Zeng 1

Zicheng Zeng

BGMT 310 – 01

Written Case Analysis 1

October 1, 2021

Abstract

Krispy Kreme Doughnuts, formally known as Krispy Kreme, Inc., is an American doughnut

company founded by Vernon Rudolph in 1937. The small business was launched shortly after Vernon

Rudolph bought a doughnut recipe from a French chief and rented a building in Winston-Salem, North

Carolina. The company started by selling doughnuts to local grocery stores. Along with the development

of technology and the increase of brand loyalty, Krispy Kreme Doughnuts has experienced tremendous

growth. During the 1960s, it spread throughout the south of the United States. In April 2000, Krispy

Kreme became a publicly-traded company with $10 a share and rose to $50 a share within two years. In

the same period, it also began expanding extensively on a global scale. By 2004, it had 357 stores

operating in 40 states and 10 foreign countries. As the company grew rapidly, it suffered from slipping

sales and underperforming franchise operations. Later, it was caught in a devastating accounting scandal.

This case analysis aims to dissect the failure of Krispy Kreme Doughnuts, identify the critical issues and

symptoms, and provide solutions and recommendations.

Company History

Krispy Kreme Doughnuts was founded in 1937. In the 1950s, production boomed with the

introduction of automatic dough cutters. By the 1960s, it was known throughout the southeastern United

States. It was sold to Beatrice Foods in 1973 after Rudolph’s death. Beatrice implemented cost-cutting

measures by modifying store design and using cheaper ingredients. In 1982 a group of investors led by

one of the original Krispy Kreme franchisees, Joseph McAleer, completed a leveraged buyout from

Beatrice. It returned Krispy Kreme to its roots, mainly by reverting to the original doughnut recipe and

signage. In 2000, Krispy Kreme was successful in raising significant capital with its Initial Public Offer
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(IPO). In 2004, Krispy Kreme suffered from huge losses. The company blamed a diet-conscious public

pursuing low carbohydrates for its problems.

Company Background

Krispy Kreme Doughnuts is a branded retailer and wholesaler of doughnuts and packaged sweets.

It produces over five million doughnuts a day and offers over 30 varieties. It also serves various types of

coffee and drinks. The company’s principal business is to own and franchise Krispy Kreme stores that sell

and distribute altogether doughnuts as well as complementary products. Krispy Kreme Doughnuts thrives

to be a leader in sharing delicious tastes and creating joyful memories. It believes that “Things are better

enjoyed together, especially the sweet fluffy clouds of deliciousness we call doughnuts.” The mission

statement is “to make the most awesome doughnuts on the planet every single day.”

Brand Elements

Krispy Kreme Doughnuts is famous for the “Doughnut Theater”. Krispy Kreme stores make the

doughnuts and the process is visible to the customers. The “Doughnut Theater” acts as visual proof that

they are freshly made. It also serves as a source of entertainment when customers are waiting in line.

Another brand element that separates Krispy Kreme from other restaurants is the sign, which says “Hot

Krispy Kreme Original Glazed Now.” When the sign is lit up, the public knows that a fresh batch of

doughnuts is made. It is a great way to attract impulse buyers.

Business Segments

As a vertically integrated company, Krispy Kreme operates through three business segments: company

store operations, franchise operations, and Krispy Kreme Manufacturing and Distribution. Krispy Kreme

has been dependent on franchisees for expansion into new markets. Franchisees that were in business

before the initial public offering (IPO) are considered as Krispy Kreme associates while new franchisees

are considered Area Developers. The associates were able to carry on with business as usual, but the Area

Developers are responsible for helping to grow the business.

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Operation and Sales

Both company-owned stores and franchise stores make and sell doughnuts and comple-mentary

products through on-premises and off-premises sales channels. On-premise sales include direct in-store

sales to customers visiting inside or coming through the drive-through window. Discounted sales for

community organization fundraising purposes are also included in on-premises sales. Off-premises sales

include fresh- doughnut distributions of branded, unbranded, and private-label doughnuts to gro-cery and

convenience stores. These doughnuts are sold packaged or unpackaged from a retailer’s display case. The

average factory store can produce as many as 10,000 doughnuts in a day, most of which are sold off-

premises to local convenient stores and grocery stores. Approximately 27 percent of sales revenue is

attributed to on-premises sales, 27 percent is attributed to Manufacturing and Distribution, and 40 percent

is attributed to off-premises sales.

Competition

Krispy Kreme Doughnuts competes in the quick-service restaurant industry. Stable same-store

sales growth and positive operating conditions have also contributed to the surge in casual-dining industry

stocks. The casual-dining sector continues to gain share from fast-food chains, as an older, wealthier

population favors dining in full-service restaurants. This trend is expected to continue. There are three

main competitors for Krispy Kreme: Dunkin’ Donuts, Starbucks, and Tim Hortons.

Dunkin’ Donuts is by far the number-one competitor of Krispy Kreme. It is also a quick-service

restaurant that offers over 25 varieties of doughnuts as well as beverages, bagels, and break-fast

sandwiches. It has over 1,900 stores in over 30 countries outside the United States and over 5,300 stores

located in the United States. Both the number of stores and scales are significantly larger than Krispy

Kreme. The second competitor is Starbucks. It sells, together with fresh, rich-brewed coffees, primarily

through approximately 12,000 retail stores located in the United States. The third competitor is Tim

Hortons. It is Canada’s largest restaurant chain that serves coffee and donut. The company quickly grew
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in size and expanded its menu with pastries and home-style lunches. Tim Hortons and Krispy Kreme

Doughnuts share similarities in history and presence in each respective country.

The Failures of Krispy Kreme

Although Krispy Kreme Doughnuts has strong competitors in the quick-service restaurant

industry, the competition has little to do with the failures of sales and franchising. Instead, it is mainly due

to poor decision-making. In 2004, Krispy Kreme announced adverse results. While the number of Krispy

Kreme stores was increasing, the same-store sales growth percentage has plummeted. Revenues for the

second quarter of fiscal 2008 decreased 7.5%. The net loss for the second quarter of fiscal 2008 was $27.0

million. There was also a sudden and large drop in the market value of equity. Worst of all, it was under

investigation by the Securities and Exchange Commission (SEC) for the aggressive way it accounted for

franchises and the prices paid for some of these franchises.

Franchise Strategy

There are several reasons why Krispy Kreme’s franchise strategy failed. First, franchise locations

are poorly planned. It started opening locations too close in proximity, resulting in new locations taking

sales away from the older locations. Other locations were in a health-conscious community. In addition,

Krispy Kreme’s franchise strategy focuses on selling equipment and supplies, including ingredients to

their franchises at high margins. This is a stark contrast to the more standard franchising strategy where

firms would build the business around franchise royalty payments and receive a percentage of the sales.

On the contrary, Krispy Kreme forced franchisees to purchase equipment and supplies from headquarters.

When it focused growth on expanding its number of stores, receiving income from high margin

equipment and supplies, while sacrificing same-store sales.

Over Expansion

As Krispy Kreme expanded aggressively, their not-so-fresh packaged products were becoming

ubiquitous in grocery stores and gas stations. Krispy Kreme is known for fresh and pleasant-smelling

doughnuts. When they offered packaged doughnuts in the supermarkets, gas stations, or kiosks, it made
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people stop caring as much. The results were not successful since this practice weakened the appeal of the

core product. Packaged doughnuts are no longer special that could only be get from the restaurant. People

would pass up the restaurant because they knew they could just get them at the supermarket. When

people shop at the supermarket, they would likely walk past the packaged doughnuts because they are not

drawn in by that fresh smell. Over expansion also ended up saturating the market, which led to dropping

sales.

Solutions

There are a lot of serious steps to take for Krispy Kreme before continuing to expand on an

international scale. It needs to gradually gain back the confidence of shareholders and stockholders. The

only way to achieve that is to develop a concrete strategy for steady growth. In that way, the company can

begin to increase sales and profitability. There are three main preventive measures for Krispy Kreme. The

first one is to implement cost-cutting measures and lower the number of openings. Reducing the

saturation of the market can the company innovate and enhance the available products, this will increase

profitability. In addition, it needs to stop pushing debt to franchises. Some franchises would rather see

quick bottom line profits on their statements Formulate a strategy for steady growth not only help increase

profitability but also resolve conflict of interest between the management and the franchises. Last but not

least, Krispy Kreme must revert to more conservative accounting practices. There is a lot of expectation

for a company that has gone public and trades stock shares on the public market. The pressures to produce

profit can be extreme, but the leaders should not carry out ethical decisions to deceive the public.

Recommendations

Although the international markets seem to be profitable, improvements still can be done

especially when expansion in the States has become a bottleneck. The top priority is to continue to study

the country's cultures and business environments. For instance, Asian countries love foreign goods and

their sweet taste. Therefore, it is paramount to increase presence in Asian countries. Another key to
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improving sales is to tap into new consumer markets, including the “breakfast crowd” and health-

conscious. It also helps to compete against the three competitors. Restaurants can also be upgraded.

Krispy Kreme should revamp the customer experience with vintage signs, free Wi-Fi, and a redesigned

ordering system.
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References

Brooks, Rick, and Mark Maremont. “Ovens Are Cooling at Krispy Kreme as Woes Multiply.”

The Wall Street Journal, Dow Jones & Company, 3 Sept. 2004,

https://www.wsj.com/articles/SB109416724305108759.

Craver R. Krispy Kreme on firm base but faces steep climb, stock experts Say. Winston Salem Journal,

June 6 2009.

“Krispy Kreme.” Krispy Kreme - Doughnuts, Coffee & Drinks, http://www.krispykreme.com/.

Warner, Melanie. “Krispy Kreme Tumbles into the Red.” The New York Times, The New York Times,

23 Nov. 2004, https://www.nytimes.com/2004/11/23/business/krispy-kreme-tumbles-into-the-

red.html.