Krispy Kreme

Executive Summary
Founded in 1937, Krispy Kreme Doughnuts has become the most
revered doughnut brand in the U.S.It is one of the leading chain of
doughnut outlets with more than 1,000 locations throughout the
United States and in about 25 other countries. The company owns and
operates 114 locations and franchises the rest. The shops are popular
for their glazed doughnuts that are served fresh and hot out of the fryer.
The company is known for marketing not just the doughnut itself but
also the unique experience that customers get from eating them.
However, in early 2009, Krispy Kreme was one of the 15 firms listed to
have a high probability of being bankrupt during the year
Executive Summary
• In an attempt to bolster earnings, Krispy Kreme wanted to claim more
of the profits from their franchisees, so they decided to repurchase
existing franchises. The stores themselves were raking in major cash,
while Krispy Kreme only saw 4-5 percent of the earnings. While this
seemed to be a good idea, it was done too fast. They leveraged the
company to a breaking point facing $146 million worth of debt. As a
result, its stock has fallen more than 90% from its peak to $6.48 for
the trading day ended April 19, 2005. Turn-around specialist Stephen
Cooper was able to buy some time with desperation financing, and if
he will heed our advice, earnings will once again be “Hot and Fresh."
Statement of the Problem
Krispy Kreme faces a multitude of problems stemming from, among
other things, poor management decisions. More specifically,
management has disregarded signs of too rapid expansion, engaged in
questionable accounting practices and failed to recognize the effects of
their wholesaling operations. Management has continually denied that
the company’s problems stem from its own actions and blame the
recent decline in sales to the popularity of low-carb diets.
Objectives
•To increase stock price to the previous levels and thereby increase
shareholder value.
•To correct inaccurate entries in the financial statements and to present
a clean and unbiased report.
•To implement extensive marketing measures for its brand and
products and investment strategy for both on and off premise
operations.
•To increase sales and profitability in terms of its core business,which is
selling doughnuts.
•To gradually gain back analysts’, investors’, and lenders’ trust
confidence in the company in the succeeding months.
Alternative Courses of Action
1. To conduct a corporate-wide financial and operational audit of random
stores, both company-owned and franchised to determine causes of negative
ratio of revenues to expenses.
2.To develop or enhance the marketing department
3.To conduct a cost-effectiveness analysis of the supply chain.
4.Close unprofitable stores and focus on other domestic areas and global
market
5. Short-Term-Retention Bonus Plan
6. Long-term-EVA bonus plan
7.To cut their employee head count, cease growth,
To conduct a corporate-wide financial and operational audit of
random stores, both company-owned and franchised to determine
causes of negative ratio of revenues to expenses.
• The Quarterly Operating Performance (Peter and Donnelly, 2009)
tables demonstrated that from Fiscal Year 2004 to Fiscal Year 2005,
performance declined in both venues. However, this information
does not detail either the reason for the decline, or why the report
indicated that the company-owned stores’ performance declined at a
faster rate than did the other franchisee operations. The benefit(s) of
conducting this audit would be that it would assist management in
identifying causes of increased operating expenses in corporate stores
vs. the franchise operations. Another benefit would be in discovering
the accounting errors in existing systems that resulted in reduction of
net income by from 2.7% - 8.6%. Management needs clear and
accurate information in order to make appropriate operating
decisions for the company.
To develop or enhance the marketing
department
• Flawed or absent marketing research has resulted in store closings
and or expansions that were not backed up by market data or
evidence that this investment would be feasible. This is needs to be
counteracted quickly by the development or enhancement of the
marketing department. This should be done by recruitment of
competent in-house marketing specialists to develop a marketing plan
and carry it out either through in-house efforts, or (preferably),
through the use of an external marketing firm.
To conduct a cost-effectiveness analysis of the
supply chain.
Krispy Kreme should investigate other supply chain methods for
coffee and flour products. Simply based on the amount of flour that
Krispy Kreme would be purchasing, many suppliers would provide
volume discounts, which could benefit the company by lowering
operating costs.A side benefit, which was mentioned in the earlier
situational analysis, would be the access to market data from outside
sales personnel, bringing the market “gossip” with them. This will
provide Krispy Kreme with some “incidental”, secondary market
research on their competitors. Krispy Kreme is known for donuts, not
for coffee, and historically has suffered from mixed reviews.
Close unprofitable stores and focus on other
domestic areas and global market
When one of your business branches is incurring a loss and others is
gaining a profit it would be beneficial to just close the former and focus
on the latter. Operating both a business that is losing and gaining is not
good. The profit that you get from the gaining branch will just go to the
branch operating with a loss. It would be better if you will just close the
other branch and sell your assets there,with this step you will
undertake losses will be minimize and you might use the money you
get from selling your assets in expanding your business that is gaining
or maybe krispy kreme might study other possible market that it might
delve into
Short-Term-Retention Bonus Plan
Since rumors have been spread concerning bankruptcy, mid to top level
employees could be frightened of the idea of not being employed.
Because of this, employees might think their only option is to seek
employment elsewhere. If these key employees are lost, the chances of
turning the company around will be slim to none. We feel in order to
address this issue; a short-term retention bonus plan should be
implemented to provide incentives for employees to stay with the
company by compensating them for their risk of an uncertain future.
The Plan is set up to provide monetary benefits every six months, until
the compensation committee determines otherwise, to employees that
stay with Krispy Kreme.
Another problem that faces Krispy Kreme is that management does not
own a sufficient amount of stock. Current information reveals that
insiders are trading large portions of stock they currently own. These
trends illustrate that management is unconfident in the companies’
future earnings as well as acting in its own self interest. As stated
before, management over expanded which caused financial distress.
Another goal of the retention bonus plan would be to provide an
incentive to employees for holding on to their stock, as well as to
motivate management to increase its ownership in the company. The
reason for doing this is to better align the interests of both
management and stock-holders. With management and stockholders
interests on the same page theoretically, management will start making
decisions that are more beneficial to the company, by maximizing the
value of the firm. These decisions will lead to an increased stock value
for all.
Long-term-EVA bonus plan
Last year salaries of top executives increased by ten percent which
makes their base salaries slightly above the median percentile of base
salaries paid for comparable positions within similar companies (KKD
proxy statements). The increase in salaries is based on earning growth,
personal performance, and increased responsibilities of the individual.
We feel that this is an inadequate way of measuring salary increases
because basing salaries off earnings growth has also given
management a reason to expand quickly without paying attention to
inventories and increasing expenses.Another reason why using
earnings growth is misleading is because management is using false
accounting information.
Its false accounting methods, as well as accounting practices in general,
have led Krispy Kreme to reward its employees based on overstated
performance/earnings and to make poor management decisions such
as over expanding. In general the accrual accounting method does not
match cash flows, but matches expenses to revenues instead of
recognizing when they are paid (Rich).
The new plan will call for a decrease in base salaries and an increase in
the amount of compensation at risk based on the company’s EVA.\
EVA will not only improve the quantitative data of the company, but
will also help in the development of the company management
framework. Having EVA criteria will arm management with the
knowledge and tools to better manage the company by establishing a
strong criterion for decisions.
To cut their employee head count, cease
growth,
As stated prior, Krispy Kreme has been spending a great deal of money
buying back franchises. This action alone has been causing Krispy
Kreme to spend hundreds of millions of dollars in order to accomplish
this directive. These actions are an attempt to increase their revenues
by having a larger percentage of each stores profits.
Krispy Kreme needs all the free cash it can find in order to meet future
debt payments and continue operations. In order to free up cash for
the debt payments and to continue their core operations Krispy Kreme
will need to cut their employee head count, cease growth, and sell off
any operations that are unprofitable.
ANALYSIS
ENVIRONMENTAL ANALYSIS
Krispy Kreme Doughnuts, Inc. was founded in 1937 and is
headquartered in Winston-Salem, North Carolina. Krispy Kreme is a
major competitor in the restaurant industry, known primarily for its
donuts. Near the end of 2004 and the beginning of 2005, the economy
began to slow. Other business in competition with Krispy Kreme began
to crowd into its market and expansion plans that Krispy Kreme had
projected had to be scaled back due to falling sales. Consumer interest
in reduced carbohydrate consumption, including ,but not limited to,
the interest in and popularity of low carbohydrate diets, such as the
“Atkins” and “South Beach” diet plans have been blamed for declining
sales in pre-packaged (grocery store) donuts.
Industry Analysis
Their leading competitors are “Dunkin Donuts”, with worldwide sales of
$2.7 billion (2002) 5200 outlets worldwide and a 45% market share
based on dollar sales volume, and “Tim Hortons”, a Canadian-based
company, which has expanded in the U.S. Markets. “Tim Hortons” sales
in 2002 in the U.S. (160 outlets) and Canada (2300 outlets) were a
combined $651 million.There are constant threats of new competitors
in this industry.Competitors are always coming up with substitute
products to attract customers.
The Organization
Krispy Kreme’s business strategy is focused on revenue from their
company-owned stores, royalties and franchises fees , and sales of the
mixes, specialty coffees and donut making equipment. Their
organizational structure was simple. They felt strongly that the
franchising was the best way to go, as it involved little risk for them,
provided income, and at the same time, put more of the responsibility
on the franchise holders. In 2001, cash flow return on equity
investment for franchises was at 91%, so attracting franchises was not a
problem. In 2003, the company’s business strategy was to add enough
new stores and increase sales enough to achieve 20% annual revenue
growth and 25% annual growth in earnings per share. However, they
failed to invest in product development beyond the “let’s try that”
stage.
The Marketing Strategy
It is difficult to determine where the marketing department resides
within the organization, as very little evidence of market research exists.
Krispy Kreme’s marketing plan seems simple on the surface; they don’t
appear to have put much effort into marketing their product. The
company spent very little on advertising, depending largely on word of
mouth, and local publicity. Store openings were popular events in the
communities, so often newspapers and other media provided free
publicity for the events. This strategy seems to still work well for new
store openings, but would not be sufficient to generate continuing
business. This is evidenced by the fact that even while new stores are
opening, older stores within the same market are having to close. In
short, the company’s marketing strategy appeared to consist merely of
allowing its product to sell itself.
SWOT ANALYSIS
STRENGTH
•Strong Brand Recognition and Recall
•Krispy Kreme makes it possible for different organizations throughout
the community to use their product as a fundraiser.
•Krispy Kreme has Strong Channel of Distribution
•4.Employees are better trained.
•5.Expanded assortment of offerings at KKD stores including beverages
•6.It has a unique brand and variety of freshly made donuts.Wide
appeal of signature hot original glazed doughnuts
•7.KKD can offer to have customers watch product being made at the
donut theater.
• OPPORTUNITIES:
• 1.Growth in two-income households will increase snack-food
consumption
• 2.Untouched domestic locations
• 3.Increasing popularity of coffee shops and bakery cafes
• 4.Customer receiving "Hot-Donut" now instead of waiting
• 5.All equipment and Uniforms are supplied
• 6.Penetration into foreign/intl. Markets and popularity of American
foods and fashion in overseas markets
• 7.Americans continue to experience time-starvation
• 8.Acquisition of Atlanta Bread
• 9.Expansion of new locations (Maine, Mass)
• 10.Entertaining opportunities moving from home to work
environment
WEAKNESS
• Manufactures all equipment internally in its Manufacturing and
Distribution Department
• Non-interactive website
• No online ordering capability
• Uncertainty of International markets
• KKD snacks are not healthy
• Limited product line (heavy reliance on doughnut sales)
• Overextended (i.e., Montana Mills acquisition)
• Pricing in some locations
• Bad Relations with Franchisees (cost of equipment, packaging,
ingredients etc)
• No other Standout Products (Weak Menu)
THREATS:
• Competitors like Dunkin Donuts, Tim Horton’s,Starbucks and other
National Chains/Specialty Eateries.
• Low-carb trend in eating preferences
• Increasing cost of Ingredients
• Increasing utility and fuel costs
• All-natural, organic, healthy eating trends
• Krispy Kreme stores went up too fast
• 7.Cultural differences in breakfast and snack foods
• 8.Increase in eating at full-service restaurants combined with a
decrease in the use of fast-food restaurants
• 9.Store locations too scattered
EXTERNAL FACTOR EVALUATION (EFE) MATRIX OF Krispy Kreme Doughnuts

Key External Factors Weight Rating Weighted Score

Opportunities
1 Growth in two-income households will increase snack-food 0.14 4 0.56
consumption
2 Untouched domestic locations 0.09 3 0.27
3 Increasing popularity of coffee shops and bakery cafes 0.06 3 0.18

4 Channel expansion possibilities (i.e., Internet pre-ordering) 0.07 4 0.28

5 Penetration into foreign/intl. Markets 0.08 3 0.24

6 Technological advancements 0.05 3 0.15
7 Acquisition of Atlanta Bread 0.04 2 0.08
8 On-Premise sales royalties 0.04 2 0.08
Threats
1 Competitors like Dunkin Donuts, Tim Horton’s, Starbucks and other 0.10 2 0.2
National Chains/Specialty Eateries.
2 Increasing cost of Ingredients 0.08 1 0.08
3 Store locations too scattered 0.07 2 0.14
4 Increase in eating at full-service restaurants combined with a decrease 0.08 3 0.24
in the use of fast-food restaurants
5 Cultural differences in breakfast and snack foods 0.04 2 0.08

6 All-natural, organic, healthy eating trends 0.06 1 0.06

TOTAL 1.00 2.64

Total weighted score for the Krispy Kreme external Factors is 2.64 whichindicates that the business has above average ability to
respond to external factors.
 INTERNAL FACTOR EVALUATION (IFE) MATRIX of Krispy Kreme Doughnuts
Key Internal Factors Weight Rating Weighted Score
Strengths
1
Strong Brand Recognition and Recall 0.14 4 0.56
2
Wide appeal of signature Hot Original Glazed Doughnuts 0.08 4 0.32
3
Strong Channel of Distribution 0.06 3 0.18
4
Customers watch product being made at the Donut Theater 0.05 3 0.15
5
High customer satisfaction with Fresh Quality Donuts. 0.08 4 0.32
6
Doughnut machine Technology 0.09 3 0.27
7
Gained Reputation through various fundraising programs 0.05 3 0.15
8
New fall product line of donut called Spice 0.04 3 0.12
Weaknesses
1
Lack of more International locations in the United Kingdom, Japan 0.10 1 0.1
and Spain
2
Limited product line (heavy reliance on doughnut sales) 0.09 1 0.09
3
KKD snacks are not healthy (need to consider low-calorie donut) 0.06 2 0.12
4
No online ordering capability 0.05 1 0.05
5
Bad Relations with Franchisees (cost of equipment, packaging, 0.06 2 0.12
ingredients etc)
6
Pricing in some locations 0.05 1 0.05
TOTAL 1.00 2.6
Total weighted score for the Krispy Kreme internal factor is 2.6 which is above average.So it is internally strong
and aggressive approach.
Key Success Weight Krispy Dunkin Tim Starbucks McDonalds
Factor/Strength Measure Kreme Donuts Horton’s

Quality/Product 0.15 8/1.2 7/1.05 5/0.75 9/1.35 6/0.9

Performance
Reputation/image 0.10 8/0.8 9/0.9 4/0.4 8/0.8 5/0.5
Manufacturing capability 0.20 7/1.4 8/1.6 5/1 9/1.8 6/1.2
Technological skills 0.05 7/0.35 6/0.3 4/0.2 8/0.4 7/0.35
Dealer network/distribution 0.05 4/0.2 6/0.3 4/0.2 7/0.35 5/0.25
capability
New product innovation 0.05 6/0.3 5/0.5 5/0.25 8/0.4 5/0.25
capability
Financial Resources 0.05 5/0.25 6/0.3 4/0.2 5/0.25 3/0.15
Relative cost position 0.05 5/0.25 4/0.2 5/0.25 6/0.3 5/0.25
Customer Service 0.30 7/2.1 8/2.4 7/2.1 7/2.1 8/2.4
Capability
Sum of Weights 1.00
Weighted Overall 6.85 7.55 5.35 7.75 6.25
Strength rating
Analysis of Competitive Profile Matrix:
The Firm with the largest overall competitive strength rating enjoying
the strongest competitive position is Starbucks followed by Dunkin
Donuts and then Krispy Kreme. Here Krispy Kreme score exceeds Tim
Horton’s and McDonalds. So Krispy Kreme is at net competitive
disadvantage against Starbucks and Dunkin Donuts.
Krispy Kreme attempts to win their market share through superior
doughnut quality and vertically integrating back into their company to
generate sales in coffee and other beverages.The strategic plan of
Krispy Kreme Doughnuts is to produce hot, fresh doughnuts that a
customer can receive right off of the assembly line. They create
business through sales at company-owned stores, royalties from
franchised stores along with franchise fees, and selling franchised
stores pre-made doughnut mixes and doughnut making equipment.
They created sales volume from both on-premise sales at Krispy Kreme
stores and off-premise sales at supermarkets and convenience stores.
Krispy Kreme strategic plan changed store operations to showcase their
superior product and allow flexibility of new store sizes. Every Krispy
Kreme store is designed as a doughnut theater which allowed
customers to see the entire doughnut process take place. After
doughnuts were produced, stores turned on neon signs saying HOT
DOUGHNUTS NOW. The major strength of Krispy Kreme is their product,
and people come here because this is the only place that you can
receive a fresh hot doughnut. Krispy Kreme has also started to alter
store sizes because some markets do not require the standard 7,000
square-foot store.
Another major advantage to Krispy Kreme is the vertical integration
that took place with Digital Java Inc. Now Krispy Kreme can control the
sourcing and roasting of their own coffee which ensures that the
company has strict quality standards and consistency. They have also
created Krispy Kreme Manufacturing and Distribution that has
produced sales to their franchisees by providing equipment to their
FINANCIAL ANALYSIS
According to a financial statement filed by Krispy Kreme Doughnuts, Inc.
filed 10/31/06 for the Period Ending 01/29/06, lower average weekly
sales had a disproportionately adverse impact on company store
profitability due to the significant fixed or semi-fixed, as a result, the
Company closed 14 stores in fiscal 2005 and 47 stores in fiscal 2006.
The lower sales in the franchise stores had a direct impact on the
revenues of the Krispy Kreme Manufacturing & Distribution (KKM&D),
as well as revenues from royalties. According to this financial
statement, Krispy Kreme Doughnuts, Inc. is “...vertically integrated to
help maintain the consistency and quality of products throughout the
Krispy Kreme system.”
A loss incurred in fiscal 2005 reflects impairment charges of
approximately $159.0 million related to goodwill, other intangible
assets and property and equipment associated with the Company
Stores business segment, and approximately $35.1 million related to
the Company’s discontinued Montana Mills segment. According to the
report, “The Company incurred a loss from continuing operations of
$157.1 million in fiscal 2005 compared to income from continuing
operations of $49.8 million in fiscal 2004.
OPPORTUNITIES SO STRATEGIES WO STRATEGIES
1. Increasing popularity of coffee 1. Development of bakery cafés 1. Increase products offered in locations
shops and bakery cafés (i.e., coffee, sandwiches)

2. Popularity of American foods and 2. Development of store locations in overseas 2. Develop Montana Mills in a way that
fashion in overseas markets markets fits the mission of KKD

3. Growth in two-income households 3. Increase locations to be convenient for busy 3. Increase locations
traffic areas in several markets
4. Americans continue to experience 4. Provide special offerings geared towards 4. Offer standardized, but value pricing
time-starvation encouraging people to bring doughnuts to work compared to Starbucks

5. Entertaining opportunities moving 5. Continue to be innovative in technological

from home to work environment applications that can improve efficiency

THREATS ST STRATEGIES WT STRATEGIES

1. Competitors like Dunkin Donuts and 1. Focus on signature glazed doughnuts as a 1. Develop new product offerings
Starbucks differentiating advantage over competitors

2. Increase in eating at full-service 2. Offer nutritional information with an emphasis 2. Offer value-based and consistent
restaurants combined with a decrease on new low-carb, low-calorie, or organic pricing
in the use of fast-food restaurants offerings

3. Low-carb trend in eating 3. Develop low-carb doughnuts

preferences
4. All-natural, organic, healthy eating 4. Develop doughnut made with organic
trends ingredients
Tows Matrix Analysis
After doing the analysis of Krispy Kreme in terms of its strengths,
weaknesses, opportunity and threats we were able to figure out that
Krispy Kreme's major strength is its strong brand recognition.
Customers are well-aware of signature glazed doughnuts which makes
it a trademark for Krispy Kreme. It also has a strong channel of
distribution which makes it easily available to its customers. However,
the problem area for Krispy Kreme is basically its limited product line; it
relies too much on the sales of its doughnuts. It needs to come up with
innovative products as its competitors can always have a fair chance of
stealing away Krispy Kreme's customers. In order to retain its customer
base, it is really important that Krispy Kreme should try to diverse its
product lines. Another major problem lies with the absence of its
stores in some areas, while the pricing of its products in the other areas.
• The management needs to analyze the products demand and the
potential in various areas, and based on the analysis it must open the
branches wherever suitable. it also needs to take care of the pricing
of the products and it should see the products should not be over-
priced in some areas where the customer cannot afford to spend
much on the food items.
• Krispy Kreme can see its major opportunities lying in the fact that
there is an increase in the popularity of coffee shops and bakery cafes
and its has become a hotspot for youngsters as well aged-population
where people can come to relax and have an informal meeting with
their colleagues. So it should make use of this opportunity and should
come with better ideas to cater the market.
CONCLUSION
During the Krispy kreme stock price run-up of 2000-3 a series of
warning signs appeared, but investors seemed to ignore them. While
each of these signs individually do not presage a coming disaster, when
taken as a whole they should have served as a warning to investors.
Publicly-available documents show extensive insider share-selling,
significant conflicts interest among senior managers and the Board of
Directors, an unwise investment in a non-core business, high turnover
in the CFO position, a willingness to buy out the franchise rights of
insiders of premium prices, a history of operating loss at the franchise
level, a willingness to use accounting games to avoid putting debt on
the balance sheet, and a disturbing consistent trend of beating
quarterly EPS targets by just enough to earn significant bonuses for
executives.
• Wise investors should not have been surprised when the stock price
began to fall precipitously in 2004 and the company (followed quickly
by the SEC) began an investigation into its management decision-
making and accounting practices.
Recommendation
• Because management wanted more power, pay, prestige, and perks,
they chose manipulate the numbers to support their actions. Our
plan will change the way management thinks by restructuring the way
they receive their pays and bonuses. We will encourage management
to own more stock, which will solve the stockholder-management
conflict. We also have a long-term plan that will force management to
base their decisions off of EVA instead of earnings growth.
Management will then make better informed decisions, on monetary
and operational aspects. We feel that the earning solutions along
with the short and long-term plans will restore Krispy Kreme to the
industry leader it once was.
• Having EVA criteria will arm management with the knowledge and
tools to better manage the company by establishing a strong criterion
for decisions. Less time will be spent on making decisions as well as
knowing what projects to undertake by better understanding what is
good for the company. In the future, management will be better at
evaluating business opportunities, freeing up much needed time.
Management can better spend this time searching for opportunities
instead of bailing itself out of trouble.at current and long term costs,
time value of money, and how money can better serve them
elsewhere. This new implementation will cause Krispy Kreme’s
management to think outside the box and to find other ways to add
value, either through core business improvements or by doing
something that is cost effective and allows them to increase
growth.This will not create negative competition among management
because all will be positively impacted through the team’s actions
• We also believe that krispy kreme need to conduct a corporate-wide
financial and operational audit, including but not limited to, company-
owned and franchised stores to determine causes of the negative
ratio of revenues to expenses. It is this analyst’s opinion that ample
data exists to, simultaneously and as part of this audit, conduct a
cost-effectiveness analysis of the company’s supply chain, i.e., their
use of a vertically integrated supply chain, to determine if this
method is, and will continue to be, the most efficient method over
time (Alternative CIt is believed that the results of this audit would
provide senior management with the clear and accurate information
required to make appropriate financial and operating decisions for
the company.
Additionally, operations information would provide critical data to all
levels of management, from the most senior levels to line supervisors
at corporate headquarters, as well as providing useful information to
franchisees to guide them in their financial and operational decisions.
This in turn could result in higher revenues and lower expenses at all
levels which would benefit both the franchisees and the Krispy Kreme
Doughnuts, Inc. According to The Center for Audit Quality (CAQ),
“Auditors conduct a systematic examination to consider whether the
financial statements are fairly presented and free from material
misstatements.” (2009, page 3). Therefore, it is also believed that,
regardless of the outcome from the audit reports, potential investors’
confidence will be enhanced if information is believed to be accurate as
released.