KRISPY KREME

INTRODUCTION

Krispy Kreme Doughnuts, Inc., began as a family-owned business back in 1937, as

an expansion of a pre-existing business, when Vernon Rudolph purchased a doughnut shop

along with the now-famous secret recipe for making yeast-raised doughnuts. His doughnuts,

which he delivered to grocery stores in the Winston-Salem, North Carolina area, quickly

became immensely popular with customers. So popular in fact, that he cut a hole in the wall

of his shop so that he could sell hot doughnuts to potential customers passing by on the street.

(Peter and Donnelly, 2009, Page 690). Who knows, but this may have been one of the first

“drive-thru/walk-up” windows in the restaurant business! And that is just one example of

Mr. Rudolph’s and his early partner, Mike Harding’s, forward-thinking marketing ideas for

that era. The idea of making all of the shops look the same, so that they would be recognized

by patrons wherever they traveled, as well as the viewing windows for watching the

doughnuts being made, were good examples of marketing promotional strategies. These

strategies are still considered by Krispy Kreme to be “Brand Elements” as reported in current,

annual financial reports. By keeping control of the recipe and the doughnut-making process,

they also maintained product standards and reduced, while not completely eliminating, the

competition through the uniqueness of their product. In fact, attempts to change the recipe, or

even the look of the shops, in later years met with negative reactions from customers and the

company quickly returned to the original taste and feel of the “original” Krispy Kreme.

The company and its doughnut became synonymous with a particular look, taste and feeling.

This emotion that became associated with Krispy Kreme, described as “a feel-good business”

and one that “created an experience” as opposed to just selling doughnuts (Peter and

Donnelly, 2007), became the core of the company’s marketing strategy, and just maybe, one
of the prime reasons for its subsequent struggles in the early 2000’s. Selling a “feeling” or

“experience” can be a successful marketing tool.

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. In addition to its original glazed

variety, Krispy Kreme serves cake and filled doughnuts, crullers, and fritters, as well as hot

coffee and other beverages. 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. Such probability was largely due to the significant losses the firm has

experienced since fiscal year 2005. It was observed that Krispy Kreme has been experiencing

a net loss of 20 stores in United States, however it has favorably seen a net increase of 94

new international stores. Expanding in areas with favorable demographics, relatively high

levels of sweet consumption, and the acceptability of Western brands are now their concern.

Since Krispy Kreme reported that its franchisees have grown stronger, the firm considers that

it may open 160 more new stores internationally in 2010 and beyond. Although the firm’s

domestic franchises still face financial strain, is this an appropriate move for the firm to

pursue? How can the firm survive in this global market while competing against several

competitors?
STATEMENT OF THE PROBLEM

The primary, and most critical, problem area is the lack of a cohesive marketing

structure within or a strategic marketing plan for the organization. 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.It also resulted to sudden

and very large drop in the market value of equity for krispy kreme Doughnuts, Inc. associate

with series of announcements made in 2005.Those announcement caused investors to revise

their expectations about the future growth of krispy kteme which had been one of the most

rapidly growing American corporations in the new millennium.

The “Montana Mills” acquisitions was based on the CEO’s “feeling” that the services

for “flour-based”, short-shelf life products investment was a logical fit with their current

process of vertically integrating an services for “flour-based”, short-shelf life products.

Market research would have the identified the new trends toward reduced carbohydrate

consumption patterns in the general public. 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. As a result, Krispy Kreme acquired a company in

2003 that by the end of fiscal year 2004, had lost $2 million dollars. While Krispy Kreme

later divested itself of the Montana Mills operation, this entailed a write-off of $34 million

initially; with further write-offs of $2-$4 million in subsequent quarters. This bad

investment, in addition to slumping sales resulting from the trend toward low carbohydrate

diets resulted in the company’s reporting a $24.4 million loss for the quarter of fiscal year

2005. This is evidenced by the fact that even while new stores are opening, older stores
within the same market have to close. In short, the company’s marketing strategy appeared

to consist merely of allowing its product to sell itself.

VISION

Our vision is to be the worldwide leader in sharing delicious taste and creating joyful

memories

MISSION

Our mission is to reach every culture throughout the world with our delicious

doughnut. We will provide quality service and product to everyone that walks through our

door.

SWOT ANALYSIS

SWOT Analysis, which is based on thorough review of the business (corporation, product

category competition, customers and products), identities and evaluates the internal strengths

and weakness of the companies well as its external threats and opportunities. The marketing

mix is driven by the results of the SWOT analysis.

STRENGHTS: OPPORTUNITIES:

1. Strong Brand Recognition and Recall 1. Growth in two-income households will

2. Krispy Kreme makes it possible for different increase snack-food consumption

organizations throughout the community to use 2. Untouched domestic locations

their product as a fundraiser. Fundraising 3. Increasing popularity of coffee shops

program has helped non-profit organizations and bakery cafes

 raise millions of dollars in needed funds. 4. Customer receiving "Hot-Donut" now

3. Krispy Kreme has Strong Channel of instead of waiting

Distribution.Krispy Kreme is most popular in 5. All equipment and Uniforms are

grocery and convenience stores which gives supplied

customers easy access to the product. 6. Penetration into foreign/intl. Markets

4. Employees are better trained. and popularity of American foods and

5. Expanded assortment of offerings at KKD stores fashion in overseas markets

including beverages 7. Americans continue to experience

6. It has a unique brand and variety of freshly made time-starvation

donuts.Wide appeal of signature hot original 8. Acquisition of Atlanta Bread

glazed doughnuts 9. Expansion of new locations (Maine,

7. KKD can offer to have customers watch product Mass)

being made at the donut theater. 10. Entertaining opportunities moving

8. It has a high capacity to make 4,000 to 10,000 from home to work environment

donuts daily. 11. Channel expansion possibilities (i.e.,

9. Krispy Kreme Doughnuts prides themselves on Internet pre-ordering)

high customer satisfaction with fresh quality 12. Technological advancements (i.e.,

donuts. paperless ordering, predictive

10. It offers additional products through businesses modeling software, hand held

acquisitions. computers for delivery drivers)

11. Krispy Kreme offers a product that is second to 13. On-Premise sales royalties (3%).The

none, with regards to taste, freshness and the higher the sales, the more money

finest ingredients. It has a great desire for growth received

and success of people and company.

12. KKD has great service and innovation.

13. Krispy Kreme has Doughnut machine

Technology. It also has e-commerce which gives

owners access to real-time information.

14. KKD has a drive through window for sales.

15. It also has a new fall product line of donut

called Spice.

16. It is expanding into Dunkin Donuts territory.

WEAKNESSES: THREATS:

1. Lack of more International locations in the 1. Competitors like Dunkin Donuts, Tim

United Kingdom, Japan and Spain Horton’s,Starbucks and other National

2. Manufactures all equipment internally in its Chains/Specialty Eateries.

Manufacturing and Distribution Department 2. Low-carb trend in eating preferences

3. Non-interactive website 3. Increasing cost of Ingredients

4. No online ordering capability 4. Increasing utility and fuel costs

5. Uncertainty of International markets 5. All-natural, organic, healthy eating

6. KKD snacks are not healthy (need to consider trends

low-calorie donut) 6. Krispy Kreme stores went up too fast

7. Perishability of product 7. Cultural differences in breakfast and

8. Limited product line (heavy reliance on snack foods

doughnut sales) 8. Increase in eating at full-service

9. Overextended (i.e., Montana Mills acquisition) restaurants combined with a decrease

10. Pricing in some locations in the use of fast-food restaurants

11. Bad Relations with Franchisees (cost of 9. Store locations too scattered

equipment, packaging, ingredients etc)

12. No other Standout Products (Weak Menu)

EXTERNAL FACTOR EVALUATION MATRIX (EFE)

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 0.14 4 0.56
snack-food consumption
2 Untouched domestic locations 0.09 3 0.27
3 Increasing popularity of coffee shops and 0.06 3 0.18
bakery cafes
4 Channel expansion possibilities (i.e., Internet 0.07 4 0.28
pre-ordering)
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, 0.10 2 0.2
Starbucks and other 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 0.08 3 0.24
combined with a decrease in the use of fast-
food restaurants
5 Cultural differences in breakfast and snack 0.04 2 0.08
foods
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

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 0.08 4 0.32
Doughnuts
3 Strong Channel of Distribution 0.06 3 0.18
4 Customers watch product being made at the Donut 0.05 3 0.15
Theater

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 0.05 3 0.15
programs
8 New fall product line of donut called Spice 0.04 3 0.12

Weaknesses
1 Lack of more International locations in the United 0.10 1 0.1
Kingdom, Japan and Spain

2 Limited product line (heavy reliance on doughnut 0.09 1 0.09

sales)
3 KKD snacks are not healthy (need to consider low- 0.06 2 0.12
calorie donut)
4 No online ordering capability 0.05 1 0.05

5 Bad Relations with Franchisees (cost of equipment, 0.06 2 0.12

packaging, 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.
WEIGHTED COMPETITIVE STRENGTH ASSESMENT

Analysis of Weighted Competitive Strength Assessment:

Key Success Weight Krispy Dunkin Tim Starbucks McDonalds
Factor/Strength Kreme Donuts Horton’s
Measure
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 0.20 7/1.4 8/1.6 5/1 9/1.8 6/1.2
capability
Technological skills 0.05 7/0.35 6/0.3 4/0.2 8/0.4 7/0.35
Dealer 0.05 4/0.2 6/0.3 4/0.2 7/0.35 5/0.25
network/distribution
capability
New product 0.05 6/0.3 5/0.5 5/0.25 8/0.4 5/0.25
innovation 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

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 stores.

One of the problems with Krispy Kreme is that the U.S. is becoming more health

conscious. Although they have provided low-calorie alternatives, people eat doughnuts for

the taste, especially Krispy Kreme doughnuts. When former owners Beatrice Foods bought

Krispy Kreme in 1976 and changed the recipe, there was a public outcry and sales declined. It

is believed that the low-calorie market will not be lucrative for Krispy Kreme because people

associate us with a certain taste of a hot, fresh doughnut.

The supermarket sales may also affect brand image. Although 50% of company revenue is

due to supermarket and convenience stores,these stores do not create the same taste that is

associated with Krispy Kreme.Doughnuts will have sat out all day and dried up creating a

different taste from what Krispy Kreme is about. This could create negative customer opinion

about the product and led to lost customers.

Strength of Krispy Kreme is how many different ways they have created income.

Krispy Kreme creates 66% of their 665,592,000 annual income from company store

operations, 4% from franchising operations, and 30% from KK manufacturing and

distribution in 2004. Strength of Krispy Kreme is store operations. Since customers come to

Krispy Kreme for the warm doughnuts, they have created a 40-foot glass window that allows

customers to view the entire doughnut making process. Krispy Kreme uses their strategic

plan of superior, hot, fresh doughnuts to their advantage by allowing all customers to view

the creation process.

A weakness of Krispy Kreme is that it continues to try and grow when all financial

data indicates that franchisees are competing with each other rather than rivals. When stores

are located near each other, they affect the sales volume of the other store. When the first

Krispy Kreme is put up in a new market, obsessed consumers camp outside for days to be the

first to have a fresh doughnut. As more and more stores are introduced into an area, this

frenzy fades and the craze dies out.

Krispy Kreme could explore is further expansion into the global market. The majority

of Krispy Kreme sales come from cult-like followers that will do anything for a Krispy

Kreme doughnut. This following could be extended into other foreign markets besides
Canada and England. There are opportunities to expand their coffee company, Digital Java

Inc., and create new ways to provide fresh doughnuts to the public.

Threats that Krispy Kreme faces are competitive pressure from Dunkin Donuts and

increase interest in low-calorie and low-carbohydrate diets. Americas recent health interest

has had a major impact on companies such as Krispy Kreme. Analysis of Krispy Kreme

shows that although there is a strong loyalty towards the product, there could be a drop in

revenues due to the recent craze.

After quantitatively analyzing the current market with a weighted competitive

strength assessment, it can be concluded that Dunkin Donuts has a few distinct advantages

over Krispy Kreme that will allow more lasting power for Dunkin Donuts. Although Krispy

Kreme outperforms DunkinDonuts in taste and freshness, Dunkin Donuts sweeps all of the

other categories. They have greater manufacturing capabilities, distribution capabilities,

customer awareness, lasting power, and coffee taste. Dunkin Donuts has expanded their

market to all areas of the U.S. which has led them past Krispy Kreme in customer

recognition. Krispy Kreme has focused the majority of their stores in the south east of the

U.S. Although Krispy Kreme provides superior taste, this taste can only be provided at in-

store locations. Winchell Donut House is able to compete with Krispy Kreme in taste and

freshness, but all other aspect are lacking.

It can be recommended that Krispy Kreme Donuts backs out of some of their current

markets. Consumers come to Krispy Kreme to receive a warm, fresh donut that is created

right before their eyes. Only so many consumers are interested in this type of donut and

Krispy Kreme stores rivaling each other. Stores are competing against each other for the
same market share which is having an adverse effect on the overall company. Krispy Kreme

seizes expansion into current U.S. markets. This will allow Krispy Kreme to see the strengths

of each market, in order to decide if expansion and contraction is the possible solution to

Krispy Kreme problems.

Krispy Kreme must also restore shareholder loyalty in order for stock prices to turn

around. When Scott Levingood and his management team were controlling Krispy Kreme,

many accounting errors took place that led to customer dissatisfaction and disloyalty of the

shareholders. For Krispy Kreme to turn around, the customer and shareholder loyalty is

restored.

The final issue that should be addressed is the possible withdraw from supermarkets.

Although this accounts for 50% of revenue for Krispy Kreme Donuts, they are destroying

product identification. Consumers expect to taste a certain donut every time they bite into a

Krispy Kreme glazed donut. When these donuts have been sitting out for 15 hours, this is not

the same warm, fresh taste the people relate to. Krispy Kreme should either withdraw their

product from supermarkets or change the process in order to provide freshness with every

donut.
OBJECTIVES

 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.

 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.

ALTERNTIVE COURSES OF ACTION

1. Close unprofitable stores and focus on other domestic areas and global market

-increased capital from sold locations and properties.decreased loss

Develop new market

2. Create a cohesive strategic marketing plan for the organization.

3. Follow the general accepted accounting principles in preparing its financial reports

4. Downsize and focus expansion on global markets.

5. Expand the current product mix.

 6. 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.

7. To develop or enhance the marketing department

8. To conduct a cost-effectiveness analysis of the supply chain.

ANALYSIS

6. 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. (Page 711). 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. By itself, the fact that this reduction had to be stated by

a percentage range, rather than a specific percentage, would indicate that accounting methods

are not accurate enough to provide this critical information. Finally, this independent audit

may serve to revitalize investor confidence in the company. Regardless of the struggles, if

the information put forth in the market is believed to be accurate, investors may be more

willing to take a chance in the company.

As discovered during the situational analysis, probably the primary, and most

critical, problem in the operational area is in the lack of a cohesive marketing

structure within or a strategic marketing plan for the organization. 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. This marketing plan must

contain elements addressing appropriate marketing research of industry

environment and a marketing strategy addressing current and possible future

competition.

Secondary Sources for marketing research are often a good place to obtain

base-level data at minimum financial outlay. This kind of data for the

restaurant and food service industry can be obtained through online sources

such as “Market Research.com”. For example, the “2009 Restaurant, Food &

Beverage Market Research Handbook”, by Richard K. Miller & Associates,

can be downloaded for a nominal cost of $285. The benefit of this item is that

it could be used as a tool to assist senior management in understanding what

the marketing research plan will attempt to address and accomplish. It also

would provide a broad look at the industry environment and issues currently

faced. Other secondary sources, such as the “Restaurant Marketing Group™

(RMG)”should also be investigated. This firm has various methods that it

uses for conducting consumer research, one of which, the “Food Actually”

study is described as “...a measure of a consumer's perception of the

ingredients a brand uses.” Research for the study was conducted as an online

survey focused on each brand’s Food Actually® rating, the factors

contributing to the Food Actually® rating, and how significant Food

Actually® is in relation to other brand considerations. A Food Actually®

rating is given to each of the 128 brands included in the study using a ten point

scale to determine the consumer’s perception of, and confidence in, a brand’s

food. This report costs a mere $99, but could provide valuable insight into

consumer’s decision-making process.

However, in the case of Krispy Kreme™, secondary sources of data are not

sufficient for developing a cohesive marketing strategy. Primary data must be

obtained about the current industry, customers and competition, both current

and potential. While collection of primary data, could theoretically be done by

in-house marketing personnel, hiring an experienced marketing firm that

focuses on the restaurant and food service industry would be more effective

and efficient in the long run. The firm mentioned above also provides a

service called “Rapid Ad Feedback” which delivers a quantitative-qualitative

feedback on upcoming campaigns before they go “live” to ensure the message

is effective. This can tell the marketing department if potential consumers

understood the main message of the ad and if not, what was confusing. It can

also provide information on what respondents perceived about the brand

(based on what they saw in the ad and what might motivate them based on the

ad). A competent market firm should be able to provide all both quantitative
 and qualitative data such as market research, customer profiling & loyalty,

focus group moderating, and local store marketing. This last item assists the

operation audit mentioned above by providing valuable primary data on an

ongoing basis. Of course, the firm mentioned above is just an example of the

type and services one would for in a marketing firm.

1. Create a cohesive strategic marketing plan for the organization.

Pros

 Market research can provide the company with more reliable information for which to

base their decisions

 Assist the management to more effectively address issues faced

Cons

 Large costs will have to be incurred due to employing competitive strategists or

training personnel to learn more about strategic planning

 Plans take time to be made

2. Following the general accepted accounting principles in preparing its financial reports

Pros

 Prevents erroneous recording of financial transactions

 Provides more reliable and objective financial information

  Maintains investors’ confidence

Cons

 Additional costs will be incurred

3. Downsize and focus expansion on global markets.

Pros

 Operating expenses are reduced thus increasing income.

 New market can be developed.

Cons

 Cost for expanding to new locations is high.

 Market in places where stores are closed down will be lost.

4. Expand the current product mix.

Pros

 This will improve the lack of diversity in their product line.

 May attract new customers.

Cons

 New ideas may give discomfort to old customers.

 Customers might not like the new product(s) thus there is a risk they will not be sold.