Case Analysis of Krispy Kreme Doughnuts, Inc

Company Background

In 1933, Vernon Rudolph bought a doughnut shop in Paducah, Kentucky, from Joe
LeBeau. His purchase included the company’s assets, goodwill, the Krispy Kreme name, and
rights to a secret yeast-raised doughnut recipe that LeBeau had created in New Orleans earlier.
Several years thereafter Rudolph and his partner, in order to look for larger market, moved their
operations to Nashville, Tennessee. Other member of the Rudolph family joined the enterprise,
opening doughnut shops in Charleston, West Virginia, Georgia.

In 1937, Rudolph quit the family business, and left Nash Ville taking with him a Pontiac,
$ 200 in cash, some doughnut-making equipment and the secret recipes, after efforts of finding
other location, he settled on opening Krispy Kreme doughnut shop in Winston-Salem, North
Carolina. Rudolph chose Winston-Salem because the city was developing into a tobacco and
textiles hub in the Southeast and he thought that a doughnut shop would make a good addition to
the thriving local economy. Soon afterward, Krispy Kreme doughnuts became highly popular in
the area.

In the early 1950’s Rudolph met Mike Harding who was then selling powdered milk to
bakeries. They became partners and they believed that the key to Krispy Kreme’s expansion was
to have contact over each step of the doughnuts baking process and he able to deliver hot
doughnuts to customers as soon as they emerged from the frying and sugar-glazing process.

In 1976, Beatrice foods bought Krispy Kreme and proceeded to make a series of changes.
The recipe was changed and the company’s script-lettered signs were altered to produce a more
modern look. Customers reacted negatively to the changes and business declined. A group of
franchises led by Joseph McAleer, bought the company from Beatrice in 1982 and the new
owners quickly reinstated the original recipe and the original script-lettered signs.

To grow revenues, the company relied mainly on franchising “associate” stores and
opening a few new company-owned stores. Associate stores operated under a 15 years licensing
agreement that permitted them to use the Krispy Kreme system within specific geographic
territories.

In the early 1990’5, with interest rates falling and much of the company debt paid down,
the company began experimenting with expansion. Under the new president and Chief Executive
Officer, Scott Livengood, expansion was done because the company’s exclusive focus on the
southeastern US market was not working for the company.

By mid- 1990’s, company executive determined that it was time for aggressive
expansion, for repositioning of the company and for shifting the focus from a wholesaler bakery
strategy to a specialty retail strategy that promoted sales of the company and emphasized the
“hot doughnut experience” another strategy was to expand the number of national stores through
franchises and company-owned stores.

In late 1990 and early 2000, the company prepared an initial public offering of the
company’s stocks. The old corporate structure of Krispy Kreme Doughnut Corporation was
merged into a new company- the Krispy Kreme Doughnuts, Inc. Krispy Kreme was the second
best performing stock among all initial public offering in the United States in 2000. In fiscal year
2001, Krispy Kreme reported sales of $ 301 million and profit of $ 14.7 million.

As far as Krispy crème is id concerned, its long term debts including current maturities
were paid out as of 2001. The company had a chain of company- owned stores which were doing
good on the business. It has developed a vertically- integrated supply chain which generated a
substantial fraction of both revenues and earnings. The company has good distribution line/
system of its products. The company had the model of selling in wholesale channels and less on
brand which contributed to stagnant sales. The company’s exclusive focus was on southeastern
U.S. market which hand cuffed efforts to leverage the company’s brand equity and product
quality in the rest of the U.S.

However, the company had a great potential for growth to become the industry leader in
the U.S. and internationally where its sores were welcome because it’ appeal extended across all
major demographic groups including age and income. It has the potential to develop its products
and be competitive with industry leaders. However, the company was faced with stiff
competition from industry leaders, Dunkin Donuts and other competitors who were operating
and known internationally and have already acquired markets abroad.

By some estimates, the Doughnut industry in the United States was a $4.7 billion market
in both 1998 and 1999. Americans consumed an estimate 10 billion doughnuts annually- just
over three dozen per capita. There was a little indication that the health consciousness craze and
had swept the United States in recent years had cut much into sales; industry observers and
company officials attributed this in part to doughnuts being an affordable indulgence and the
tendency of many people to treat themselves occasionally.

The dominant and longtime industry leader was Dunkin’ Donuts, with worldwide 2000
sales of $2.32 billion, 5,200 outlets, and close to a 45% U.S. market share based on dollar sales
volume. Aside from the doughnut product the company was also the largest coffee- and- baked-
goods chain in the world, selling 6.4 million donuts and 1.8 million cups of coffee daily.

Compare to Krispy crème, Dunkin’ Donuts put more emphasis on coffee and
convenience. According to one Dunkin’ Donuts executive, “ People talk about our coffee first.
We’re food you eat on the go. We’re part of your day. We’re not necessarily a destination store.”

I. TIME CONTEXT: 1990

II. VIEWPOINT: Scott Livengood, CEO

III. CENTRAL PROBLEM: A new strategy that will make the company as the top industry leader

in United States of America and internationally.

IV. OBJECTIVES:

Must objectives:

1. To be able to make a new strategy to become the top industry in U.S.A and internationally.

2. To be able to develop its products and be competitive with industry leaders.

3. To be able to acquire and operate markets abroad.

Want objectives:

1. To be able to sell more stocks with higher prices and increase shareholder value.

2. To be able to gain and increase its annual sales.

3. To be able to innovate and produce more products other than doughnuts.

V. AREAS OF CONSIDERATION

Strengths:

1. Krispy kreme as one of the industry leaders in U.S.A

2. Krispy kreme as the second best performing stock among all initial public offering in the U.S in 2000.

3. Krispy Kreme become known for "hot doughnuts experience".

Weaknesses:

1. Strong competition for Dunkin' donuts.

2. Franchising business of the Krispy Kreme is not doing well.

Oppurtunities:

1. Market expansion in U.S and internationally.

2. Menu expansion by having products other than doughnuts.

3. New slogans that will be remarkable with the customers.

4. Improve franching business.

5. Create healthy menu options.

 Threats:

1. Majority of the people in U.S become weight conscious.

2. People become aware of the fact that sweet doughnuts contains more calories.

3. Dunkin' donuts as the dominant and longtime industry leader.

VI. ALTERNATIVE COURSES OF ACTION

ACA#1: Develop or innovate other products other than doughnuts such as coffee, cakes etc.

Advantages:

1. Attracts new customers and may keep existing customers.

2. May increase products or items sold per purchase.

3. May increase sales and revenue.

4. May decrease losses

Disadvantages:

1. May increase the research and development cost of the company.

2. May not fit on the taste of the customers.

ACA#2: Close and sell other stores that are already unprofitable and focus on local areas

international markets.

Advantages:

1. Focusing on the stores unsold may lead to its profitability.

2. Increase capital from stores and properties that are sold.

3. Will reduce the maintaing cost of non-profitable stores.

Disadvantages:

1. Taking the risk of closing stores may result to bigger losses.

2. Workers of the non-profiltable sold stores will lose their jobs.

3. May lose customers from closed and sold stores.

ACA#3: Formulate marketing strategies such as having advertisements on television, radio

or social media sites.

 Advantages:

1. May increase its sales and revenue

2. Will attract more customers specially kids and teenagers.

3. The company will be known in U.S and global areas easily.

Disadvantages:

1. Will increase the research and development cost and expenses.

VII. RECOMMENDATION

I recommend the ACA#1. In order for the Krispy kreme doughnuts to achieve its goal to be the
top leader in the industry of doughnuts or pastries the company must develop or innovate new products
other than doughnuts such as coffee, cakes and etc. This will attract more customer not only adults but
specially teenagers and children. This may increase the company sales and revenue and may decrease
losses. Although, this may also increase the company's research and development cost.

VIII. PLAN OF ACTION.

1. The company's board of directors approves the innovation and development of the products and
menus with healthy options.

2. The CEO prepares plan of action including the following:

a. Each branches or stores conduct a research of what products does the customers want/
doesn't want by distributing survey forms to each customers.

b. Sort and examine the menu. Remove the products that are less sold by the customers.

c. Hire the best nutritionists for help in making the healthy options in the menu.

d. Start innovating some products.

e. Review the pricing of the products and the quality of the products.

f. Submit the plan of action to the board of directors.

g. Implement the plan.