UNIVERSITY OF SOUTHERN PHILIPPINES

MBA 108 BUSINESS POLICY AND STRATEGIC MANAGEMENT

THE KRISPY KREME CASE STUDY

INTRODUCTION

Krispy Kreme Doughnuts, Inc., a doughnut shop which began 1937, has now operated 395 stores
worldwide from its humble beginnings as a store window in North Carolina. The company belongs to
the restaurant industry, and competes in the fast food and fast casual sectors, which are subject to high
competition.

Krispy Kreme competes in two distinct markets - the restaurant industry (fast food, fast-casual, and full
service) and retail (supermarkets, gas stations, and retailers). Given 2 distinct markets, the company
will need to formulate a strategy to differentiate themselves from the product line of competitors and
enable themselves to remain true to their brand while addressing the customer demands based on the
customer experience requirements.

BACKGROUND

Company Background
Krispy Kreme is a company that despite its history dating back to 1937, has only started to experience
rapidly increasing sales, expansion, and customer awareness in the last few years. In 1937, Vernon
Rudolph began selling homemade doughnuts to local groceries for resale in Winston-Salem, North
Carolina. His doughnuts were based on a recipe his uncle had obtained from Louisiana, and they were
unique in their inclusion of yeast. This allowed the dough to rise, which gave the doughnuts a light, airy
composition, different from the usual cake doughnuts.

Rudolph passed away in 1973, and company growth slowed for a while, until the Beatrice Foods
Company acquired Krispy Kreme in 1976. A group of franchisees bought Krispy Kreme back from
Beatrice Foods in 1982, and refocused the company’s energies on the hot doughnut experience

Krispy Kreme went public in 2000, with one of the most successful Initial Public Offerings of the year.
Trading under the ticker symbol KKD, the company stock rose from $21 to its peak of $49.37 in 2003
and then began a tragic slide that lasted through most of 2005.

Competition Analysis
Krispy Kreme competes in two distinct markets. The first, and most obvious, is the restaurant industry,
which is broken into three segments: fast food, fast-casual, and full service. The first two are primarily
separated by the quality of food and atmosphere. The company’s limited menu offerings and store décor
suggest its place in the fast food sector, but the quality of their doughnuts is more in line with the quality
of food served at fast-casual locations. This industry has performed well in the last year, despite
underperforming the broader market. Restaurants are benefiting from the recent trend away from at-
home dining: about half of total food expenditures of the last year were spent outside of the household,
and the percentage is expected to increase.

The coffee segment of fast food and fast-casual restaurants is an important one. Currently, only 15%
of Krispy Kreme’s sales come from beverages, which is significantly lower than the industry average.
The company sells a “premium” private label brand of coffee under the Krispy Kreme name, allowing
the profit margins on coffee to be much greater than the margins on doughnuts. Gotham Global
encourages the company to increase coffee sales.

At the recent Annual Meeting, the idea of selling a doughnut and coffee “combo” was suggested.
Attaching coffee sales to already-healthy doughnut sales is a good idea and should be followed through.
The increased focus on coffee sales will put the company up against coffee chains like Starbucks and
Caribou Coffee in addition to direct competitor Dunkin’ Donuts. While these companies represent a

Jun Benedict Quirol Niel Anthony Cinco

Instructor MBA 1
strong market force, consumers in the fast food and fast casual restaurant market have low switching
costs, and the unique product mix of high quality doughnuts and premium coffees can attract customers
from rival companies.

Direct competitors are:

• Dunkin Donuts - $2.7 Billion in sales (2002), 5200 outlets and 45% market shares.
• Tim Horton - $651 million in sales (2002), 2460 outlets

Indirect competitor such as:

• Starbucks, (coffee)
• Seattle’s Best (coffee)
• Winchell’s Donut House (bakery)
• LaMar’s Donut (bakery)

Krispy Kreme also sells their donuts to supermarkets, gas stations, and retailers (including Wal-Mart)
for resale. In this market of pre-packaged doughnuts, the company faces competition from the likes
of Little Debbie, Hostess, and Entenmann’s. These companies have a wide range of product offerings,
extending beyond doughnuts to snack cakes, cookies, and pastries. Krispy Kreme’s offerings are less
spread out than its competitors, so promoting the Original Hot Glazed™ and other strong sellers in this
market would leverage the power of the company’s reputation towards competitive sales.

Financial Performance
Krispy Kreme is a major competitor in the restaurant industry, known primarily with doughnuts. 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 carb diet have been blamed for declining
sales in pre- package (grocery store) doughnuts.

Krispy Kreme’s Business strategy is focused on revenue from their company owned store, royalties and
franchise fees, and sales of mixes, specialty coffee and donut making equipment. They felt strongly that
the franchising was the best way to go, as it involves little risk for the, provided income and at the same
time, put more responsibility on the franchise holder.

In 2003, the company’s business strategy was to add enough new store to increase sales enough to
achieve 20% annual revenue and 25% annual growth in earnings per share. However, they failed to
invest in product development as their product were easy to replicate sufficiently for most customer. As
a matter of fact, many of their competitors consider Krispy Kreme entry as advantage, as it brought
attention to donuts, which resulted in increasing their own sales.

In the financial report made by CSI Market, in 2017, Krispy Kreme Doughnuts Inc reported Revenue
growth of 3.03% year on year in the first quarter, to $ 136.48 millions, this is lower than Krispy Kreme
Doughnuts Inc's recent average Revenue growth of 6.75%.

Fast forward to today, Statistica.com indicated that the sales of Krispy Kreme in the United States from
2001 to 2019 amounted to 887 million U.S. dollars in the United States in 2019, up from 805 million
U.S. dollars the previous year – significantly doubled compared to the sales in the previous
decade.

SWOT Analysis

STRENGTH WEAKNESS
• Recognizable logo • Lack of continuity in advertising
o Recognizable in another language. o No clear audience -
• Recognizable brand name • Loss of uniqueness
o The word doughnuts doesn’t have to be o Opened too many stores
used with Krispy Kreme. • Multiple marketplaces disperse resources
• Longevity in the market - Trusted o Stand-alone shops

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Instructor MBA 1
 • Excellent reputation among customers o Grocery stores
o Quality product – tasty and fresh • Limited menu
• Traditional product with universal/cultural appeal o Doesn’t tap into the “breakfast crowd”
o People like doughnuts! • Cumbersome web navigation
o International stores have cultural o Eye-catching and modern, but large and
favorites. busy
• New business-savvy CEO
o Stocks have gone up since Jim Morgan
took over in 2008.
• Technology innovation – deliveries, ecommerce
adaptation

OPPORTUNITIES THREATS
• Market expansion • Competition due to common basic product
o U.S. – much “white space” on map o Dunkin’ Donuts, Panera, Starbucks,
o International local competitors
• Menu expansion • High gas prices
o Choice for the “breakfast crowd” o Effects on consumers
o Healthy choices o Effects on transport
• Clientele expansion • Poor jobs economy
o Appealing image to attract people of all o Effects on consumers
ages and backgrounds o Effects on staffing
• Tech/media advertising • Increased health-consciousness
o What new tech can be used to o Information age provides advertising but
advertise? also dangers
o How can the Web be utilized? • Government regulation of foods
• Joining forces with another business o Ingredients – saturated fats
o E.g. like Dunkin’ Donuts and Baskin o Portion sizes
Robbins

EVALUATION OF THE CASE

Having all those research and inputs above, let’s look at what Krispy Kreme needs to revisit and
consider in their strategy so as to ensure that weakness and threat points are addressed based on the
strengths and opportunities captured:

Points to Maximise
• Krispy Kreme’s brand identity and product advantage
Krispy Kreme’s breadth of appeal extends across all major demographic groups. The
flagship product is affordable and competitive with other firms’ value menu prices; customers
can also purchase doughnuts by the dozen. The Krispy Kreme name and brand are tied to
the “one-of-a-kind taste” that generations of customers have grown to love. The Hot
Doughnuts Now sign is a strong impulse purchase generator and another component of the
strong corporate identity.

• Krispy Kreme’s footprint

Krispy Kreme expanded across the US at a rapid pace following its public offering, and the
losses from overexpansion outweighed the benefits, and increased footprint globally. The
presence can be advantage but the positioning of their stores must be considered given the
traffic for each location. This is so they can maximise the sales of their products covering
any relevant operational cost.

Points to Consider
• Krispy Kreme donuts labelled as health risk
Krispy Kreme flagship doughnuts contains four grams of trans fat5, which is especially
unhealthy and receiving media attention as it becomes banned across the country. This
amount of trans fat is appalling when considering the overall size of each doughnut. Even
worse are some of the company’s flavored doughnuts.

However, a lot of health advocates such as a study made by Diabetic Health Clinic called
out that the KK doughnuts have refined carbohydrates and addictive contents that can

Jun Benedict Quirol Niel Anthony Cinco

Instructor MBA 1
 impact health. Therefore, the company must look into how to address this with a product or
a marketing campaign otherwise this can essentially hurt their brand.

• Krispy Kreme’s expansion pace

The overexpansion may have worn out the mystique of the brand in the United States as
indicated in the financial reports published by the company to its stakeholders over the last
decade. However, foreign markets, especially in China, are booming and have not been
oversaturated with Krispy Kreme products, let alone been introduced to them. Expanding to
foreign locations will certainly be profitable. Although gas stations and supermarkets are
already profitable domestic retail channels, focusing resources back onto company stores
can leverage the remaining power behind the brand to repair the damage of overexpansion.
Same-store sales increased from 2% to 9% in 20061, indicating that the overexpansion
issue has begun to disappear, and that domestic demand remains strong. Many firms in the
fast food and fast-casual markets are slowing expansion to free up capital for remodeling
stores, and Krispy Kreme would benefit from a similar strategy, combined with a brand-
centric advertising campaign.

• Krispy Kreme’s product and service differentiation against competition

Competitor Dunkin’ Donuts has introduced a new focus on premium coffees, and has
incredible market presence with over 5,000 United States stores6. Together with Starbucks
and Caribou Coffee, Dunkin’ Donuts will make it difficult for Krispy Kreme to package coffee
beverages with doughnut sales. Another competitor, Tim Hortons, went public in March
2006, and has seen their stock follow a steady upward trend since July. Also of note, major
cities are beginning to ban trans fats in restaurants. New York City and Philadelphia already
have the bans in place. Krispy Kreme would have to abandon

• Krispy Kreme’s marketing strategy

The problem with KKD strategy 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 expansion that were not backed up by market data or
evidence that the investment would be feasible

Proposed Solution/Changes

Krispy Kreme Doughnuts is one of the leading companies when it comes to doughnuts and coffee.
Other companies consider them as one of the big threats and competition that’s why they must be very
careful in every step they’ll do because one small mistake can make the company down. Based on this,
the following are proposed solutions in consideration to the analysis and evaluation above:

• Customer Segmentation and Product Proposition based on this

Given the fierceness in the competition, Krispy Kreme will need to determine which types of
customers buy their products or which products, maximised and leverage on this buying
power and frequency. This will also enable them to understand what products to develop
and/or innovate based on the customer needs per segment; and address any health
concerns.

Developing a study on whether they expand their product portfolio to go-to-market with
healthier option based on these customer demands should help make a decision to address
this social clamour.

• Control and Efficiency – Support System and Migration

Given the number of franchisee, this posts both as a risk and opportunity to maximise their
sales performance. Downsizing the internal stores and migrating the presence of the
franchise numbers as soon as strong controls are in place should help reduce operating
expense. The risk to be on the look out for would be how to ensure the culture remains
consistent and lessen variation between franchisees.

Jun Benedict Quirol Niel Anthony Cinco

Instructor MBA 1
 Developing and deploying a Franchise Support System and strategy should enable them to
ensure they can control and monitor all the activities across different franchisee. Reviewing
and improving the manufacturing and value chain should enable in delivering the product
efficiently and consistently.

• Brand Marketing and Promise

There has been a long standing positive impact of the “HOT DOUGNUT NOW” sign and
advertising that has gone really well for the company. Implement Marketing Strategies that
would touch the emotional and social benefits of Krispy Kreme product should ensure
product recall and strong customer pull into the product.

Marketing Research must be done periodically to stay updated of trends and customer
behaviour. This data and insights should inform any future R&D for product development,
as well as appropriate strategies to address any market threat and negative press.

• Differentiation and Advantage

The success and longevity of the Krispy Kreme may be attributed by their customer
experience and product quality. Hence, optimising its competitive advantage and strengths
through differentiation in products and services. Continue to maximise the marketing of the
“HOT DOUGHNUT NOW” while ensuring the quality of the product lines are guaranteed.

Recommendations

Krispy Kreme has ridden the advantage of its recognizable brand and logo, longevity, reputation, and
especially quality product. This is evident in the footprint of the company in the international market and
selectively in the U.S.

While they play in really competitive but distinct markets, the company will need to develop a strategy
to differentiate themselves from the product line of competitors and enable themselves to remain true
to their brand while addressing the customer demands based on the customer experience
requirements. They can do this by focusing on:

• Targeted-Customer Marketing - Tap into new consumer markets, including the “breakfast
crowd” and health-conscious. This through customer segmentation, utilising customer
experience and human-centred methods to determine the customer demands.
• Stronger Franchise Network - Look for new opportunities in technology and approached
to improve supporting their franchises given the performance contribution of this group
• Innovative and Expanded Product Portfolio - Fine-tune and enable changes in their
current product line to address any consumer health trends and regulations, but also
differentiate themselves against competition
• Sell the Brand Promise – Apart from increasing sales volume, stronger customer
relationships through advocacy by sparking appeal and emotional pull towards the brand.
This ensures there is customer loyalty and trust.

Ultimately, the Krispy Kreme strategy must have a connected and cohesive messaging and
structure to ensure any strategic plans contribute to a single narrative. Whether it is about
strategic store expansion, product development, or sales and marketing promotions, this
should all connect to the vision and be marketed to the customer-base in such to strengthen
what the brand and customer value propositions are.

Jun Benedict Quirol Niel Anthony Cinco

Instructor MBA 1