University of the Philippines Cebu College Management Division Lahug, Cebu City

Mgt 190 Case Analysis # 1 Krispy Kreme Doughnut ± 2008

Date Due: December 16, 2010 Date Submitted: December 16, 2010

Submitted to: Professor Jesus C. Cinco, Jr.

Submitted by: Group 2 Krystel Kaye Lee ± Team Leader Regie May Berou Anya Camille Gabucan Bea Marie Jaen Glorabelle Resma

EXECUTIVE SUMMARY
Krispy Kreme envisions itself to become one of the world¶s best and well-known doughnut companies. To reach this, they have to capitalize on their key strengths to combat the changes in the macroenvironment. Competition in the industry is fierce with dominating players and their ability to respond to the growth opportunity in the international scene. The U.S. market is also rapidly trending toward healthier food products which Krispy Kreme does not currently offer. For the past years, they have been incurring net losses despite their turnaround strategy. Total revenues for the company stores and supply chain have been decreasing since 2005. Becausethey failed to update their Uniform Franchise Offering Circular, they are suffering from opportunity losses in domestic franchisees. Their current production capacity is also underutilized because of a larger number of factory stores over satellite stores. After the internal and external factor evaluation, its best move is to hold and maintain. This will be achieved by implementing the market penetration strategy which focuses on aggressive marketing and increasing franchisees in the existing markets. This is the best strategy because it entails the least cost for Krispy Kreme and they can utilize their current resources for implementation. However, in this fastgrowing industry and fierce competition, they may be left behind. The company will utilize a mix of 25% debt and 75% equity. The generic strategy of the firm is Focused Best-Value provider. This will encompass the market penetration strategy for a fully-effective implementation.

Group 2

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Group 2 Table of Contents PROBLEM STATEMENT VISION MISSION OBJECTIVES Financial (refer to Balanced Scorecard) Strategic (refer to Balanced Scorecard) SITUATION ANALYSIS Internal Environment Analysis Financial Analysis Value Chain Analysis External Environment Analysis General Environment Industry Environment Competitive Environment 1 1 1 1 1 1 2 2 2 3 3 3 4 4 Page | i STRATEGY FORMULATION STRATEGY EVALUATION STRATEGY IMPLEMENTATION 4 6 7 2/24/2011 5:32 12 .

.......................................................... 10 Appendix 2: Horizontal Analysis of Income Statements .............21 Appendix 11: Strategy Formulation Matrix I (SWOT Matrix) ............... ............................ ................... ............................... .................................... ........ 12 Page | ii Appendix 4: Key Financial Ratios and Their Trends ................ 17 Appendix 8A: Industry Analysis (Current) .................................... .............. ......... 27 Appendix 15: Gantt Chart ± Strategy Implementation .......................................... .................... .......... 11 Appendix 3: Horizontal Analysis of Balance Sheets ...........................16 Appendix 7: Tabulation of Key Trends/Changes in the Macroenvironment ...... ..... 13 Appendix 5: HA/VA of Store Count .......... ......................... ...................... ............. ................................................................................................................................................. . ........................................................... ................. 20 Appendix 10: EFE Matrix ... 19 Appendix 9: Competitor Analysis ................ ........................26 Appendix 14: Balanced Scorecard ............ . ................................. .............................Group 2 List of Appendices Appendix 1: Vertical Analysis of Income Statements .........................................22 Appendix 12: Strategy Formulation Matrix II (IE Matrix) ....................18 Appendix 8B: Industry Analysis (Next 3-5 Years) .25 Appendix 13: Strategy Evaluation Matrix ....... ........................ .. ............................................14 Appendix 6: IFE Matrix...................................................................................................... 28 2/24/2011 5:32 12 ..............................

To employ team building activities for employees at least once a year. OBJECTIVES Financial (refer to Balanced Scorecard) y To have a positive and increasing return on equity targeting at least 10% increase annually. y We capitalize on integrity and trust to achieve success for the whole organization. MISSION In Krispy Kreme. To increase the number of franchises and satellite stores by putting up at least two stores per month annually in both domestic and foreign markets. y We commit to deliver increasing value to our stakeholders by producing better-than-average returns and taking advantage of the opportunities that come our way. Strategic (refer to Balanced Scorecard) y y y y y To increase the frequency of customer walk-ins by at least 15% annually and have improved customer feedback. y With our special doughnut-making equipment and doughnut-making theaters. y We will continuously give back to the community by helping out organizations and launching different activities for their benefit. we regularly produce one-of-a-kind doughnuts that are always sought after by our customers. motivate and reward our employees for their job security and career growth.Group 2 PROBLEM STATEMENT What would be the best strategy for Krispy Kreme to pursue in order to increase revenues and recover from financial losses? Page | 1 VISION To be one of the world¶s best and well-known doughnut companies. 2/24/2011 5:32 12 . To get at least 10% of the area population as website members annually. To launch at least one advertising campaign per quarter. y We will continue to develop. y We bake mouthwatering doughnuts that appeal to the taste of the children and young adults all over the world.

55% in 2006 to 77.24% to 78. This may be the cause of the company¶s decision to increase its cash in working capital because inventories are not moving quickly. they are not able to sell these quickly as shown in the decrease of their inventory turnover from 27 days to 32 days in inventory. This shows that they are tying up so much cash in working capital. However. Their debt ratio has increased from 73.98 times which shows that the company has now more capability to pay its annual interest charges.30% which is a significant increase from -21. Krispy Kreme has not succeeded in their turnaround strategy where they failed to generate income and a positive return on equity (ROE). stockholders want more leverage from debt because it increases expected earnings.21 times. This is also the result of closing poor performing stores. This shows that they are able to cover their short-term debts and obligations with the use of their liquid assets such as cash. showing that they have been saving on storage costs for doughnuts. and their basic earning power also went up to -4. However. This is also supported by the decrease of 15% and 10% respectively. Fixed asset turnover increased from 2. However. Total asset turnover remained relatively the same at 1.41% in 2007. The company¶s return on assets also increased 2/24/2011 5:32 12 . However. As core competencies. However. another important note is that Krispy Kreme had an increasing amount of cash from 2005 to 2007 that is not proportionate to their decreasing total revenues.43% decrease in their cost of revenues from 2005 to 2007. in their short-term and long-term debts from 2005 to 2007. Krispy Kreme offers a variety of doughnuts and beverages to go with them. they are still unable to reach optimal financial performance because of failure to attain positive figures. Krispy Kreme¶s current ratio increased from 95. This can be improved when sales are increasing and when some underutilized assets are disposed. Financial Analysis From the computation of Krispy Kreme¶s ratios.Group 2 SITUATION ANALYSIS Internal Environment Analysis A total IFE score of 2. they are performing relatively well mainly because of their massive cost-cutting. These significant improvements are mainly the results of their effective cost-cutting practices as shown in the 84. or both actions are done.77% from 12. otherwise.46 times in 2007 which means they are utilizing their fixed assets effectively to generate sales. special flavor offerings for certain seasons. Net profit margin has also increased to -8.98% wherein the company¶s net income became less negative.77 indicates that Krispy Kreme is relatively internally strong with significant Page | 2 competitive strengths that can be used to address its response ability to the changes in the external environment. along with their one-of-a-kind taste.38% in 2006. Krsipy Kreme¶s inventories have decreased 8% from 2005 to 2007. Times-interest-earned ratio has increased to -0.66% in 2006. Customers can also enjoy watching the entire doughnut-making process through their store theaters. Their gross profit margin has increased to 15.11 times to 2. Their quick ratio also increased from 68.34% in 2007.74% in 2007. Although potential creditors do not prefer high debt ratios. it still needs to improve this performance to achieve a positive figure. and a unique franchise program. they have access to many different distribution channels in both domestic and international markets. Also. Krispy Kreme will face difficulties when it decides to borrow additional funds in the future. Their doughnut-making equipment and process which give them a large capacity to produce doughnuts is one of their distinctive competencies.52% in 2006 to 97.

This change can 2/24/2011 5:32 12 . This technological innovation has given them the opportunity for notable economies of scale. and in marketing and sales. but also area developers are contractually required to develop a certain number of stores.Group 2 from -29. especially in Asia and the Middle East. Although factory stores are reducing in number since fiscal 2005. Krispy Kreme has notable considerations in their operations. Employer brand image may have decreased significantly. The domestic market is now becoming relatively unfavorable because of the growing trend for healthier food choices. Their structure complements their strategy with different executive heads for each important function. General Environment The socio-cultural changes in Krispy Kreme¶s international environment contribute a better capability to increase ROE than the domestic environment. especially in Britain. significantly increased from -75. The U.4% from 2005 because not only can the company save itself from the development and operations costs. this market is shifting toward healthier choices with the rate of overweight and potential obesity. As for the secondary activities.S. Similar in the international scene. issues in the human resources department may have been one of the number of factors that caused the failure of their turnaround strategy.89%. The bottom-line ratio. show that the number of working Americans are increasing thus. However. However. the increase in satellite stores is not yet enough to take advantage of this production. Employees may still have been demoralized after the recent layoff of employees by 31. Nonetheless. many companies are also expanding to favorable foreign countries which can lessen Krispy Kreme¶s success in these markets and hinder its potential growth.000 dozens daily per factory store. The company has a great opportunity to enter the international market.000 to 10. which was the primary market of the company. However. Demographics in the U. Factory stores still comprise 74. Their current production capacity is at 4. They are not able to take advantage of opportunities well and are not able to avoid significant threats.S.9% of the total number of stores systemwide. Page | 3 External Environment Analysis Krispy Kreme has an EFE rating of 2. specifically production and store count. because of cultural differences. it gives rise to the number of people eating out. they will encounter problems in succeeding in the European market. One of their distinctive competencies is their automated doughnut-making equipment which gives them the capacity to produce up to 10. The availability of favorable foreign countries allows the company to decrease its marketing costs because of acceptability and increase its revenues because of their love for sweets. the general management of Krispy Kreme is relatively efficient.22 which means that they are relatively externally weak.000 dozens daily. there has been an increasing number of area developers which can offer the company better results and more stores to operate. population.18% to -44. It is good to note that satellite stores by area developers increased to 286.12% which can be a result of their cost-cutting and debt leverage. and the preference for casual dining.50% to -10.8% and the retirement savings dispute back in 2005. return on equity. Value Chain Analysis On the primary activities of the value chain. now prefers healthy food products and this decreases the customer base of Krispy Kreme doughnuts.

Krispy Kreme. has a significantly lower number of stores as the two giants have thousands in different foreign countries. With this trend. Krispy Kreme also has the lowest variety of product offerings compared to the other three because they only sell doughnuts and beverages while Dunkin¶ Donuts and Tim Hortons offer breakfast and lunch choices. Considering their financial status. Tim Hortons is rated the weakest in global presence as they are only crowding one area which is Canada. are accustomed to their own choices. Page | 4 Industry Environment The doughnut industry is currently highly unattractive in general. These players are also considering entering the international market which is now getting crowded with many participants. Low-calorie and low-sugar substitutes will also be strongly marketed and preferred as the need for healthier products increase.S. STRATEGY FORMULATION The chosen generic strategy is Focused Strategy with Best Value. respectively. Also. Competitive Environment Dunkin¶ Donuts is the leader among the four dominating players in the doughnut market while Krispy Kreme comes in third. The industry remains unattractive in the next 3-5 years.S. storage costs are significantly high which increases the fierceness of competition. Krispy Kreme and Tim Hortons only have approximately 200 to 300. compared to Dunkin¶ Donuts and Starbucks. Plus. The competition among firms is fierce with a few dominating players who are playing in a slow-growing industry. calorie-packed doughnuts will be forced to go out of business or shift to developing healthy foods. Alternative # 1: Market Penetration focusing on increased market share through greater marketing effort and opening of satellite stores in current geographical areas The main source of Krispy Kreme¶s advantage is their distinctive product that invited generations of loyal customers for its one-of-a-kind taste and its special flavor offerings. In terms of U. The global market is now intensified with the global presence of a growing number of fast-food companies which lowers the company¶s ability to generate better-than-average ROE. Plus. market poses a trend toward healthy choices and the British. there is a growing trend of substitutes to snack products as the U. because of the nature of its product. In addition. Dunkin¶ Donuts and Starbucks rank first with thousands of stores across the country. end consumers have low switching costs since they can choose from many brands but still get the same product ± doughnut. Once the domestic market hits its saturation point. presence. stability would be an intensive strategy for Krispy Kreme since they are incurring net losses for the past several years. the following are several alternatives for Krispy Kreme. the players will be more aggressive to stay in the industry to protect their market share. among others. Only the economic trends are in favor of Krispy Kreme.Group 2 lower the company¶s ROE because of decreasing revenues. there will be a surge in the number of companies competing in the international market. Not only is the industry¶s stock performance improving but also the food product price inflation is leading to an increase in ROI. Marketing efforts would allow the product to be pushed to the market 2/24/2011 5:32 12 . With this generic strategy.

it will be much easier for Krispy Kreme to introduce and sell this new line. Moreover. more stores will be opened in their existing domestic and international areas. Alternative # 2: Product Development in the U. they can easily push these area developers to open more satellite stores than factory stores. With their existing presence in the domestic market where they have thousands of retail outlets including off-premise channels. it has posed a threat to Krispy Kreme.S. They can also increase the variety of their current doughnuts. Thus. the company will face more costs in changing the process of doughnut-making and introducing this concept to their employees who might resist this change. Alternative # 3: Related Diversification focusing on adding new food products such as sandwiches.Group 2 aggressively. casual dining sector which is growing more rapidly than the quick-service industry. Krispy Kreme has made a name in the doughnut industry and they could use this to their advantage where loyal customers no longer need to go to other restaurants. Intensive advertising and strong marketing campaigns to its existing markets.S. Krispy Kreme should invite more franchisees to increase its satellite stores in both of its current domestic and international markets. The main drawback for this alternative is the high cost to be incurred on the research and testing of the appropriate mix and the new taste of the product. Krispy Kreme can 2/24/2011 5:32 12 . market by providing a new. The U. Krispy Kreme can better serve the U. This would later on relate to a significant increase in market share and total revenues once effectively implemented. For this alternative. They can add new related products such as sandwiches. especially Asia and the Middle East. The doughnut company should opt to diversify their product offerings. With the increasing food product price inflation in the U. Moreover.000 dozens daily. Moreover. They must update their UFOC regularly to attract these franchisees in the U. development costs are being pulled down to improve return on investment. bagels. there is an increasing number of two-income households that increases doughnut consumption. and more beverages to their menu as what their competitors Dunkin¶ Donuts and Tim Hortons are doing. Krispy Kreme might be left behind since greater opportunity for further growth and profitability are seen in the untapped international market. The international market. bagels. This strategy provides KKD to have a major competitive advantage among others through increasing economies of scale. lunches.S. they do not need to create another supply chain for this new line. Krispy Kreme already has a vertically integrated structure. which can be sold at numerous satellite stores. market. and more beverages As the casual-dining sector is gaining share from fast-food chains. With lower calorie content of Dunkin¶ Donuts. will give the product the exposure it needs.000 to 10. Since they already have future stores opening from their development agreement with six countries mainly found in Asia. Krispy Kreme needs to reduce their calorie content to match or beat its major competitor. lunches. This will be a defensive strategy toward the U. Krispy Kreme doughnuts will be comparable with Dunkin¶ Donuts¶ and consumers will be forced to think twice on which brand is of more value. healthier doughnut menu.. market is also moving toward healthy food choices.S. also poses a great opportunity because they are both fond of sweet snacks and openness to Western brands which is what Krispy Kreme is. especially in the unsaturated international market. Also.S. Page | 5 The drawback with this alternative is that competitors are fast growing and becoming rapidly global in scope. Through this. It takes advantage of the present capacity of the Krispy Kreme factories of 4. market. At the same time. creating a healthier doughnut line With the improving stock prices in the quick-service industry.S.

S. On the other hand. UK. The major drawback of this alternative is the high expenses to be incurred for expansion. Krispy Kreme will face difficulties in achieving growth relative to their competitors. the risk is high because of the differing economic conditions of the countries to be tapped. As their U. Alternative three is rated as one because the current human resource has no experience yet of producing and selling the new products. Alternative # 4: Market Development in the international market focused on introducing present products into new geographical areas This alternative is developed from the opportunities in the international scene. the company will be able to introduce their one-of-a-kind doughnut to new markets specifically those areas where they have not entered yet. and Spain are also favorable markets that can offer growth and profitability to the company. Not only sales will increase with their population. the company will have many challenges and difficulties in getting the funds for implementing the strategy. the company is placed in a weak financial position. Countries such as China are favorable in terms of its population and fondness of sweets. Page | 6 STRATEGY EVALUATION Due to consistent losses that KKD had incurred for the past three years. licensing. These new products can significantly improve the sales performance of the company. The drawback of this alternative is that Krispy Kreme would have to exert more effort to effectively market this new menu. The existence and demand from the international markets. there are still many untapped geographical markets that may lead to increased market share and revenues. They also have to hire professionals who will recommend the products and recipes to prepare. alternative one is rated as four since KKD would not require much hiring and training of new employees and they could readily utilize their existing human resource. training would also be given to employees in order to produce such new products entailing additional cost. they are not very attractive to creditors. There will be significant costs for marketing. 2/24/2011 5:32 12 . Training cost for employees is also very high because they will have to orient them to the diversified menu. to name a few. five of which are in Asia. Alternative four is rated as three because KKD has already gone through different processes required to enter a new market. The total capacity of their production will be fully utilized once they open new factory stores and a proportionate number of satellite stores in untapped countries. With their increasing debt-to-asset ratio. Alternative two is rated as three because cost would be incurred for research and development. There is also a small possibility of cannibalization where they may lose their image as a doughnut company. a rating of four is given to alternative one since marketing the same product to the existing markets would not be that costly relative to the other alternatives. but exposure and market share will also go up. For the feasibility of human resource. Therefore.Group 2 attract more customers with their diversified menu. Moreover. Alternative two is given a rating of two since KKD would need a professional to make the new product menu. and building new stores in totally new geographical areas. While alternative three is rated as two because aside from research and development. High-income countries such as Singapore will also be a favorable market because people have the financial capacity to spend on products such as snack foods. a rating of one is given to alternative four since entering a new market will require higher investment. Given the company¶s current financial position. They are currently serving 10 foreign countries. market is going toward the saturation point. especially in Asia. With that. gives the company the growth opportunity it needs. Germany. Through market development.

These advertisements will be placed outside major malls and popular places like parks and arcades or gaming centers where families and young adults frequent to relax and to have fun. Billboard and Posters KKD should put up billboards in populated areas like city capitals of their existing markets countries. alternative one ranks the highest since it uses their existing competence in providing doughnuts with one-of-a-kind taste. Moreover. alternative one and three is rated as two because both alternatives do not directly respond to the changes in the environment. In terms of long-term profitability. having a diverse product offering would generate more revenues for the company. it is still in line with the company¶s mission. In terms of competitive advantage. This is due to the growing number of health-conscious individuals which alternative two can address and the fast-growing doughnut industry for alternative four. Intense marketing efforts may not necessarily mean long-term sales growth and developing a new product in the domestic market would not maximize their returns in the future because they are known for selling sweet doughnuts. On the other hand. Krispy Kreme will utilize 25% debt and 75% equity. Alternative four has the highest rating which is four because it is in line with Krispy Kreme¶s vision. Alternative two and three is rated as one because it would not capitalize on their competitive advantage.Group 2 For technology feasibility. Alternative two and four is rated three to consonance or response ability. In terms of consistency. This alternative is a stepping stone for Krispy Kreme to reach its vision while upholding its mission. Alternative two and three is rated as one because this would require additional technology to produce the new products. Alternative two has been rated as four because even if it is just for the domestic market. these alternatives cut their potential for growth since they are tied up with their existing market knowing the greater potential in the international market. STRATEGY IMPLEMENTATION To support the activities in Alternative 1. Alternative one is rated as five because they no longer need to acquire new technology to implement the strategy. Alternative one has been rated three because it still upholds its mission in producing distinctive doughnuts but its scope is not that large to be one of the world¶s best and well-known doughnut makers. Alternative four is given a four because KKD has the existing technology to enter new markets. While Alternative one and two is rated as three since these alternatives may only be good for a specific period of time. Alternative three and four has the highest rating since it has the best Page | 7 potential for maximizing returns in a fast-growing industry. posters and other aggressive print advertising using the different leading publications within those areas. word of mouth and sponsorship of events are powerful tools for driving top-of-mind awareness of Krispy Kreme products. The company shall undertake the following actions to improve its over-all performance: y Strengthening Brand Name through Marketing KKD should strengthen and broaden its brand name by being more visible in their existing markets domestically and internationally. Alternative four is rated as four since the culture and taste preference of new geographic markets may not match the products they offer. Also. 2/24/2011 5:32 12 . The company will have to complete one advertising campaign per quarter. Advertising through billboards. These advertisements should highlight the distinctive taste of its doughnuts and the areas where they can be bought. Alternative three is rated as two since this alternative does not focus on the core product that KKD offers.

Group 2 Print Advertising For KKD to save on advertisement costs. anywhere and removes geographical boundaries to reach a significant number of customers at very low cost and shortest time. This will enhance the company¶s exposure to reach a larger customer base thus increasing total revenues. KKD customers will turn into loyal customers and promote Krispy Kreme to their social circles. more people are being pulled to Krispy Kreme. This can provide convenience to the customers since they do not have to spend time filling up forms and can also benefit the company with cost savings for printing papers. waiting for orders. employing team building activities at least once a year for employees will help boost their morale and at the same time. y Using e-commerce to increase brand popularity and possibly increase Market Share The company can gain more sales and popularity through venturing into internet marketing and selling. With this convenience. The theory of six degrees of separation explains ³that a very small number of people are linked to everyone else in a few steps. Page | 8 Word of Mouth To further save on advertisement costs. They can use the power of e-commerce which is available anytime. Otherwise. comments. they can easily create and strengthen relationships with end consumers ± the outer circle. Members with bulk orders who are located within an estimated kilometer radius can enjoy free delivery. they can simply order online and pick their orders up at the nearest stores without the hassle of lining up. and the possibility of stockouts for their favorite flavors. the company should consider print advertisements rather than TV advertisements where they will place their ads in newspapers or magazines available nationwide for each of their geographic markets. The company will aim to acquire memberships of at least 10% of each area population in the U. and suggestions through their mobile phone or event through telephone. Moreover.´ Word of mouth will help significantly increase the number of customer visits and repeat transactions.S. and in foreign countries. and the rest of us are linked to the world through those special few (Gladwell. They will also introduce mobile feedback systems where customers can send their feedbacks. they will be able to use the partner company¶s image to increase Krispy Kreme¶s own image. Krispy Kreme can boost customer experience and satisfaction by providing free newspapers. magazines. update their employees with the current business processes and policies. they can share the costs of pushing their products and at the same time. 2/24/2011 5:32 12 . This way. 2000). once the inner circle is improved and empowered. With their continuous improvement of processes and customer relations. and other reading materials to dining customers. therefore. Sponsorship of events KKD will sponsor events especially those that are related to their target market such as parties and launchings. In addition. This will be much affordable than advertising on regional or international publications. Krispy Kreme can create a website that advertises and sells their products online to be done through automatic and free membership registration. the company must capitalize on the power of word of mouth and the six degrees of separation. This will make all customers ± employees and end consumers ± feel that they are being valued by the company and can spread a great experience that other doughnut companies could not provide. Krispy Kreme will also co-sponsor events with businesses that are rapidly growing. The employees are considered to be the first customer circle of the company.

KKD will increase the number of franchise stores. Annual systemwide meetings to debrief the past fiscal year and to brief the entire workforce for the coming fiscal year. preferably satellite stores targeting at least two stores per month in a year for both domestic and international areas. Krispy Kreme will have the web design and web development outsourced to attain greater value (benefit over cost). y Increase franchise stores in existing markets To improve the company¶s presence in the market they are currently serving. But they will still have to train their staff and crew in using computer software and tools to access and manage this online venture within two months prior to the launching of the website. and taking actions according to customer feedback. Quarterly systemwide meetings to address key changes. With these regular meetings.Group 2 To attain this. analyzing. This increase in franchise stores will enable the company to increase their revenues. Monthly systemwide meetings to make sure the company¶s goals are met. Page | 9 Procedures for Assessing Strategy: y y y Checking. Weekly company meetings to monitor operational activities. Check financial reports quarterly to determine financial progress. Expanding in their existing markets will entail lesser cost than expanding to other countries because they have already established their name and have already done their research and analysis in the macroenvironment of these countries. they can be more effective in addressing key changes and create strategies around these changes. More stores also mean convenience for customers in seeking and purchasing Krispy Kreme doughnuts which can increase customer satisfaction and revenues. 2/24/2011 5:32 12 .

00 (19.656.423.334.00% 0.00 (116.00 (26.00) 1.43% 474.00 31.581.597.56% 21.00 12.00% 0.157.00% -8.00% 2.00 110.849.394.46% 16.00 (41.00% 0.88% 0.36% -19.00) -5.816.59% 6.46% 4.00 250.00 187.00 84.97% 1.00) (198.51% 35.00 (40.542.14% 0.591.860.00) 1.00% (40.00 56.231.00) Total Revenues Cost of Revenue Gross Profit Operating Expenses Research & Development Selling & Administrative Non-recurring Others Total Operating Expenses Operating Income Income from Continuing Operations Total Other Income/Expenses Net EBIT Interest Expense EBT Tax Expense Minority Interest Net Income from Continuing Op.57% 68.00 389.72% -0.18% 4.00 (157.77% (7.00 (118. Non-Recurring Discontinued Operations Extraordinary Item Effect of Accounting Changes Other Items Net Income Preferred Stock NIAC 84.76% 12.73% 5.00 21.00 15.00 597.770.110.934.17% 0.732.00) (131.98% -24.00% 0.41% 0.37% 15.629.00) (41.339.00 6.00% -0.339.00 87.491.00 28.19% -28.00% 0.66% 0.66% 48.423.169.00 (153.895.397.249.87% 4.00% 0.054.181.00) (776.00) 9.472.00) fiscal 2005 707.211.00) (146.195.00 (139.183.754.34% 71.847.380.37% 0.211.00) 20.00) -1.00 161.379.00) 0.920.253.00 (136.423.52% -21.00) 4.00 28.361.054.00) (41.00 (131.00% (131.32% 34.00 98.046.00) 67.00) 20.00 90.02% 2/24/2011 5:32 12 .766.86% 7.00 543.00) (198.Vertical Analysis fiscal 2007 fiscal 2006 461.875.01% 0.00) 6.72% 6.394.26% 0.772.00) (1.00) 0.603.674.63% Page | 10 10.34% -5.394.727.48% 3.98% 22.Group 2 Appendix 1: Vertical Analysis of Income Statements Income Statement .

195.64% 19. Non-Recurring Discontinued Operations Extraordinary Item Effect of Accounting Changes Other Items Net Income Preferred Stock NIAC -23.09% -11.00 28.00) (41.110.934.47% 195.00 (131.00 6.98% -11.253.00) (198.00) (131.00 (139.849.48% -73.44% -25.00 110.Group 2 Appendix 2: Horizontal Analysis of Income Statements Income Statement .727.00) 20.00 28.875.40% -34.00) 20.85% Page | 11 -13.00) (1.79% 474.00 (118.37% -20.68% -80.00 250.394.397.00) Total Revenues Cost of Revenue Gross Profit Operating Expenses Research & Development Selling & Administration Non-recurring Others Total Operating Expenses Operating Income Income from Continuing Operations Total Other Income/Expenses Net EBIT Interest Expense EBT Tax Expense Minority Interest Net Income from Continuing Op.00) (131.754.10% 68.00 (19.00 56.52% -79.00 48.00 187.00% 0.674.00 (41.00) 4.054.423.732.334.394.23% -20.84% -87.00 98.84% 193.Horizontal Analysis fiscal 2007 fiscal 2006 461.183.361.00 597.00 (116.491.423.423.629.00) (776.603.00 21.597.00 31.00) (7.472.895.00 389.770.84% 543.046.23% -108.93% -43.84% -9.542.656.00 161.52% -37.339.06% -86.02% -33.00 90.00) (146.00) fiscal 2005 707.591.00% -100.00 71.00 (26.054.847.181.339.00 -35.13% -79.52% -29.13% 2/24/2011 5:32 12 .00) 9.394.231.249.169.379.581.00) 2.00% 0.00% -100.00 (153.00) 1.00% -29.860.00 (40.380.211.772.92% -136.00 -34.77% -73.06% -14.00) (41.211.920.00 (157.00) 6.00) 67.766.00) (40.816.00 (136.48% -82.10% -60.157.00 -34.96% -194.00) (198.00) 6.

656 4.635 117.373 4.43% -55.278 5.48% 10.058 48.692 4.33% -100.45% 2/24/2011 5:32 12 .146 480.734 205.23% -27.913 390 239.84% 25.17% 53.397 3.98% -14.140 1.57% -78.00% 13.530 310.48% 23.261 168.181 2.654 28.64% -90.855 -38.962 349.16% 582.246) 1.16% 0.Group 2 Appendix 3: Horizontal Analysis of Balance Sheets Balance Sheet ± Horizontal Analysis fiscal 2007 fiscal 2006 ASSETS Current Assets Cash Short-term Investments Net Accounts Receivable Inventory Others Total Current Assets Long-term Investments Plant.686 49.492 118. Property.33% -27.818 4.417 848 302.465 119.05% -96.621 28.255 (191.37% 46.23% 145.486 60 153.211 4.26% 61.925 3.74% 3.162 5.025 14.90% 29.546 41.010) 1.242 64.00% 14.88% 128.966 25.094 1.730 134.097 8.611 (55.584 7.52% -10.038 270.85% -66.266 78.03% 149.900 9.06% -54.363 9.67% 68.65% -9.579 29.480 117.45% 27.50% -61.827 410.00% 26.855 144.40% -100.943 480.919 147.250) 582 240.53% -67.54% -11.67% -99.591 13.980 83.335 295. Equipment Goodwill Intangible Asset Accumulated Amortization Other Assets Deferred Long-term Asset Charges TOTAL ASSETS LIABILITIES Current Liabilities Accounts Payable Current Debt Others Total Current Liabilities Long-term Debt Other Liabilities Deferred Long-term Liabilities Charges Minority Interest Negative Goodwill TOTAL LIAB SHAREHOLDERS¶ EQUITY Misc Stocks Redeemable Preferred Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Shareholders¶ Equity TOTAL SHAREHOLDERS¶ EQUITY TOTAL LIABILITIES & SHAREHOLDERS¶ EQUITY fiscal 2005 36.02% -54.227 26.426 108.29% 30.514 147.184 298.214 32.278 Page | 12 133.226 5.89% 245.034 1.72% 117.870 105.985 4.71% 383.19% 322.539 349.74% -30.618 309.671 410.187 131.70% -45.942 (233.90% -14.46% -14.44% -8.19% -100.19% -33.492 30.23% 16.

63% -20.41% 342.02% 2/24/2011 5:32 12 .57% -4.Group 2 Appendix 4: Key Financial Ratios and Their Trends Ratios LIQUIDITY Current Ratio Quick Ratio DEBT MANAGEMENT Debt-to-Asset Ratio Debt-to-Equity Ratio Long-term Debt.35x 11.47% 77.55% 278.24% 2005 101.19% -29.33% 48.52% 68.46x 1.38% -24.61% 134.45x 2.98% -10.65% -5.50% -75.73% -28.16% Page | 13 77.74% 78.to-Equity Ratio Times Interest Earned ASSET MANAGEMENT Inventory Turnover Fixed Asset Turnover Total Asset Turnover PROFITABILITY Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Asset Return on Equity 2007 97.72% -21.22x 15.07% 135.75x 49.43x 2.30% -8.83% 99.98x 73.21x 13.89% -44.12% 12.18% 15.20% -0.34% 2006 95.66% -21.11x 1.

1% 131 41 59 165 0 13 0 24 433 108 0 43 145 5 0 9 85 395 -12.5% -63.Associates Domestic .0% -20.Associates Satellites .0% 190.7% -8.Area Developers Satellites .Consolidated Factory Stores .Associates International .0% 80.9% -70.0% -18.2% 131 54 59 189 433 2006 2005 Page | 14 2/24/2011 5:32 12 .Franchisees Area Developers .Area Developers Systemwide Total By Location: Domestic .Company International .7% -100.Company Domestic .9% -72.4% -8.3% -7.Company Satellites .6% -100.2% -3.0% 100.Associates Factory Stores .0% -11.9% -100.Area Developers Systemwide Total 107 0 52 113 6 0 0 117 395 387.4% -28.3% -100.2% 124 51 54 167 7 3 5 22 433 113 0 52 230 395 -13.9% -7.5% -8.Consolidated Satellites .Consolidated Domestic .4% -3.4% 12.4% -9.2% -28.6% -13.0% 286.8% -100.0% -14.0% -11.2% -100.5% 112 15 57 150 6 0 0 62 402 158.0% -11.9% 21.9% -31.Group 2 Appendix 5: HA/VA of Store Count Horizontal Analysis 2007 By Owner: Company Store Consolidated Franchisees Associates .6% -100.Company Factory Stores .Franchisees Systemwide Total By Type: Factory Stores .2% -7.8% 113 15 47 148 5 0 10 64 402 -8.4% -13.Consolidated International .8% 118 15 57 212 402 -9.Area Developers International .

6% 0.Area Developers Systemwide Total 107 0 52 113 6 0 0 117 395 27.0% 10.Company Domestic .2% 28.6% 2006 2005 Page | 15 2/24/2011 5:32 12 .7% 36.6% 11.0% 2.5% 38.Area Developers International .Consolidated International .2% 5.6% 43.1% 113 0 52 230 395 28.0% 0.9% 36.7% 11.3% 0.0% 2.0% 13.7% 14.Associates Factory Stores .Consolidated Factory Stores .5% 0.Area Developers Systemwide Total By Location: Domestic .1% 0.6% 112 15 57 150 6 0 0 62 402 27.0% 29.5% 13.9% 3.1% 3.2% 118 15 57 212 402 29.8% 12.6% 38.2% 52.0% 5.Group 2 Vertical Analysis 2007 By Owner: Company Store Consolidated Franchisees Associates .0% 15.Consolidated Satellites .8% 1.3% 1.7% 131 54 59 189 433 30.2% 58.Franchisees Systemwide Total By Type: Factory Stores .3% 21.Associates Satellites .5% 108 0 43 145 5 0 9 85 395 27.4% 3.0% 0.9% 124 51 54 167 7 3 5 22 433 28.Company International .Franchisees Area Developers .0% 3.5% 113 15 47 148 5 0 10 64 402 28.Company Factory Stores .4% 131 41 59 165 0 13 0 24 433 30.0% 13.2% 37.Associates International .7% 14.6% 1.6% 0.3% 12.3% 9.Consolidated Domestic .5% 13.7% 1.0% 0.6% 1.Associates Domestic .Area Developers Satellites .3% 0.7% 1.5% 15.Company Satellites .5% 0.2% 0.1% 0.

KKD has a distinctive product that invited generations of loyal customers for its ³one-of-a-kind taste´ and its special flavor offerings 7.04 0. fixtures. Reduction of labor force of 31.09 Page | 16 0.48 0.03 3 0.20 0.83% in two years which further lowered their employer brand image 6.1 4 4 0.12 2.15 0. KKD doughnuts have higher calorie content compared to its major competitors 7.05 0. Macau.S.40 0.20 0.12 0. Strong marketing and CSR efforts for community fundraising projects and for opening off-premise channels to gain more exposure and sales 6. giving them the control over quality 5.07 0. and a 26% increase in sales in equipment.04 0.08 0.07 0.09 0. Total Rating Weighted Score 0.03 4 3 0. KKD still incurred a net loss for the second quarter of fiscal 2008 2.000 dozens to 10. improving Net Income 9.06 1 1 2 1 2 1 2 2 0. KKD is vertically integrated in three segments. the Philippines and Indonesia 8.02 0. Increasing number of franchises in the international scene brought more revenues to KKD. Company brand image greatly suffered from legal issues back in 2005 3. furniture. Exposure in 10 foreign countries with an on-going development of 200 additional stores in the Middle East.04 0. Stock price rebounded to over $8 a share 3.43 times. and similar items to the KKD Supply Chain 4.05 4 0. Inventory turnover decreased to 11.28 0. Despite their turnaround strategy. Automatic doughnut-making equipment that gives them the capacity of 4.000 dozens per factory store daily WEAKNESSES 1. Revenues for company stores and supply chain decreased 5.15 0.Group 2 Appendix 6: IFE Matrix Weight STRENGTHS 1. Tokyo.32 0.09 0.12 4 0.07 0.03 4 3 0. 4. Hong Kong. KKD products can be found at thousands of retail outlets 2.77 2/24/2011 5:32 12 .06 0. Failure to update registered Uniform Franchise Offering Circular in the U. Effective cost-cutting practices including closing of poor performing stores.04 0.08 0.

wealthier population´ in the U. The Asian population is known for their fondness of sweets. 2/24/2011 5:32 12 . Decreased revenues will lower ROE. which also lowers ROE.3% of American adults are overweight. It will also lower Net Profit as there is a possibility of developing a healthier product menu. Increased revenues that will increase ROE. Thus. which will lower ROE. it lowers their ROE. Thus. Western brands in Asia and in the Middle East are popular. The ³older. increasing ROE. Increased Net Profit and revenues will lead to increased ROE. Decreases revenues and Net Profit as KKD has to compete in an intensified global market. Socio-Cultural Europeans are loyal to their own doughnut brands and have different eating habits than the American market. Higher revenues that will contribute to higher ROE. Global A number of fast-food companies are considering international expansion as a growth opportunity.S. Lower revenues as customers tend to shift to healthier foods thus. It also lowers Net Profit as there will be a need to develop new doughnut lines and strong marketing efforts to cater to this region. Increase in ROI will lead to an increase in ROE. Demographics More Americans are now working and with it is an increasing number of people eating out. 33. lower ROE. Attractiveness of the industry stocks is improving which can attract more stockholders. it lowers the ROE. Increase in revenues from a larger customer base. Decreased revenues because customers are now going into the healthy substitutes.S. Food product price inflation is still increasing thus pushing companies to decrease their development costs. Lower revenues since Europeans are accustomed to their own taste of doughnuts. There is a trend for healthier food choices in the U. market prefers casual dining Economic Stock prices in the QSR industry are improving.Group 2 Appendix 7: Tabulation of Key Trends/Changes in the Macroenvironment Classification Nature of Trend/Change in the Macroenvironment Impact on the Firm¶s Ability to Generate Better-than-Average Returns (ROE) Increased Net Profit from lower Page | 17 marketing costs because of high acceptability.

this segment is becoming crowded y High entry barrier because of strong retaliation from domestic players y Increasing trend of Americans being overweight which leads to consumers seeking for healthier or low-calorie food products y British market have biscuits as substitutes for other snack products y Low switching cost for end consumers y Raw materials are commodities so companies face low switching cost General Impact in Attractiveness Page | 18 High Highly Unattractive Threat of New Entrants Low Highly Attractive Threat of Substitutes High Highly Unattractive Bargaining Power of Buyers Bargaining Power of Suppliers Overall Assessment High Low Highly Unattractive Highly Attractive Highly Unattractive 2/24/2011 5:32 12 . market y High storage costs due to the industry¶s perishable offerings y All major Europeans and American doughnut chains are slowly entering the Asian market thus.Group 2 Appendix 8A: Industry Analysis (Current) Competitive Force Intensity of Rivalry among Competing Firms Nature of Competitive Force Supporting Case Details y Few dominating players with a significant number of stores in the domestic and international scene y Slow industry growth as determined by stable samestore sales growth in the domestic market y High strategic stakes in the U.S.

low-calorie.Group 2 Appendix 8B: Industry Analysis (Next 3-5 Years) Competitive Force Intensity of Rivalry among Competing Firms Threat of New Entrants Threat of Substitutes Nature of Competitive Force High Low High Bargaining Power of Buyers High Supporting Case Details y Domestic market will reach its saturation point y Increased number of players in the international market y High entry barrier y Increasing number of healthy. and low-sugar substitutes y Bargaining power of buyers in the domestic market does not change significantly y Buyers can choose from a variety of brands so switching cost is low y No change General Impact in Attractiveness Highly Unattractive Highly Attractive Highly Unattractive Page | 19 Highly Unattractive Bargaining Power of Suppliers Overall Assessment Low Highly Attractive Highly Unattractive 2/24/2011 5:32 12 .

40 Presence Total 1.00 1.0 4 3 4 Weighted Rating Score 1.60 4.40 (Variety) Global 0.40 1.70 0.50 0.00 2.50 Stores Product Offers 0.40 1 0.0 Weighted Rating Score 1.25 2 0.35 4 1.05 1.60 3.80 2.Group 2 Appendix 9: Competitor Analysis Tim Hortons Critical Weighted Success Weight Rating Score Factors US 0.65 2 2 2 Page | 20 2/24/2011 5:32 12 .3 Dunkin¶ Donuts Rating 4 4 4 Starbucks Krispy Kreme Weighted Score 0.00 1.

Growth in two-income households that will lead to an increase in snack-food consumption and doughnut sales growth 4. Since 2004.12 0.27 2. Industry stock prices are improving 3.45 0.38 2/24/2011 5:32 12 .15 0. especially Asia Total Rating Weighted Score 0.15 0. Dunkin¶ Donuts) in the domestic and international market 4.08 2 4 0. along with UK. THREATS 1.12 0.09 1 3 0.20 Page | 21 0.06 2 0. development costs has been decreasing in the U. 2.32 0. Fast expansion of competitors (e.15 0. which makes things difficult to control 5. Asia and the ME are favorable markets for KKD offerings. Europeans and American doughnut chains are expanding in the international market.05 3 4 0.15 0.g. Healthy food choice is the growing trend 3.S. Cultural differences among countries make operations and doughnut consumption varied.Group 2 Appendix 10: EFE Matrix Weight OPPORTUNITIES 1.45 0. Germany. and Spain.30 0.12 0. Casual-dining sector is gaining share from fastfood chains and it is expected to grow 2.15 1 1 3 0.

Exposure in 10 foreign countries with an on-going development of 200 additional stores in the Middle East. KKD still incurred a net loss for the second quarter of fiscal 2008 2.Group 2 Appendix 11: Strategy Formulation Matrix I (SWOT Matrix) STRENGTHS 1. Increasing number of franchises in the international scene brought more revenues to KKD. Effective cost-cutting practices including closing of poor performing stores WEAKNESSES 1. KKD is vertically integrated in three segments. the Philippines and Indonesia 8.S.83% in two years which further lowered their employer brand image 6. and a 26% increase in sales in equipment. furniture. Failure to update registered Uniform Franchise Offering Circular in the U. KKD products can be found at thousands of retail outlets 2. Macau. giving them the control over quality 5. Tokyo. Stock price rebounded to over $8 a share 3. KKD has a distinctive product that invited generations of loyal customers for its ³one-of-a-kind taste´ and its special flavor offerings 7. Revenues for supply chain decreased because of local merchants serving their international stores 5. 4. Company brand image greatly suffered from legal issues back in 2005 3. fixtures. Hong Kong. Reduction of labor force of 31. KKD doughnuts have higher calorie content compared to its major competitors Page | 22 2/24/2011 5:32 12 . and similar items to the KKD Supply Chain 4. Strong marketing and CSR efforts for community fundraising projects and for opening offpremise channels to gain more exposure and sales 6. Despite their turnaround strategy.

and Spain. bagels. T4. Automatic doughnutmaking equipment that gives them the capacity of 4. S6-7. O1) Page | 23 W-O STRATEGIES Update UFOC to increase the number of franchised satellites in the U. T6) Related diversification offering sandwiches. S6.S.Group 2 9. Dunkin¶ Donuts) in the domestic and international market 5. T1. W3.000 dozens per factory store daily S-O STRATEGIES Market penetration in the U. Germany. O3) Market penetration in the Asian market focusing on store openings (W6. etc. T1) W-T STRATEGIES Market penetration in the U. Decreasing development costs in the U. Fast expansion of competitors (e. S9. especially Asia (S3. T4) Conduct feasibility study on other foreign countries that are not currently being served to identify the most favorable to serve (W1. (S1. Asia and the ME are favorable markets for KKD offerings. T4. Healthy food choice is the growing trend 4.S. O2-4) Increase stores in the international market.S.000 dozens to 10. O1) OPPORTUNITIES 1. S4-5. T3) Increase number of stores current in the foreign countries being served (S1. market focusing on aggressive advertising and close poorperforming stores (W1-2. market focusing on advertising efforts and increasing the number of franchised satellites (S1-2. Since 2004. Casual-dining sector is gaining share from fast-food chains and it is expected to grow 2.S. there has been an increasing trend of food product price inflation 3. Europeans and American doughnut chains are expanding in the international market.S. Growth in two-income households that will lead to an increase in snack-food consumption and doughnut sales growth 4. along with UK. especially S-T STRATEGIES Check the feasibility of product development in the U. which makes things difficult to control 6.g. 2.W7. market focusing on creating a healthier doughnut line (S1. (W3-4. THREATS 1. S8-9. T6) 2/24/2011 5:32 12 . Industry stock prices are improving 3. Cultural differences among countries make operations and doughnut consumption varied.

Group 2 Asia Page | 24 2/24/2011 5:32 12 .

0   ntensive Divest Divest 1.0 ntensive/ ntegrative ntensive     Divest 2.Gr u Appendix 12: Strategy Formulation Matrix ( E Matrix)      3.0 Legend Company Stores= 50% KK Supply Chain = 27% Franchise = 23% / / .0 ntensive/ ntegrative         2.0 ntensive/ ntegrative     1.0 Page | 25 ntensive 3.

0 II.1 5.0 2.3 0. Feasibility a.0 0. Sc. Sc.0 1.1 0.2 3.2 0. Sc.0 3.0 III.2 2.0 1. Technology 0.0 3. Sc.4 0.4 2. Alternative 3 Raw Wtd Sc.1 0.0 0.1 3.0 0. Alternative 2 Raw Wtd Sc.0 1.0 2.4 0.0 4.4 0.6 0.2 2.5 3.0 4.5 2/24/2011 5:32 12 .0 V.6 1. Long-term Profitability 0.0 0. Sc.0 4.3 0.8 0. Financial 0.6 3.6 0.0 3.Group 2 Appendix 13: Strategy Evaluation Matrix % Weight Alternative 1 Raw Wtd Sc. Advantage 0.0 resources c. Consistency 0.0 condition b.0 2.4 0.4 0.0 IV. Criteria I.2 0.1 0.2 0.0 1.0 5.1 0.0 4. Consonance 0. Human 0.0 1.2 0.2 5.8 0.1 4.5 0.0 3. Alternative 4 Raw Wtd.4 2.6 0.0 Alternative 1 Market Penetration Alternative 2 Product Development Alternative 3 Related Diversification Alternative 4 Market Development Page | 26 0.0 4.1 4.8 0.0 Totals 1.3 3.0 1.

Group 2 Appendix 14: Balanced Scorecard Page | 27 2/24/2011 5:32 12 .

& Admin. Outsourced HR & Oper. Mktg. / / . & Ad. Mktg. & Oper. Mktg. Admin. & Sales Mktg. & Ad. & Ad. & Ad. Agency Mktg. Mktg. Mktg. & Oper. & Ad. Page | 28 Mktg. Admin. Agency Mktg. Admin. & Oper. & Admin.Gr u Appendix 15: Gantt Chart ± Strategy mplementation ID 1 2 3 4 5 6 7 8 9 13 29 30 31 32 33 34 35 36 37 38 78 117 Key Activities Division Responsible Y-1 Y1 Y2 Y3 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Outsourced Outsourced Mktg. Research Consultant Research Consultant & Admin. Mktg. Mktg. Mktg. Admin. Mktg. Agency Mktg. Agency Mktg. Research Consultant Research Consultant & Admin. Admin. & Oper. Outsourced HR & Oper. Y4 Qtr 4 Qtr 1 Qtr 2 Q ¡ Venturing into E-Commerce Create a Website Create Database Test Functionality of Website and Database in test areas Improving Website and Database Functionality Train Employees on the use of Website and Database Systemwide Launching of Website Full Implementation and Monitoring Evaluation of Website Effectiveness Intensive Marketing Preparation of Advertising Campaign for one quarter Presentationof Campaign to the Board for approval Production of Campaign Materials Full Implementation and Monitoring Evaluating Effectiveness of Campaign Increasing Franchise and Satellite Stores Conduct Research on feasible areas for stores and demand of franchisees Present Study to the Board for approval Preparation of Lincensing Rights and Legal Documents Preparation of Strategy and Plan for increasing stores Full Implementation and Monitoring Evaluation of the Implemented Strategy Marketing Outsourced Outsourced Mktg. Agency Mktg.

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