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Krispy Kreme Doughnuts, Inc

Marketing Case Analysis Course: MBA 524 Instructor: Mary A. Higby Date: April 22, 2008

Presented by: Jack Szczepaniuk Chun-Chiang Chan

Summary
• • • • • • • • Introduction to Krispy Kreme Krispy Kreme Downturn Krispy Kreme Finances S.W.O.T. What is the Problem? Critical Issues Alternatives Our Recommendation

Introduction to Krispy Kreme
• Founded by Vernon Carver Rudolph in 1933 • First donut shop (partnered) was in Paducah, KY

• Operations were moved to Nashville, TN
• Focused on selling to grocery stores • Rudolph opened his own shop in Winton-Salem,NC in 1937 with $25 dollars and a 1936 Pontiac

Introduction to Krispy Kreme • Out the door • Around the corner • Down the block .

Introduction to Krispy Kreme • Automatic doughnut cutting machine • Air-pressure doughnut pourer • Donut “hole” does not exist • Entire process is automated • “Hot Original Glazed” • The Red Light .

.S.Krispy Kreme U.

Krispy Kreme Worldwide .

2001 (KKD) . 2000 (KREM) • Bought Digital Java Coffee Company in April 2001 • Moved up to the NYSE on May 17.Krispy Kreme Stock • Opened on the NASDAQ on April 5.

Krispy Kreme Downturn • Low-carb. low-sugar doughnuts • Increase cost in ingredients • Too many stores in too little time • Lack of advertising has caught up with KK .

Krispy Kreme Finance Iss 4/6/2000: $9.41 8/18/2003: $49.37 5/10/2004: $20.37 11/5/2003: $44.42 1/16/2008: $2.31 5/5/2004: $32.05 1/16/2007: $11.75 1/31/2003: $30.30 10/27/2005: $4.60 12/28/2001: $45.23 4/18/2008: $3.11 .

92 90.23 22.08 56.86 21.49 55.24 0 0 0 -135.73 380.64 110.05 -198.77 598.2 389.68 -5.93 161. Net Non-Operating Other.15 49.01 -3.44 5.23 -40.38 9.06 Total Extraordinary Items Accounting Change Discontinued Operations Net Income 0 0 0 -42.68 9.Krispy Kreme Finance–Income Statement 2007 Revenue Total Revenue Cost of Revenue.35 493.65 155.29 -1.72 -0.28 48.77 67.05 28.07 14.77 -23.3 31.59 68.35 649.08 30.24 2006 543.16 82.78 19.73 28.82 48. Total Gross Profit Selling/General/Administrative Expenses.36 474.78 -135.67 -136.76 -41.85 2003 490.34 -1.85 -139.53 88.49 -26.72 31.28 109. Total Depreciation/Amortization Unusual Expense (Income) Operating Income Interest Income (Expense).55 5.56 0 0 0 31.73 490.05 2004 649.03 1.7 45.06 -147.85 0.6 -7.06 .47 50.58 -19.38 71.99 33.54 -0.Total Income After Tax 461.2 461.76 2005 707.31 -0.36 543.21 -42.26 -2.28 0 -1.67 -157.9 -118.11 -41. Net Income Before Tax Income Tax .77 707.

18 -13.49 2006 2005 2004 2003 .11 8.22 1 5.23 0 410.65 28.2 22.69 0 45. Net Intangibles.6 55.36 309.64 -11.57 27.Long Term Other Long Term Assets.Trade.98 48.69 5.09 46.56 13.18 32.01 0 12 131.22 0 16.58 6.15 34.97 2.56 0.18 1. Net Long Term Investments Note Receivable .77 40.86 27. Net Accounts Receivable .Short Term Receivables .09 0.8 37.16 0 14. Total .27 0.75 0 34.28 21.13 202.23 0 480.82 63. Net Accounts Receivable .98 16.83 -1.82 141.5 287.69 1.04 19.85 24.Trade.03 21.58 29.51 -2.82 0 14.32 0 410.97 23.28 45.48 9.03 205.86 0 349.24 0 62.Other Total Inventory Prepaid Expenses Other Current Assets.45 0 2.03 0 71.94 0 28.49 197.38 119.24 36.12 9.49 16. Total Total Assets 36.71 44.KK Finance–Balance Sheet (Asset) 2007 Assets Cash and Short Term Investments Cash & Equivalents Short Term Investments Total Receivables.49 147. Total Total Current Assets Property/Plant/Equipment.66 1.84 3.15 11.97 21.2 49.Net Goodwill.09 -1.83 137. Total Other Assets.21 32.82 168.97 29.6 29.98 0 73.69 27. Gross Provision for Doubtful Accounts Notes Receivable .68 39.31 0 656.59 0 17.37 3.44 35.76 0 32.75 7.6 0.38 0.

19 57.69 57.14 0 58.85 5.45 239.28 0 2.02 134.11 137.25 0 1. Total Total Liabilities Redeemable Preferred Stock Preferred Stock .97 8.61 -0.24 17.53 0 0 310.09 -0.86 3.87 125.19 2006 2005 2004 2003 Deferred Income Tax Minority Interest Other Liabilities.11 -0.06 20.3 8.91 0.95 90.85 0 29. of LT Debt/Capital Leases Other Current Liabilities.39 26.41 656.43 0 153.08 59.19 5.15 22.9 140.26 220.Non Redeemable.95 19.56 102.25 0. Total Total Current Liabilities Total Long Term Debt Long Term Debt 7.34 0 0 295.48 48.4 -1.97 105.19 0 0 294.11 14.69 270.73 0.48 0.27 78.01 1.2 -55.26 0 -191.49 .94 480.62 8.18 302.64 90.77 436.67 410.61 273.49 0.87 105.18 0 0 298.94 0 -233.43 108.48 -0.28 3. Total Total Equity Total Liabilities & Shareholders’ Equity 0 0 29.1 0 117.14 0 0 173.67 137.11 4.78 240.3 9.22 137.92 118.25 1.98 12. Net Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Other Equity.24 118.12 8.44 43.KK Finance – Balance Sheet (L+S) 2007 Liabilities and Shareholders' Equity Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port.38 143.11 23.35 410.6 9.96 349.

66 0.73 -4.86 4.34 10.76 28.74 0.98 2.87 27.57 -0.34 31.23 198.28 1.98 10.92 -25.67 -14.28 7.5 2.62 11.52 -6.07 -0.41 51.KK Finance – Cash Flow 2007 2006 2005 2004 2003 Net Income/Starting Line Depreciation/Depletion Deferred Taxes Non-Cash Items Accounting Change Unusual Items Equity in Net Earnings (Loss) Other Non-Cash Items -42.97 -7.49 40.85 -9.76 4.97 10.65 84.05 0 2.54 1.14 31.03 0 0.65 0 28.01 39.2 1.73 3.77 -198.14 -4.92 -6.6 -135.68 0.53 -18.03 4.56 6.32 0 0.06 8.8 48.97 2.8 22.87 0 87.12 213.24 21.09 18.05 -0.89 102.93 2.92 -1.24 37.94 2.98 -8.06 14.47 17.91 .33 0.81 -3.12 -2.06 21.12 1.01 Changes in Working Capital Accounts Receivable Inventories Other Assets Payable/Accrued Taxes Payable Other Liabilities Cash from Operating Activities 3.52 -0.44 0 2.56 22.97 0.11 7.32 82.

14 -0.82 -1.69 16.32 0.95 -1.01 -10.14 Issuance (Retirement) of Debt.34 6.03 0 10.18 -169.24 1.18 0 1.63 -108.01 -4.38 -2.4 0 7.15 -44.5 50.9 32.57 0 0.4 0 0.48 0 19.59 -0.01 16.03 27.2 .7 -81.7 -9.1 -41.69 58.66 21.96 -2.3 21.33 0 -12.94 -4.93 Cash from Investing Activities Financing Cash Flow Items Other Financing Cash Flow Total Cash Dividends Paid Issuance (Retirement) of Stock.43 2.66 9.5 9.98 -35.26 16.55 76.Beginning Balance Net Cash .11 0 -11.21 0.32 -91.2 21.4 1.43 0 0 -12.Krispy Kreme Finance – Cash Flow 2007 Capital Expenditures Purchase of Fixed Assets Other Investing Cash Flow Items.05 -15.17 32.22 -0.98 36.31 29.14 33.4 2005 -74.66 0 -3.52 -91.64 1.35 2004 -78. Net Cash from Financing Activities Foreign Exchange Effects Net Change in Cash Net Cash .57 -1.62 0 28.43 -0.92 -3.97 0 2.55 0.14 0.9 2.64 -2.14 -13.Ending Balance -15. Net 12.47 8.54 7.18 -0.7 -1.31 -74.4 2006 -10.71 27.38 -10.46 33.87 2003 -81.39 -0.03 41.96 -1. Total Acquisition of Business Sale of Business Sale of Fixed Assets Sale/Maturity of Investment Purchase of Investments Other Investing Cash Flow -4.32 -78.96 0 19.63 -0.21 -34.

888 19.74M 0.41% 147.72% 675.31 20.57M 28.10% 402.82% 461.66M -1.81B 172.92 1.45 -3.46M 4.75M 32.89 1 1.90% 1.50% 9.47B 26.20 5.875 -11.55M 16.56M 12.603 5.24% 1.83M 204.81M 0.586 N/A N/A 0.20% 256.10% -59.29B 759 20.36K N/A 23.21% 19.18M Oper Margins (ttm): Net Income (ttm): EPS (ttm): P/E (ttm): PEG (5 yr expected): P/S (ttm): 0.54 1.56% 41.00M 57.Krispy Kreme Finance Krispy Kreme Doughnuts Starbucks Tim Horton’s Caribou Restaurants Industry Specialty Eateries Industry Market Cap: Employees: Qtrly Rev Growth (yoy): Revenue (ttm): 201.22 1.90M 1.70K 7.59 19.82B 6.21 .85M 1.47 3.70% 430.21 1.50% 1.42% 264.72% 8.14% -22.13% 25.400 24.29B 525 10.000 17.91 1.07B Gross Margin (ttm): EBITDA (ttm): 11.10 0.47 9.86B 53.34M 1.944 N/A N/A 0.65M -0.84M 3.47% -30.

Strengths of Krispy Kreme • • • • Signature hot Original Glazed doughnut People know Krispy Kreme Hot light January 28. 282 were owned by franchisees . 395 Store worldwide.2007. of which 113 were owned.

etc) • Corporate Structure (CEO retired) . packaging. ingredients.Weaknesses of Krispy Kreme • Not flexible – difficulties reordering when non-Hot light stores are sold out • Franchisees close stores • No other standout products (weak menu) • Bad relations with franchisees (cost of equipment.

Opportunities for Krispy Kreme • Reputation –Fundraising program has helped non-profit organizations raise millions of dollars in needed funds • Worldwide sales • May steal back customers • Untouched domestic locations .

and other National Chains/Specialty Eateries • KK stores went up too fast • Store locations too scattered • Increasing cost of ingredients • Increasing utility and fuel costs . Starbucks. Tim Horton’s.Threats to Krispy Kreme • Dunkin’ Donuts.

Competitiveness .What is the Problem? How will Krispy Kreme return to profitability? .Franchisee relations .Efficiency .

Critical Issues • Banks saved KK in 4/08 extending life of loan agreement (interest rate higher) • New CEO in fiscal 2008 • Highly competitive w/ Dunkin Donuts. Tim Horton’s and Starbuck’s • Focus on marketing • Closing of Franchises • Globalizing Krispy Kreme .

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

A1 – Advantages and Disadvantages Advantages • Increase capital from sold locations and properties • Decrease loss • Develop new market Disadvantages Lose domestic locations Lose foothold in certain regions Risk for international locations Increase cost for new locations • • • • .

Alternative 2 • Diversify and expand product mix • Develop culturally oriented products • Redesign current product names and descriptions • Redesign packaging (cups. wrappers.) . etc. bags.

A2 – Advantages and Disadvantages • • • • • Advantages Attracts new customers Attractive to the international market More Competitive with the market May keep existing customers May increase items sold per purchase More efficient More cost effective in the long run Disadvantages • New development and packaging costs • New ideas may discomfort old customers • Risk of not selling • • .

Alternative 3 • Themed doughnuts  Holiday doughnuts  Special order birthday doughnuts  Special event catering (wedding. etc. events . games.) • Krispy Kreme Club w/ emails. coupons.

A3 – Advantages and Disadvantages Advantages Attractive young ages Increase the holidays' sale Loyal customers will increase Increase the customers' database Disadvantages • Remodel the production line • Increase the website setup cost • Need to find more workforce to support new activities • • • • .

Alternative 4 • Develop Krispy Kreme Mascot • Formulate marketing strategy for mascot and 2008 Beijing Olympics • Begin advertisements on TV and Radio .

it may not have big help May be too late to plan for Olympics Olympic sponsors and partners were chosen years ago .A4 – Advantages and Disadvantages • • • • Advantages Increase the visibility on market Increase sales Increase celebrity/icon marketing possibilities More helpful on increasing the international market • • • • Disadvantages A huge cost of advertising expense KK visibility is too low.

Our Recommendation Alternative 1 • • • • • Unprofitability must be realized Back to the basics Avoid being greedy again Grow slowly Other alternatives may be implemented in the future .

com The Triangle Business Journal www. Inc Marketing Case Analysis Course: MBA 524 Instructor: Mary A. 2008 Presented by: Jack Szczepaniuk Chun-Chiang Chan Sources Krispy Kreme website www.krispykreme.investopedia.com Investopedia www. Higby Date: April 22.Krispy Kreme Doughnuts.com .bizjournals.