Essay Instructions: You are to write a 3-page paper. Read the Case Study below and at the end of the Case Study answer the Discussion Questions. You Are to State the Question First and then continue to answer the question. Do Not Use Outside Sources!
Krispy Kreme Doughnuts, Inc. 2004
The neon sign “Hot Doughnuts Now,” when illuminated, lures hungry customers into the local Krispy Kreme stores. The sign signals Krispy Kreme’s signature product Hot Original Glazed doughnuts, are right now rolling under the glazing process and are ready to be devoured by anxiously waiting customers. There’s nothing better than a hot, fluffy glazed doughnut that melts in your mouth to satisfy your sweet tooth. Krispy Kreme Doughnuts went public on April 5, 2000, allowing its customers to have their donuts and eat them too. It opened a test doughnut-making store in a Wal-Mart Supercenter in October 2003.
History
Vemon Rudolph opened a donut company, Krispy Kreme, on July 13, 1937, in Winston-Salem, North Carolina. The company started out by selling elements to local grocery stores. People walking in front of the bakery soon began stopping by to ask if they could purchase the donuts hot. Rudolph decided to cut a hole in the wall of the bakery so that his Hot Original Glazed doughnuts could be sold directly to the customer, making the introduction of Krispy Kreme’s retail service. During the 1950s, the element making process was mechanized with the new Krispy Kreme automatic doughnut cutter. Hand cut donuts became a thing of the past. All processes in the bakery became entirely automatic. This was the original version of Krispy Kreme’s continuous yeast donut making equipment. The year 1962 saw a new innovation for Krispy Kreme. Doughnuts were no longer cut; they were extruded by air pressure from a doughnut hopper directly to trays. On May 28, 1976, Krispy Kreme doughnut Corp. became a wholly owned subsidiary of Beatrice Foods Company of Chicago, Illinois. The headquarters for Krispy Kreme remained in Winston-Salem, North Carolina. Krispy Kreme posts in purchase from Beatrice Foods Company on February 28, 1982, by a group of Krispy Kreme franchisees, led by Joseph A. McAleer Sr. Krispy Kreme made huge dream when a contribution of Krispy Kreme artifacts was donated to the Smithsonian institution’s National Museum of American History in Washington, DC., on July 17, 1987. Krispy Kreme sought to enhance and broaden its beverage offerings to customers and therefore acquired Digital Java, Inc., in 2001. Digital Java was a small coffee roaster and brewing- equipment fabricator located in Chicago. Also in 2001, Krispy Kreme’s comments transferred to the New York Stock Exchange under the new ticker symbol KKD. On December 11, 2001, Krispy Kreme opened its first store outside the United States, in Canada. Then on June 19, 2003, it opened its first store outside of North America, and Australia.
Present Conditions
Krispy Kreme produces approximately 7.5 million donuts a day, serving customers in 302 stores operating and 41 states in the United States, and also in Canada and Australia. KKD acquired Montana Mills Bread Co., in early 2003. Under the terms of the merger agreement, the shares of Montana Mills common stock will be converted to Krispy Kreme stock. Krispy Kreme has plans to develop a bakery Café strategy with Montana Mills’ product and brand as a basis for this new concept. Montana Mills offers more than 80 types of bread, muffins, rolls, scones, cookies, brownies, and cakes, which are sold through its 22 retail stores located primarily in suburban areas in New York, Ohio, Pennsylvania, in Connecticut. The stores cater to upscale customers, offering baked goods, ready-made sandwiches, specialty coffees, and gift items. Montana Mills went public in June 2002 and trades on the American Stock Exchange under the symbol MMX.
Company Profile and Philosophy
The principal business of KKD is high volume sales and production over 20 varieties of the finest quality donuts, including the signature Hot Original Glazed. Krispy Kreme’s commitment to quality and consistency has created a long-standing devoted customer base. The doughnut making stores, quality ingredients, vertical integration are part of what makes Krispy Kreme capable of differentiating itself from competitors. Krispy Kreme is dedicated to a strategic philosophy, which includes the following beliefs:
• All products will have a taste and quality that are second to none
• Control product quality and freshness of the ingredients.
• Be thoroughly prepared to execute growth initiatives when they become needed.
• The keys to creating and maintaining a competitive advantage include observing the quality, service, and innovation are second to none.
• Instill the belief that the company is a set of capabilities, not just a product or brand.
• Have a passion that growth and success as a company is a natural result of the growth and success of our people.
Business Structure
Krispy Kreme is a vertically integrated company with three reportable segments: Company store operations, franchise operations, and Krispy Kreme manufacturing and distribution (K K M & D.) unit. KKD company stores are owned by the KKD Company and are consolidated joint ventures; there are 114 units in this division. There are 188 franchise stores that are owned by either area developers or associates. These stores pay royalties to Krispy Kreme company stores and franchise stores both make and sell doughnuts and complementary product through on premises and off premises sales channels. The KKM& D division provides all supplies including foodstuffs, equipment, signage, and uniforms to all KKD locations. KKD’s Co. stores have both on and off premises sales. On premise sales include direct in-store sales to customers visiting inside or at the drive-through window. Discounted sales for community organizations fund-raising purposes are also included in on premises sales. Off premise sales include fresh doughnut distributions of branded, unbranded, and/or private label doughnuts to grocery and convenience stores. These doughnuts are sold packaged or unpackaged from a retailer’s display case. KKD Inc., offers franchise opportunities. Franchisees pay royalties to Krispy Kreme doughnuts in return, for the use of Krispy Kreme name. Two franchise programs are offered. First, in the associate program, which is the original program, franchisees pay royalties of three percent of on premises sales and 1% of all other sales with the exception of private labels. Second is the area developer program developed in the mid-1990s, in which royalties of 4.5% of all sales are paid along with franchise fees ranging on $20,000 to $40,000 per store. Almost all area developers and associates contribute 1% of all sales to the national advertising and brand development fund. Krispy Kreme offers franchises in the US market as well as the global market. Franchise stores and company stores are required to purchase all supplies from KK M& D. The KKM& D unit buys and processes all ingredients used in the doughnut mixes and manufacturers the doughnut making that all stores are required to purchase. KKM& D also includes the coffee roasting operations. KKM& D ships all food ingredients, juices, display cases, uniforms, and other items to Krispy Kreme locations on a weekly basis by common carrier.
Competition
The number one competitor of Krispy Kreme is Dunkin’ Donuts. Dunkin’ Donuts is owned by Allied Domecq PLC, which is an international company whose core businesses is in spirits and wine, and quick serve restaurants. Dunkin’ Donuts has 5,438 stores; 1,602 stores outside the United States and 3836 located in United States. Bill Rosenberg founded Dunkin’ Donuts in Quincy, Massachusetts, and KKD has recently expanded into its home territory. Sizing up a competition, one glazed doughnuts from Krispy Kreme has 200 calories. Dunkin’ Donuts carries 25 varieties of doughnuts as well as beverages, bagels and breakfast sandwiches. Krispy Kreme sales coffee espresso, frozen blends, plain or flavored milk, and has 25 varieties of doughnuts; in addition it has special flavors such as a pumpkin spice doughnuts offered during the fall months. Dunkin’ Donuts celebrated its 50th anniversary in 2000. In 2001 Dunkin’ Donuts introduced new beverage, Vanilla Chai, a creamy combination of tea, vanilla, honey, and spices. It also introduced a new logo the same year and in launched its new advertising tagline, JUST THE THING in 2000. Since KKD sells drip coffee, espresso, frozen beverages, and plain or flavored milk, the company now considers Starbucks Corp. as a key competitor. Starbucks purchases and roasts high-quality whole bean coffees, which it sells, together with rich-brewed coffees, primarily through approximately 6,800 retail stores located in the United States, Asia Pacific, Europe, the Middle East, Africa, and Latin America. Starbucks offer a wide selection of pastries and confections in addition to coffee and coffee making equipment and accessories.
Industry Outlook
The Standard & Poor’s (S&P) restaurants index was up 22.08% year-to-date through August 22, 2003 versus a 13.6% rise in the S&P 1500. Shares in the Quick Service Restaurant(QSR) industry have begun to rebound from a recent drop caused by an aggressively competitive environment, including significant price discounts by industry leaders McDonald’s and Burger King. Stable same-store sales growth and positive operating conditions may have contributed to the surge in casual dining industry stocks. A 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 estimated to continue. Food product price inflation remained modest third 2003, but began increasing in 2000 four. Major industry themes will likely incorporate an emphasis on lowering development cost of new restaurants and slowing expansion in the overstored US fast food market. Reducing the cost of new units should enhance companies’ returns on investment in improved entry into smaller markets. Some national companies are looking to international expansion for growth, while others are investing new formulas to find ways to grow. There is a new trend toward providing healthy choices. During the past two decades, an ever-increasing percentage of US dollars has gone to eating out. With a greater percentage of Americans working, there has been less time available for at-home food preparation. Krispy Kreme believes that this trend along with growth in two incomes households will increase snack food consumption and further growth of doughnuts sales.
Internal Factors
On premises KKD sales include counter sales and drive to window sales. Krispy Kreme is involved in community organization fundraisers events in which it offers doughnuts at a discounted price community fund-raising projects. Off premises cells included branded and unbranded, and private-label sales to grocery stores in convenience stores. Krispy Kreme entices customers with its doughnut making theaters, which are stores that have glass viewing areas that allow customers to watch the actual doughnut making process. Generations about loyal customers have grown to love that one-of-a-kind taste of Krispy Kreme doughnuts.
Production
Each Krispy Kreme doughnut store is a doughnut factory which has the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. KKM& D manufactures the donuts making equipment and produces the donuts mixes that all stores are required to purchase. KKD relocated to Chicago based Digital Java to its home town Winston-Salem, North Carolina. The full beverage program was implemented in approximately 70 KKD locations. It is anticipated that the remaining stores will receive the new beverage program, primarily espresso and frozen beverages, and the next 12 to 18 months.
Management
KKD’s upper management structure is comprised of eight officers, including the president and chief executive officer, and seven senior vice president.
Global Issues
Krispy Kreme currently has international locations in Ontario Canada, British Columbia, Québec, and Sydney Australia, and has plans to open stores in Britain and Mexico in early 2004; over the next five years, it plans to open 25 stores outside the US. Krispy Kreme has teamed up Harrods’s department store as the place to debut donuts in Britain. The United States and Britain differ in eating habits in office etiquette. Brit’s are accustomed to their traditional English breakfast of eggs, bacon, and milk. KKD plans to conceive the Brit’s to replace the biscuit, which is a cookie, with a doughnut for other snack food. Another concern for Krispy Kreme is persuading people to buy donuts by the dozen to take to the office. Most people in Britain do not have cars; therefore they cannot stop by the drive-through window on their way to work. Office etiquette is more formal in Britain and a dozen of Krispy Kreme hot glazed original doughnuts would cost about 5 pounds, which is about eight dollars Krispy Kreme will also offer the tea drinking British its own custom brew of coffee. KKD’s largest competitor, Dunkin’ Donuts, can be found throughout the world. Dunkin’ Donuts currently has location in Aruba, the Bahamas, Brazil, Brunei, Bulgaria, Canada, Chile, Colombia, the Dominican Republic, Ecuador, Germany, Greece, Guam, Guatemala, Indonesia, Korea, Lebanon, Malaysia, Mexico, New Zealand, Pakistan, Peru, the Philippines, Puerto Rico, Qatar, Saudi Arabia, Spain, Thailand, Turkey, the US, and the UAE.
E-commerce Issues
Krispy Kreme’s chief information officer, Frank Hood, has teamed up with network appliance to provide network storage solution for KKD. Krispy Kreme’s intranet, myKrispy Kreme.com, allows store operators and franchise owners access to real-time company information, including inventory updates, equipment maintenance, and store directories, dramatically improving communication between owners and home-office. Krispy Kreme teamed up with productivity point international to provide the tools and knowledge necessary to help train employees to reach their top potential. Knowledge of publishers’ productivity point allows employees to enter at the trainers via real-time chat and e-mail. Training is conveyed visually, not just in words, creating an environment where specific techniques can be demonstrated. Krispy Kreme doughnuts can be found on the Web at www.Krispy Kreme.com and Dunkin’ Donuts can be found at www.Dunkin’ Donuts.com. KKD’s web site is not user friendly as Dunkin’ Donuts, Dunkin’ Donuts offer online ordering of its coffee and gift baskets; KKD has no online ordering.
Future Outlook
For the year ending January 2002, Montana Mills had a negative net income. Further integration into the bakery and Café concept can lead KKD to consider acquiring companies such as Atlanta Bread Company. Montana Mills had a net loss of approximately $2.6 million for the 39-week period ending in October 2002; Krispy Kreme may have paid too much for it. The acquisition of Montana Mills has extended KKD’s breadth of competitors; Atlanta Bread Company is a bakery much like Montana Mills, except that it’s privately owned company. Sales for Atlanta Bread Company in2002were $15 million; it has 150 stores in 24 states and covers some territory that is not covered by Montana Mills. Atlanta Bread Company is worth about $75 million, and acquiring it may be a good strategy for Krispy Kreme. Krispy Kreme also should accelerate its plans for global market, which includes opening locations in the United Kingdom, Japan, Mexico, South Korea, and Spain.
Discussion Questions
1.Determine whether you think KKD paid too much for Montana Mills.
2.Determine whether you think KKD should expand globally, and if so, where and how fast, or should the firm be expanding further domestically?
3.Develop a three-year strategic plan for KKD, which is in a real fight with Dunkin’ Donuts for market share.
