research and development will continue to create additional flavours to the KKD menu.
Moreover, it will also be a challenge for the department to make healthy doughnuts because of the rising
consciousness to health particularly the issue on obesity. KKD will continue to purchase equipments and
supplies from its KK Supply Chain. The production for these new franchisees should be at the minimum
production capacity of 4,000 doughnuts for its initial operations since customer awareness for the products
are not yet establish in those areas. In addition, for its marketing strategy the company will reach out to its
customers through print ads and television advertisements. With this approach the company will be able to
raise more product awareness. The on premise and off premise sales will still be employed. The target
market should be kept in mind to be able to create the right advertising concepts. KKD’s customers are from
the middle and more from the high end market; it will be wise to open franchises where these people hang
out and those near offices. The manner that the franchisee will operate will depend on the franchise
agreement and this includes incorporating the marketing strategy of the franchisor. With these new
developments and marketing approach, the company is in deeply in need of funds. In financing this
expansion, it will be difficult to borrow money from the banks especially with the result of its financial
ratios. In addition, the accounting irregularities from the past may also have an effect on the external users of
the company’s financial statements. The finance department has to borrow from those banks that still have
faith in the company. Like the ones to whom the company has an established relationship. The costs incurred
by KKD for facilities of the franchisee will be recovered from once the franchisee invested or buys his or her
franchise. Franchising will allow more financing opportunities for the future which will be helpful to the
company in reviving the losses. When it comes to the human resources, it is up to the franchisee which
employee or staff should he or she hire in the business.

In evaluating the strategy, the organizational performance must be monitored especially looking into
the trend of the bottom line figure for the income statement. Variances reports should be done examining the
progress of the operations of the franchisees. Looking into the different financial ratios will be helpful in
evaluating such as ROI, return on equity, profit margin, market share, earnings per sahre, debt to equity, to
name a few.