Krispy Kreme Doughnut Co.

1. Krispy Kreme Doughnut Co. Presented by: Cevdet KIZIL

2. Company History • July 13, 1937 – Founded by Vemon Rudolph in Winston-Salem, North Carolina. First donuts 25 cents per dozen. • 1940s – Small chain of stores, family owned. Development of first distribution system. • 1950s – Improving and automating the doughnut making equipment. • 1960s – Steady growth throughout the Southeast. Consistent store designs. • 1973 – Founder Vemon Rudolph dies. • 1976 – Company sold to Beatrice Foods and growth slowed. • 1982 – Franchisees bought company back.

3. Company History (cont.) • 1996 - Expands outside the Southeast region, first store in New York. • 1999 – First store in California, national expansion underway. • April 2000 – Initial Public Offering (IPO) of common stock. Registered to NYSE with KKD. • December 2001 – First international store in Canada. • October 2003 – First store in Europe at England (London). • Today – Operates in 44 states of U.S., Canada, England, Mexico, Australia, New Zealand.

4. Company Indicators • Sells over 20 types of doughnuts. Produces 5 million doughnuts a day and 1.8 billion a year. • Profit Margin: 7.67 % (2004) • Revenue Growth: 35.40 % (2004) • Earnings Growth: 70.50 % (2004) • Sales Growth: 35.4% (2004) • Sales (mil.): $665.6 (2004) • Net Income (mil): $57.1 (2004) • Net Income Growth: 70.4 % (2004) • Total Employees: 6982 (2004) • Employee Growth: 78.4 % (2004) • CEO: Scott Livengood, paid $791.00 K (2004)

5. Company Strategy • Franchisees operate almost two-thirds of the chain’s locations. • Plans to expand to New England domestically, and Eastern Europe, Asia, Japan, South Korea and Spain internationally. • Sells its doughnuts to retail grocery outlets and convenience stores (distribution). • Aggressive growth. • Customer service (employees are friendly, smiling, sociable, free donuts & hats, apologies for long lines, free coupons). • Small marketing budget. Focuses on community events, sponsorship of school and church groups and other local marketing opportunities, publicizing new store openings.

6. Company Strategy (cont.) • “Doughnut-making theatres“ to prove healthy production. • Packaging. The boxes are longer and flat to protect the glaze, also a very effective symbol. • Extensive use of technology (latest machines to produce doughnuts, effective computer network connecting each store, customized web portal. Forecast tools, financial and analytics systems, ordering supplies, training demos are all online. So ordering errors down 90%, managers run twice as many shops, provides immediate online shipments, helps very fast reporting. Now 3,000 problem orders compared to 26,000 in 2000. 10 district managers currently handle 320-plus stores compared to 144 in 2001. 2%-3% more profitability just from the portal. IBM & Geac Computer Corp. hardware and software.

7. Major Critics for the Strategy • Too much reliance on sales in grocery stores and other retail outlets. This makes doughnuts more available and therefore less unique. • The company is growing very fast, that makes it really harder to control the operations and track the external environment. • The new stores are underperforming.

8. Franchising • The minimum cost for franchising is too high. Because when granted the franchise, you are required to build a chain of 15 Krispy Kream stores for the development of the market which costs $ 30,000,000. This is an important factor limiting the entrepreneurs. • 2/3 of the stores are franchisees. • Looking for franchisees in Eastern Europe, Asia, Japan, South Korea, Spain (international) & New England (domestic).

9. Krispy Kreme VS Dunkin’ Donuts • Dunkin’ Donuts implements an intensive advertising for its coffees, has more reputation compared to Krispy Kreme for coffees. • More diverse line of breakfast foods at Dunkin’ Donuts with bagels, muffins and breakfast sandwiches in addition to its own doughnuts compared to Krispy Kreme. • An estimated 30.6 million adult Americans (15.5 percent of the entire adult population) have eaten at Dunkin' Donuts in the past 30 days compared with 7.6 million (3.9 percent) who have eaten at Krispy Kreme (1.3 percent have eaten at both).

10. Krispy Kreme VS Dunkin’ Donuts (cont.) • Females show a slight penchant for Krispy Kreme over Dunkin' Donuts, an imbalance offset by men's preference for the latter. • Individuals with higher incomes are more likely than the average American to take a break at Krispy Kreme. In fact, adults earning $ 50,000 a year or more are 34 percent more likely than average to eat at Krispy Kreme. Adults who earn $ 20,000 a year are 5 percent less likely than average to eat there. The opposite holds true for patrons of Dunkin' Donuts. Adults earning less than $ 20,000 annually are 21 percent more likely than the average American to eat at Dunkin' Donuts, while those who earn $ 50,000 or more are 8 percent less likely than average to stop by for a bite.

11. The latest trends (issues) • Recently, Krispy Kreme has been losing some of its sales and profitability. Stock falling down. • Growing popularity of the low-carbohydrate diet fad leads consumers to think that Krispy Kreme’s products are unhealthy. Some groups in Australia protest Krispy Kreme for that reason. In U.S., it’s estimated that 6-7% of the consumers are on low-carbohydrate diet. So Krispy Kreme is planning to offer a low-sugar doughnut to attract dieters and diabetics. • Wall Street’s concerns about the company’s aggressive pace of new store openings resulted fall for Krispy Kreme stock.

12. The latest trends (issues) (cont.) • Securities Exchange Commission (SEC) investigates the company about its repurchase of franchises, lowered earnings, non-amortized assets (to show high profits). Stock fell down 15%. • Krispy Kreme doubled its debt load last year (2003) with an aggressive effort to buy back franchises from individual franchisees. The table shows Krispy Kreme’s profitability for the month of August, 2004. Resource: usatoday.com