Research Proposal

Krispy Kreme Doughnuts, Inc.

Winston-Salem, North Carolina

EXPANDING GLOBALLY

BY CHANGING THE PRODUCT

Prepared by

Courtney Fox

cfox@smu.edu

Introduction

The research proposal begins with an overview of Krispy Kreme’s functioning industries as well as current trends within them. The document progresses by describing the corporate structure of Krispy Kreme, specifically outlining company values and philosophies. To help develop the research, various store formats are discussed, followed by an in-depth analysis of Krispy Kreme’s financial situation. The following pages also place Krispy Kreme in the context of today’s market and illustrate the brand image and different products. The document attempts to combine research, analysis and recommendations to determine if a so called cold doughnut will allow Krispy Kreme to expand globally.

Industry Information

Krispy Creme Doughnuts, Inc. competes with several industries, to include:

Ø      Baked Goods Industry

Ø      Food Industry

Ø      Restaurant (Eating Places) Industry

Ø      Cakes and Pastries

According to the National Restaurant Association, Americans will spend about $354 billion at the nation’s more than 815,000 eating and drinking establishments. “Statistics indicate that restaurants have become an increasingly important part of American lifestyle over the past few decades” (Bread, Cake, and Related Products, 2003, ¶4).

When evaluating the restaurant industry, fast-food type restaurants like Krispy Kreme have led way, and the growth of franchising since the 1970s has also propelled the growth (franchises have almost tripled their share of the market). However, starting in the late 1990s, competition decreased in mature markets because they were becoming saturated with fast-food restaurants. During this time, the restaurant industry began to see an influx of themed-eating places trying to redefine their images. For example, T.G.I. Friday’s began mostly as a single’s bar, but evolved to a family-oriented dining place.

Another trend in the restaurant industry started in the mid-1990s when restaurants and supermarkets began to prepare foods for carry-out (commonly referred to as “home meal replacements”). Today, restaurants report that over 50 percent of their revenues come from carryout sales (Restaurants, 2003).

Despite the economic downturn in 2001 due to September 11th, the restaurant industry recently began to pick up momentum. In Western Europe, the fast food part of the restaurant industry has seen growth as well (Restaurants, 2003).

One trend in the restaurant industry is the increased use of computer and telecommunications technology to provide greater convenience and speed. These technologies include vibrating paging systems, wearable computers, and alarms (Restaurants, 2003). The bread, cake, and related products industry also researched new technology to find new methods to extend shelf life and preserve product freshness (Bread, Cake, and Related Products, 2003).

Experts in the United States continue to predict that the demand for restaurants and prepared foods will continue to increase because more women are working and people, in general, are pressed for time and seek convenient and economical alternatives to home meal preparation. This trend carries across the borders of the European Union where Nation’s Restaurant News reports that American fast foods are changing the way Europeans eat (Restaurants, 2003).

According to Market Share Reporter, 27 of the top 30 international restaurant chains are based in America. This is a clear sign that the American presence overseas is prominent and growing (Bread, Cake, and Related Products, 2003).

According to Ed Wood, a researcher of the history of bread making, 75 percent of the bread consumed in industrialized nations is produced by large commercial bakeries. It is natural that in the bread, cake, and related products industry, restaurants establish themselves close to population centers. Therefore, it is not surprising that a larger percentage of bread is consumed in large cities (Bread, Cake, and Related Products, 2003).

One specific change in consumer taste is the desire to eat healthier foods. “The bread and cake industry did face the challenge of producing products for a nation caught up in a conflict between health consciousness and a desire for taste gratification.” So, the industry responded with fat-free and lower-fat products, and by 1992 this challenge had faded into a manageable problem.

It seems that healthy food is more expensive to buy and produce than unhealthy food. Across the industry, serving sizes have increased. According to the Agriculture Department, muffins that weighed an average of 1.5 ounces in 1957 now average one- half pound each (Raeburn, 2002).

What has risen is the obesity rate in America. According to the Centers for Disease Control, 61 percent of all U.S. adults are considered either overweight or obese; the rate for kids aged 6-19 is 15 percent (Wells, 2003, ¶5). The Surgeon General observed that about 300,000 deaths per year are now associated with obesity (Parloff, 2003, ¶8). Therefore, restaurants continue to face pressures from state legislatures and others to include nutritional information on their menus so that behavior might possibly change (Leung, 2003, ¶1-5).

The food industry spends about $4.5 billion annually on advertising. This is money spent to encourage people to eat more, and so is the $50 million spent lobbying in Washington, D.C., for the food industry to have their agenda pushed (Smith, 2003, ¶12).

However, America is not the only culprit contributing to the rise in obesity. “There is no country in the world where obesity is not increasing,” says Stephan Rossner, an obesity expert at Huddinge University Hospital in Stockholm and president of the International Association for the Study of Obesity. “Even in developing countries we thought were immune, the epidemic is coming on very fast. The frightening thing is that so far nobody has succeeded to stop it,” he said (Winslow & Landers, 2002, ¶1-3).

Indulgence and convenience seem to be the most significant market trends in the cakes and pastries market. In 1999, convenience was nearly as important to customers as value. And doughnuts are both convenient and indulging. Doughnuts are the largest sector of the US morning goods market, and the leading three distribution channels in the US morning goods market are supermarkets, bakeries, and convenience stores (United States—cakes and pastries, 2002).

The remainder of this report will focus on Krispy Kreme Doughnuts, Inc., beginning with its place in the context of the industries mentioned above.

Krispy Kreme within the Industry

“More than 70 years after the debut of the world famous Hostess Twinkie™, the current baker of the treats is struggling as competitors including Krispy Kreme Doughnuts eat away at the baked-goods industry’s profits” (Shafer, 2003, ¶1). Analysts say that the baked-goods industry is falling behind its normal financial level.

Analyst John McMillin of Prudential Equity Group, Inc. argues that the baked goods industry needs to make their products more contemporary like Krispy Kreme.

James Elsesser, Chief Executive of Interstate Bakeries, Inc. said that the cake business has lost both units and share as the Krispy Kreme phenomenon has affected the entire sweet goods industry (Shafer, 2003, ¶6). The following data highlights Krispy Kreme Doughnuts, Inc. and its place within the previously mentioned industries.

Major Competitors of Krispy Kreme Doughnuts, Inc.

·         Panera Bread

·         Starbucks

·         Dunkin’ Donuts (owned by Allied Domecq)

According to Krispy Kreme’s 10-K Report from 2003, Krispy Kreme competes with numerous well-established food service companies. At the retail level, the company competes with other doughnut retailers and bakeries, specialty coffee retailers, bagel shops, fast-food restaurants, delicatessens, take-out food service companies, supermarkets, and convenience stores. At the wholesale level, it competes primarily with grocery store bakeries, packaged snack foods, and vending machine dispensers of snack foods.

Most of Krispy Kreme’s competitors offer customers a wider range of products. They have greater financial backing and other resources that allow them to react to changes in pricing, marketing and the quick service restaurant better than Krispy Kreme can (Krispy Kreme Doughnuts, Inc., 2003bc).

Krispy Kreme CEO Scott Livengood compares Krispy Kreme’s experiences and position in the marketplace to Starbucks Coffee, Inc. Livengood says that they are both specialty retailers, and they both took a product that had been around a long time and redefined and repositioned it with strong results (Shook, 2002, ¶4).

There seem to be a Starbucks on almost every street corner, and local coffee shops are suffering because of them. Similarly, local doughnut shop owners worry about Krispy Kreme putting them out of business. The small business owners cry: “They’re a big shark. We are a small fry” (“Local Donut Shop Owner Worried by Krispy Kreme Opening in Beaverton, Ore.,” 2003, ¶2). The small business owners say that Krispy Kreme is taking away a sense of people’s regionalism.

Research shows that each time Krispy Kreme enters a new market, the company increases sales for other doughnut shops. Because of the publicity and buzz generated by a new Krispy Kreme store, people in general are eating more doughnuts. Krispy Kreme new stores rarely hurt competitors. Krispy Kreme spokeswoman said, “Typically, our competitors large and small tend to see a positive impact when we arrive in a new market” (Krispy Kreme to Open Western Canadian Store, 2003).

Patti Jameson, a spokeswoman for rival Tim Horton’s, did not see Krispy Kreme’s entry into Canada as a threat. “The entry of Krispy Kreme will add excitement to the doughnut segment, and that’s only a good thing for us,” she said (Georgiades, 2003, ¶8-9). All the excitement of Krispy Kreme begins in the little town of Winston-Salem, North Carolina.

Company Information

Krispy Kreme Corporate Information:

Ø      Corporate Headquarters:  

            370 Knollwood St., Ste. 500

            Winston-Salem, NC 27103 

Ø      Internet: www.krispykreme.com

Ø      NYSE common ticker symbol: KKD

Ø      Chairman, President, CEO: Scott A. Livengood

Ø      Vice Chairman and EVP Concept: John N. McAleer

Ø      COO: John W. Tate

Ø      CFO and Treasurer: Randy S. Casstevens

Krispy Kreme is currently listed on the NYSE under KKD and was previously listed on the NASDAQ National Market as KREM since its initial public offering on April 5, 2000 (Krispy Kreme Announces 2-for-1 Stock Split, 2001, ¶1). Krispy Kreme is currently drafting a mission and vision statement.

Krispy Kreme’s website was integrated into the business by Coreport Web-based portal to allow quick and secure delivery applications as well as delivering data to employees. It allows Krispy Kreme to operate more efficiently and stay ahead of the competition (Krispy Kreme Drives Growth Via Coreport Portal Framework, n.d., ¶5).

History of Krispy Kreme Doughnuts, Inc.

Krispy Kreme began in the mid-1930s when a doughnut maker named Vernon Rudolph bought a secret recipe for yeast doughnuts from a French pastry chef out of New Orleans. Rudolph moved from to Winston-Salem and, on July 13, 1937, he opened up a wholesale business selling to local grocery stores. People walking by Rudolph’s plant began requesting hot doughnuts, so he cut a hole in the factory wall and sold them out on the street (the first drive-through).

Over the next few decades, Rudolph opened other stores—some his, some franchised—in North and South Carolina, and a regional chain was started. Rudolph soon chose the red, white, and green colors as well as the wide scripted logos and the “walking KK” letters. As for the name, it simply came on the recipe from the French chef.

Rudolph died in 1973, and Beatrice, the Chicago conglomerate that owned companies ranging from Tropicana orange juice to Samsonite luggage, bought the company in 1976. One year later, Scott Livengood (current CEO, President, and Chairman) graduated from Chapel Hill and joined the company as a trainee in personnel.

These were the years where Krispy Kreme was struggling to stay open. The franchisees, as well as many others, did not match well with Krispy Kreme’s idea of growth and a good quality doughnut. Livengood later said that Beatrice made the company cheaper. In response to this, franchisers led by Joe McAleer, acquired Krispy Kreme for $24 million.

When McAleer retired, his son Mack took over, and he soon asked Scott Livengood to become his partner. The two decided to get out of debt, so they needed to concentrate on bringing marketing to the fore of the company, including concepts such as the “doughnut theater” and increasing the size of the doughnut by 40 percent.

Although their marketing strategies were working, Livengood faced another major problem with Krispy Kreme—employees were clamoring for stock, while old franchisees wanted to sell out. Livengood decided that the company needed to go public.

However, this became a battle due to a protocol set earlier where all franchises (in this case it was 183) had to vote unanimously on matters. Eventually all 183 agreed to the idea, and in April 2000, Krispy Kreme went public (Holland, 2003).

Krispy Kreme’s business is quite simple. According to Shook (2002), the company boasts 165 franchises and 93 company-owned stores, and is opening new outlets in both large and small U.S. cities.

The first time Krispy Kreme moved to expand beyond its brand namesake was on April 7, 2003, when the company acquired the Montana Mills Bread Co. This Rochester, N.Y-based bakery chain cost Krispy Kreme about $40 million in stock (Ceron, 2003).

CEO Scott Livengood commented on the need to acquire Montana Mills Bread Co.

This acquisition is an outgrowth of the development of Krispy Kreme over the past five years. As I have indicated previously, we view Krispy Kreme Doughnuts, Inc., first and foremost as a set of unique capabilities which include the abilities to explore and nurture our customers’ passion for and connection to a brand, create an effective franchise network, vertically to provide a complete range of products and services to a system-wide store network serving flour-based products, and deliver these products across multiple channels. (Krispy Kreme Agrees to Acquire Montana Mills, Inc., 2003)

Another recent plan of Krispy Kreme was to open doughnut-making retail stores within Wal-Mart Supercenters. To provide a fresher product, doughnut machines and fresh shops managed by Krispy Kreme will be placed in a handful of Wal-Marts (Lofton, 2003). Fresh shops have Krispy Kreme doughnuts delivered multiple times during the day from nearby factory stores.

Senior Vice-President of Merchandising at Wal-Mart Canada Bob Brunet felt like the partnership between the two companies was a great fit. “Both companies are firmly committed to quality, affordability, customer service, and local community involvement” (Wal-Mart Canada launches partnership with Krispy Kreme, 2003).

KremeKo, Inc. was the company’s first international franchisee and was previously awarded development rights (Krispy Kreme Announces Expansion of Development Plans in Canada, 2003, ¶2). KremeKo, Inc. is the company’s exclusive area developer for Krispy Kreme in all provinces in Canada.

After two years of thought and research, Krispy Kreme acquired Digital Java Inc., a small coffee company in 2002. Digital Java offered a broad array of coffee-based and non-coffee based beverages, both hot and cold. This acquisition attained many strategic goals for Krispy Kreme including providing an improved coffee experience and increasing their vertical integration. This vertical integration helps Krispy Kreme control the sourcing and consistency of the coffee (Krispy Kreme Acquires Digital Java, Inc, 2002 ¶3).

One of the more interesting things about Krispy Kreme is that there is not one limited target public. According to Holland (2003), the company is equally loved by 5-year-olds and 75-year-olds alike. They are also enjoyed by whites, blacks, Asians, and Hispanics. New Englanders and Southerners love them as well as Californians and New Yorkers. Race is definitely not an issue. Only three types of people claim that they do not like Krispy Kremes: nutritionists, Dunkin’ Donuts franchisees, and compulsive liars.

Both Dunkin’ Donuts and Krispy Kreme have their loyal fans. However, according to Simmons Market Research Bureau, Dunkin’ Donuts has more. 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 versus 7.6 million (3.9 percent) who have eaten at a Krispy Kreme. This research also showed that women hold a slight favor to Krispy Kreme over Dunkin’ Donuts and individuals with higher incomes are more likely than average adults to go to Krispy Kreme. The research made clear that adults under the age of 45 are more likely than the average American to eat at a doughnut shop (Case Study: Krispy Kreme Donuts Come to Boston, n.d., Exhibit 3-¶6). Krispy Kreme caters towards a number of different audiences.

Publics

·         International

·         Domestic

-Highly Populated areas, communities

·         Associates/Employees

·         Stockholders

·         Wal-Mart, Digital Java Inc., KremeKo, Inc.

·         Nutritionists

·         Media

Trade Publications

Advertising Age, Business Week, Forbes, Fortune, National Law Journal, New York Law Journal

Industry Writers

Business Week Online: D. Shook

Business Week: R. Baker

New York Law Journal: T. Loomis

Wall Street Journal: J. Covert, S. Leung, K. Talley,

Krispy Kreme is relatively small because it has just 292 stores compared to Dunkin’ Donuts 3,600 U.S. locations (Holland, 2003). Like Dunkin’ Donuts, Krispy Kreme expands in both large and small US markets. Krispy Kreme will go wherever there is a need (Krispy Kreme Earnings Exceed Consensus, 2003, ¶11).

Of course, Krispy Kreme does target specific audiences to increase sales. For example, Leang (2000) illustrates how Krispy Kreme went about targeting the Hispanic population by using a month-long Spanish-language radio promotion, a series of billboard ads, and involvement in grassroots community events, and even bilingual menus.

With all of the company’s publics, it is no surprise that Krispy Kreme continues to expand. For the first time, it successfully expanded nationally during the late 1990s in California (Saltzman, n.d., ¶1). One large factor of Krispy Kreme’s continued financial success has been their expansion into international markets. They have expanded into Mexico, Canada, the United Kingdom, Australia, New Zealand, Japan, South Korea, and Spain. And each time they expand, they are met with great enthusiasm.

Expansion for Krispy Kreme comes after careful consideration of location and timing. The company will spend years investigating international opportunities (Krispy Kreme Awards Development Rights to Australia and New Zealand, 2003, ¶5). For example, when Krispy Kreme decided to expand into the UK, the company decided the best location would be a Harrods store in London. Research showed that British people eat about one-quarter of Europe’s sugar products and almost one-third of its chocolate (Krispy Kreme doughnuts to open branch in Harrods, 2003, ¶2). Interestingly enough, Dunkin’ Donuts pulled out of the UK recently, but Krispy Kreme believes they will not fail. They said that they have a different model than Dunkin’ Donuts, focusing only on doughnuts (Emling, 2003, p.c3).

Krispy Kreme considers the same factors when looking to expand either domestically or internationally. Central to the company’s growth strategy is aligning itself with highly capable, well-capitalized and experienced food operators (Krispy Kreme Continues Expansion Through New Area Developer Agreements and New Store Openings, 2002, ¶1). After their initial success outside of North America, Krispy Kreme became confident that its doughnuts would be well received throughout the world.

As for long-term future growth, executives say that they are confident foreign palates will acquire a craving for the sugary snacks when the outfit expands into Australia, New Zealand, Britain, Japan, and South Korea (Shook, 2002).

Shook (2002) says Krispy Kreme has taken its time finding the right corporate partner in each of those markets and CEO Livengood agrees. “We decided to target those countries based on the popularity of American products in those markets—as well as the ease of doing business.” After Krispy Kreme decides where they are going to expand, they determine the kind of store to grow with.

Store Formats

As of the release of the 2002 Annual Report, there were 276 Krispy Kreme stores and 99 of them were company owned, 120 franchised, and 57 were associated franchises. Krispy Kreme’s main way of expansion will be through new franchise stores in smaller markets (p. 24). The store opening cost ranges around $845,000.

Franchising is popular because it stems from the parent company’s ability to expand, but without as much expense and not much risk. However, franchise owners do not have much flexibility like independent restaurant owners do (Restaurants, 2003, ¶9).

The Franchise Operations segment of Krispy Kreme has an agreement where licensed operators pay royalties and fees to the company in return for the use of the Krispy Kreme name. KKM&D is a segment of Krispy Kreme that supplies the mix, equipment, coffee, and other items to both company and franchise-owned stores (Annual Report, 2002, p.64).

Krispy Kreme has two franchising programs. One is the original franchising “associate” program from the 1940s, and the other is the area developer program developed in the mid-1990s. According to the 2002 Annual Report, associates pay royalties of 3.0 percent of on-premises sales and 1.0 percent of all other sales. Area developers pay royalties of 4.5 percent of all sales and development and franchise fees ranging from $20,000 to $40,000 per store (p.25).

With all franchises, the doughnut mix, baking equipment, and roasted coffee beans are sold to store owners (Shook, 2002). Nearly two-thirds of Krispy Kreme’s 278 U.S. and Canadian stores are franchises, and the company continues to benefit from the steady expansion and healthy revenue gains from the franchisees (Business Brief, 2001).

Some of Krispy Kreme’s largest and most notable franchisees include:

Ø      ICON Doughnut Development Company

Ø      Glazed Investment

Ø      KKNY

Ø      Glazing Saddles

Ø      New England Dough, and Golden Gate Doughnuts (Krispy Kreme Continues Expansion Through New Area Developer Agreements and New Store Openings, 2002).

While franchises are a large part of Krispy Kreme’s operation, satellite stores play an integral role as well. Driven mostly by the demand for the wildly popular product, satellite stores provide growth after the factory stores have filled out. With sizes as small as 200 square feet, satellite stores are stocked daily with fresh doughnuts from the nearest factory store (Campbell, 2003, ¶11). The main problem with these satellite stores is that they only offer cold doughnuts.

Company-owned stores tried to solve the problem of the cold doughnut with new technology. The hot doughnut machine technology has slightly changed the store format of many traditional Krispy Kreme doughnuts because, customers can now see the doughnuts being made (Krispy Kreme Announces Development of New Hot Doughnut Technology, 2003, ¶1). This is just one more example of Krispy Kreme attempting to bring the hot doughnut experience to the customers.

Another change in 2003 was the addition of Network Appliance storage systems. Frank Hook, CIO of Krispy Kreme, said, “Consistently delivering a quality product requires more than a great recipe. It also takes continuous information sharing with razor-sharp efficiency.” Network Appliances is allowing Krispy Kreme to maximize storage resources and increase optional efficiency. It allows Krispy Kreme to reduce costs and increase productivity (Network Appliance Provides Krispy Kreme Doughnuts with Key Ingredient for Success, 2003, ¶2-4).

One of Krispy Kreme’s secrets to success is its consistency. Skipp’s (2003) Newsweek article tells how this consistency is maintained by managers with the right tools and technology including the company’s customized Web portal (www.mykrispykreme.com) that is designed to take guesswork and valuable time out of managing a franchise and lets owners connect with headquarters. They also created KKiTV (Krispy Kreme Interactive Television) and KKCBT (Krispy Kreme Computer-Based Training) that gives stores the ability to train via the World Wide Web (Annual Report, 2002, p.19).

However, to open a new store, the costs are substantial, and the outlets require much manpower while margins are thin (Cheryl, 2000, ¶6).

Capital

On April 5, 2000, Krispy Kreme Doughnuts announced its initial public offering of 3,000,000 shares of common stock that would be traded on the NASDAQ Stock Market under the symbol KREM (Krispy Kreme Announces Initial Public Offering, 2000).

Today, traded on the NYSE as KKD, the company’s stock has risen four times since its IPO three years ago while net income per share has compounded at more than 45 percent since 1998 (Holland, 2003). Krispy Kreme is one of most notable growth companies in America today because the stock price is up more than 500 percent since its April 2000 initial public offering. This makes Krispy Kreme one of best performing stocks of the past three years (National Law Journal, 2003).

Succeeding in today’s hotly competitive doughnut industry takes much more than a mouthwatering recipe. It requires an efficient organization from distribution of ingredients to customer sales—the kind that Krispy Kreme Doughnut, Inc. has redefined over 64 years of operation. (Krispy Kreme Drives Growth Via Coreport Portal Framework, n.d., ¶1).

Krispy Kreme brings in money three ways. The company makes 65 percent of its revenue selling doughnuts directly to the public through its 106 company-owned stores. Another 31 percent of Krispy Kreme’s sales come from selling flour mix, doughnut-making machines, and sundry doughnut supplies to its 186 franchised stores. And it gets about 4 percent of its revenue from franchisee licenses and fees (Holland, 2003).

In its 2002 Annual Report, Krispy Kreme projected continued increases in sales due to a variety of factors: growth in two-income households and a corresponding shift to foods consumed away from home, increased snack food consumption, and further growth of doughnut purchases from in-store bakeries (p. 23).

One interesting factor that makes Krispy Kreme different from most other doughnut shops is its hours of operation. The majority of Krispy Kreme stores are open early in the morning to the late hours of the night. They continue to sell doughnuts and make a profit from customers, producing items for supermarkets, and hotels (Sorted and the City: A Swift One with Sorted, 2003, ¶3).

Research from financial statements shows that while most sales growth for Krispy Kreme comes from news stores in the new markets, same store sales remain consistently strong in the company’s “heritage markets.” Heritage markets include most of the stores east of the Mississippi and south of the Mason-Dixon line (Campbell, 2003, A hierarchy of growth prospects ¶6). Note from Figure 1 Krispy Kreme’s retail locations in the United States.

In an interview with Krispy Kreme’s CEO Scott Livengood, he commented on his expanding doughnut outfit. “I love every store. They’re my children. But in terms of financial success, the markets that have really set records most recently include: Toronto, Seattle, and Minneapolis” (Shook, 2002). Various analysts study Krispy Kreme’s have their own comments on the company’s financial status.

In Figure 1, the darkened green areas show where Krispy Kreme has a presence. The yellow areas are arenas Krispy Kreme can domestically grow in.

Figure 1

Geography of Krispy Kreme

Source: www.krispykreme.com, 2003.

When researching the capital of Krispy Kreme Doughnuts, it is imperative to follow analysts within the industry.

Analysts:

Baron Capital Group, Inc.: Ronald S. Baron

BB&T Capital Markets: Andrew Wolf

Burgoyne Investment Services: Robert Burgoyne

Fulcrum Global Partners: Greg Schroeder

JP Morgan: John Ivankoe

Merrill Lynch & Co: Peter Oaks

Schaeffer Investment Research Inc.: Bernie Schaeffer

Robert Burgoyne of Burgoyne Investment Services is skeptical of Krispy Kreme on the stock market—he says that the stock if full of hot air. He thinks that it is a great company but that the stock is overvalued (Shook, 2002). He questions the company’s pricing power; how much is the public willing to pay for a dozen doughnuts?

Analysts John Ivankoe of J.P. Morgan and Andrew Wolf, retail analyst at BB&T Capital Markets, would argue with Burgoyne. Ivankoe says that “it’s 55 cents worth of pure pleasure. That’s the only doughnut I would eat.” Wolf believes that the 63-year-old Salem, N.C., chain with a wholesome 1950s image, solid fundamentals, and growth potential has been gaining adherents from far north of the Mason-Dixon Line (Gashurov, 2000).

Other skeptical analysts do not see much proven demand for Krispy Kreme outside of North America. “I’m not aware of other markets outside of North America where the reception to doughnuts would be a big hit. It’s a North American treat,” said Greg Schroeder, Fulcrum Global partners analyst. COO John Tate strongly disagrees with Schroeder. Tate said that Krispy Kreme is not looking at any countries where nobody has eaten a doughnut. Krispy Kreme would not go to a place where there is no demand, and a chain called Mr. Doughnut operates 11,000 stores in Japan (French, 2002, ¶1-9).

In 2000, analyst Ivankoe was optimistic about the stock, but in 2003 his rating changed to a “neutral.” He told his clients that he had concerns about Krispy Kreme’s new unit productivity, a higher risk long-term growth model, and the stock’s valuation (Krispy Kreme Net Income Surges 47 Percent, 2003, ¶3).

Ivankoe, who carefully follows the KKD stock, sees one recent potential danger with Krispy Kreme—the company has been seeking to buy up its franchisees. He points out that the group of developers who scout and build Krispy Kreme stores often want to sell out right after they open their first store (Eisinger, 2003, ¶3-4).

According to Bernie Schaeffer of Cincinnati’s Schaeffer Investment Research Inc., Krispy Kreme remains his favorite stock. He has liked Krispy Kreme since its 2000 initial public offering. Schaeffer thinks the company’s consistent earnings growth justifies the high price for what many think is an overvalued stock (Hindo, 2002). Schaeffer says that Krispy Kreme’s continued strength and fundamental development could possibly draw additional attention from more analysts and the brokerage community (Schaeffer’s Market Observation Features Krispy Kreme Doughnuts, 2003).

Mr. Baron from the Wall Street Journal sees KKD as the most profitable restaurant chain he has followed in his 30-plus years as a stock analyst. “They’re going to grow at a very high rate for years,” he said (Baker, 2002).

One writer for the Morningstar Column (2003) strongly disagrees that Krispy Kreme is a worthwhile stock. The unattributed writer thinks that that last thing you should want to do is buy a stock just because you like the store. Problems are brought to the forefront about investing in any sort of retail. Krispy Kreme, a retail shop, is criticized in light of its valuation because there is little chance that KKD will ever be worth more than $28 per share (based on the discounted value of its future cash flows). Another issue for KKD is the fact that unique products do not remain unique forever. The analyst said that some other company, notably Dunkin’ Donuts or Starbucks, could put out an imitation of Krispy Kreme and the magical power of the doughnut would be gone (Morningstar Column, 2003, ¶7-8).

Krispy Kreme has been recommended as a buy stock by other analysts because it is well-managed and growing. The company has expanded to more than 600 stores since 1998, and revenue has been growing consistently—from $160 million in 1999 to more than $490 million in 2002. Estimates for 2003 are around $640 million (Al Toral Recommends, 2003, ¶5). Figure 2 shows the growth of Krispy Kreme Doughnuts, Inc. company-owned stores in the past 13 years.

Krispy Kreme has struggled in the market even when they continue to report great numbers. Some speculate that Krispy Kreme stock decreases because Wall Street does not seem to have the same fondness for the company that its investors and customers have. Many investors seem to question whether the company can continue to put up such strong numbers selling doughnuts (The Sacramento Bee, Calif., 2003, ¶2).

As Krispy Kreme expands domestically, the company will have to focus more on a cold doughnut, and Wall Street views this favorably. “Hot or cold—it doesn’t seem to matter, as long as they’re clearly identified as Krispy Kreme doughnuts” said Andy Wolf, analyst with BB&T Capital Markets in Richmond, Virginia (Campbell, 2003, ¶16-17).

Krispy Kreme’s research has shown that consumers can differentiate between buying a Krispy Kreme at a Kroger and buying it at a store without the doughnut-theater approach (Campbell, 2003, ¶18). For the doughnut-theater, doughnut-making equipment is placed in stores so that people can see the doughnuts cook. The theater can fry and glaze as many as 2,600 doughnuts an hour. About two-thirds of Krispy Kreme’s revenue comes from off-premise sites like grocery stores and gas stations where the doughnuts are cold. This same strategy made Dunkin’ Donuts successful (A hierarchy of growth prospects, n.d., ¶7). Analysts are on both sides when it comes to evaluating Krispy Kreme’s doughnuts. However, one thing they all can agree on is that Krispy Kreme is successful because it focuses its efforts on the experience.

Source: Baker, 2002.

Elitism-The KRISPY KREME EXPERIENCE

“Pictures of old-fashioned Krispy Kreme logos line the walls. Classic sounds, such as The Temptations, flow from the speakers. Men in matching white shirts with Krispy Kreme logos bustle about” (Local Donut Shop Owner Worried by Krispy Kreme Opening in Beaverton, Ore., 2003, ¶11). For Krispy Kreme, it is all about the experience.

Krispy Kreme does not want to be considered just another doughnut shop or worse—fast food. Stan Parker, senior VP-marketing, says “no one looks at Krispy Kreme as a replacement for lunch or dinner. It’s a complement” (MacArthur, 2003).

Roly Morris, president and Chief Executive of KremeKo, says that the company takes a thoughtful and focused approach to expanding its wholesale business. He said, “Krispy Kreme doughnuts won’t suddenly become available everywhere because we don’t think that’s appropriate for the brand at this juncture in its evolution in the marketplace” (Krispy Kreme Steps Up Wholesale Business in Canada, 2003, ¶10).

Even though the British customer did not buy doughnuts before Krispy Kreme, the company was confident about their superior product when entering into the UK market. Its fans say that there is nothing to match the quality of a Krispy Kreme. Nothing matches the doughnuts’ exquisite taste or still-warm lightness. It is often described as more like eating cotton candy than eating a doughnut. When the red light goes on to tell people that they are cooking, there are almost accidents out on the highway with people trying to get a Krispy Kreme (Sweet Temptation, 2003, ¶9).

Krispy Kreme has a cult-like following. When Krispy Kreme stores open in a new city, there are often so many people that police are often brought in to reroute traffic, and customers have been know to camp out for days to be the first in line for a Krispy Kreme. Some even cross state borders to get them for breakfast. One woman in Michigan set the record for camping out for 13 nights when a new Krispy Kreme Doughnut store opened (Woman’s 13-Day Krispy Kreme Vigil Ends, 2003, ¶1).

When Krispy Kreme expanded for the first time out of North America to Australia, they received the same response from Australians. Some of Sydney’s most excited customers camped overnight in anticipation of the opening for their first Krispy Kreme hot doughnut experience (Krispy Kreme Announces Record Breaking Opening, 2003, ¶4).

Since 1937, the recipe is still a secret. While they believe they have a superior product, they want it to be convenient for the customer. Therefore, when Krispy Kreme looks to expand to a new location, they have a certain philosophy: locate stores off major thoroughfares to provide customers quick and easy access (Richgels, 2003, ¶2).

“People were saying putting cereal into a bowl, adding milk to it and eating it is not convenient. Ten years ago, cereal was the simplest thing you could eat. Now, people ask, “Can I do something else while I’m eating it?” (Nelson, 2002). Even though Krispy Kreme wants its product to be elite, it also wants people to find the product convenient. Therefore, a variety of techniques are used to portray the doughnut in a light that satisfies its publics.

Marketing/Public Relations

Most people have been touched by the magical brand of Krispy Kreme, but the message has reached people through different capacities.

For generations, the company survived by word of mouth and by people recommending it to friends and colleagues (Sweet Temptation, 2003 ¶15). An emphasis on local community has also propelled the brand.

Since Krispy Kreme maintains a low marketing budget, they have relied on each community to propel their doughnuts. Their origins in small Southern suburban locations give them a prime opportunity to reach the community (Case Study: Krispy Kreme Donuts Come to Boston, n.d., ¶7).

The green-white-and-red doughnut chain aims free doughnuts at people who can promote the hot-glazed to the masses: politicians, business executives, radio personalities, and reporters. These give-aways create the hype that in turn compels hundreds to attend store grand openings, bringing news crews and free publicity (Krispy Kreme’s Low-Budget Marketing Techniques Create Big Buzz, 2003, ¶7).

Company marketing chief Stan Parker tells the story of how one marketing strategy came about.

Around 1980, the folks in Winston noticed sales at the Chattanooga store were going through the roof. Headquarters decided to send a man up to Chattanooga for a look-see. Turns out the store manager had printed up an ordinary block sign that read “HOT DOUGHNUTS NOW.” A sales tactic was born. (Holland, 2003)

Today, these signs have made Krispy Kreme as much of a cultural phenomenon as a business (Skipp, 2003). The signs act as “sirens calling to customers.” Dunkin’ Donuts is selling doughnuts, while Krispy Kreme is selling the Krispy Kreme experience (Free Doughnuts Is Only One of Krispy Kreme’s Marketing Tactics, 2003, ¶3).

To lead on this cultural craze, Krispy Kreme opens its new stores in unique ways. For example, Krispy Kreme gave away $50,000 in cash and doughnuts in its first week in Boynton Beach, Florida to non-profit organizations (Boynton Beach Is Ready To ‘Get Hot’ With New Krispy Kreme Store, 2003, ¶3).

When Krispy Kreme comes into a new market, the company often uses famous people as their spokespeople to introduce the doughnut. For example, in 2002, when Krispy Kreme began its launch of 25 doughnut shops throughout the United Kingdom, Dick Clark of American Bandstand was chosen as one of partners for the launch. Clark hoped that Krispy Kreme would be as big of a hit in London as Britain’s most famous import, the Beatles, were in America (Stein, 2002, ¶2).

Shanley (2003) mentions other celebrities who own franchises and are also used to promote Krispy Kreme, including Hank Aaron and Jimmy Buffett. Hank Aaron owns a franchised Krispy Kreme store in Atlanta called 755 Doughnut Corp, which represents Aaron’s all-time home run record (Krispy Kreme Awards Franchise to Baseball Hall-of-Famer Hank Aaron, 2003, ¶3).

In 1996, Krispy Kreme opened a store in New York City by delivering boxes of doughnuts to the Today Show, gaining national exposure. To this day, Krispy Kreme has no traditional media advertising budget. “It’s simply much cheaper and more effective to give away doughnuts” (Holland, 2003).

This “shoestring marketing” gets people talking. In 2002, the free treats led to Krispy Kreme’s reference in more than 65 movies or television shows and 10,500 mentions in print publications (Krispy Kreme’s Low-Budget Marketing Techniques Create Big Buzz, 2003, ¶29). Krispy Kreme focuses on the product, not its promotion.

Another marketing strategy Holland’s (2003) article mentions is the doughnut theater. Customers know that they can watch their doughnuts being made through the glass viewing area and enjoy a doughnut fresh off the line (Krispy Kreme Opens First Store in New Jersey, 2003, ¶5).

This doughnut machine is actually part of Krispy Kreme’s domestic growth strategy. The machine reheats and glazes doughnuts that were originally cooked somewhere else. These machines “preserve the Krispy Kreme brand image while allowing for explosive growth across the country with smaller, cheaper stores all delivering the Krispy Kreme experience” (Campbell, 2003, ¶3).

Krispy Kreme wants to market to local communities by replacing candy bars and magazines as the fund-raiser of choice. Besides doughnuts, Krispy Kreme also wants to sell its own brand of coffee and collectibles with the brand name (Youngston, Ohio-Area Nonprofit Groups to Dig for Krispy Kreme Coupons, 2003, ¶8).

In the late 1990s, when Krispy Kreme expanded domestically in California for the first time, they had certain strategies that helped them reach success:

Ø      Have a groundbreaking event with an entertaining angle to entice news outlets to cover it and advance the store opening

Ø      Have a media tour with the area developer

Ø      Send out several press releases and media advisories with intriguing headlines and leads

Ø      Have a pre-opening VIP event for the community

Ø      Use the “doughnut drop” (introduce the product to drive-time radio and TV hosts).

Using these marketing techniques helped the Californian Union City Krispy Kreme to break the record for sales and win the title of “Franchise of the Year” (Satlzman, n.d., ¶5).

Fortune Editor-at-Large Andy Serwer believes that this is not some “fly-by-night dot-com.” “There’s 66 years of history here. It’s a product that people not only love, but understand” (Serwer, 2003, ¶4).

While these marketing techniques have been successful in North America, Krispy Kreme might have to look to different approaches in foreign markets. In a foreign market, the publics have not been exposed to the Krispy Kreme product, so word-of-mouth will not carry much value. Most analysts agree that as Krispy Kreme continues to expand into foreign markets, they will have a greater need for mass advertising (Krispy Kreme Doughnuts, Inc., n.d., ¶1-2). However, with zero dollars budgeted into their national advertising budget, Krispy Kreme depends on the brand to sell the product.

Brand Image

Krispy Kreme has been described as a confectionery wizard, a marketing company, young, service-oriented, and fun. Food experts are at a loss to explain the huge crowds that stores attract. With so many companies today desperate for customers, Krispy Kreme is a business that has shrieking fanatics lining up around the block in the middle of the night to buy its product (Serwer, 2003, ¶1).

The company’s key to success is the power of its brand, and now Krispy Kreme is trying to make it a global brand (Annual Report, 2002, p.11).

Although Krispy Kreme is not as recognizable as Coke or McDonald’s yet, Krispy Kreme’s brand has power. “Despite the fact that it is a fraction of the size of those icons and spends zilch on national advertising…the company’s retro red, white, and green logo is rapidly becoming part of American popular culture.” There are few brands that have been in more movies and TV shows than Krispy Kreme this decade. It has appeared in How to Lose a Guy in Ten Days and Bruce Almighty (Holland, 2003). Its free product placement on US TV shows such as NYPD Blue, Sex and the City, The Sopranos, and Will & Grace have only helped to instill the Krispy Kreme brand name (Sweet Temptation, 2003, ¶16).

Krispy Kreme has also become trendy along the way because of famous stars claiming its status. President Clinton let it be known that Krispy Kreme was his doughnut of choice, and movie stars Madonna, Jim Carrey, and Nicole Kidman have said that they are fans. Interestingly enough, while most of these stars are following the low carbohydrate Atkins diet, they seem to have no problems making exceptions for Krispy Kreme (Sweet Temptation, 2003, ¶16).

Health consciousness is affecting the marketing strategies for indulgent fast-food products. Over 27 percent of adults nationwide report that they are controlling their diet (Case Study: Krispy Kreme Donuts Come to Boston, n.d., Exhibit 3-¶8).

While Krispy Kreme has its list of celebrity advocates, notable celebrities such as Minnie Driver and Jennifer Aniston are passionate about the Atkins diet. This diet’s premise is that it is not fat that makes us fat, but carbohydrates.

Krispy Kreme leadership is not worried. One Krispy Kreme Doughnut contains 210 calories, 12 grams of fat, 13 grams of sugar and no fiber (Richgels, 2003, ¶20). According to MacArthur (2003), affordable indulgence is the main strategy that has powered the company’s tremendous growth. Stan Parker, Senior VP-Marketing, said that “people wouldn’t buy doughnuts that had half the calories and half the taste.”

Holland’s article in Fortune (2003) showed Ron Paul, President of Technomic, a Chicago food consulting company, commenting on Krispy Kreme’s image. “All kinds of companies sell sweet products, but Krispy Kreme has been very smart about their operation and how they exploit their brand.” They understand how to shower love and affection to their customers.

While Krispy Kreme is careful about how the brand is used, some analysts are concerned that the company will not be able to maintain control over the brand while operating through alternative distribution channels such as grocery stores. Analysts fear that the brand may become exploited (Low, 2001, ¶14).

Is it a great American growth story or merely a culinary flash in the pan? Krispy Kreme and its 7,000 employees would say it has to do with the American dream. Holland (2003) says “the Krispy Kreme story is about far more than comfort food. The company’s wild success in this hard environment is a tale of shrewdness, original thinking, and brinksmanship.” To Krispy Kreme, it is all about developing long and happy customer relationships.

When Krispy Kreme opened in Laval, Canada, they were warmly received because they had already proved their commitment to fostering a close and supportive relationship with other communities in Canada (Hot Krispy Kreme doughnuts available tomorrow in City of Laval, 2003, ¶3).

It seems that according to “Sweet Temptation” (2003), many people associate Krispy Kreme with the sort of doughnuts they ate when they were young. Krispy Kreme’s Vice President of Marketing, Stan Parker, elaborates:

For many people, it is the association of good times and warm memories. It could be that Krispy Kreme was where they went with their parents before church on a Sunday, or else where they went to celebrate a good school report. (Sweet Temptation, 2003, ¶20)

Holland (2003) agrees that Krispy Kreme is here to stay. “There’s 66 years of history here. It’s a product that people not only love but understand.” It is all about the Krispy Kreme experience. They want to share it with the world. And the world can see Krispy Kreme memorabilia displayed in the Smithsonian Museum of American History in Washington where it sits next to the Fonz’s leather jacket from sitcom Happy Days (Sweet Temptation, 2003, ¶19). “The collection portrays stories of entrepreneurship and invention, of the introduction of mass production and the marketing of prepared foods and connections between regional culture and commercial culture” (Rolling in the dough, 1997, ¶4). The Smithsonian exhibits why Krispy Kreme has been successful—a consistent well-made product.

Products

Although Krispy Kreme is best know for their Original Glazed Donut, there are other equally enticing products. There is the Chocolate-Iced Cream-Filled™, Glazed Devil’s Food™, and Caramel Kreme Crunch™. Last year, 2.7 billion doughnuts were made which are enough to circle the earth twice (Sweet Temptation, 2003, ¶1). The secret formula is kept in a vault upstairs at the company (Holland, 2003).

Regardless of which doughnut you choose, the hot doughnut remains at the heart of the Krispy Kreme experience. The doughnuts are made fresh throughout the day in the stores because customers are demanding doughnuts 24 hours a day. Unlike many doughnut companies, Krispy Kreme thrives on the fresh quality of its doughnuts because they can maintain their taste for a 24-hour period.

Krispy Kreme discourages resale of its products. The company only wants a fresh and consistent product for each person through its own stores and outlets with approved vendors. They want to be able to control the quality of the experience (Russo, 2003).

To keep their products fresh, the packaging of the doughnuts has to be different. “The sticky-sweet glaze of the donuts prohibits the typical box for a dozen donuts, so the boxes are longer and flat to protect the glaze. The box is a very effective symbol” (Case Study: Krispy Kreme Donuts Come to Boston, n.d., ¶11).

Even though Krispy Kreme thrives on the hot doughnut, satellite stores often have nothing but a cold doughnut to sell. While the rewarming technology (the doughnut theater) is viable, many satellite stores do not have access to this, and all they have is a cold product (Campbell, 2003, ¶7).

Hot or cold, it does not seem to matter. When Krispy Kreme opened its first store North Texas, customers did not care whether or not their doughnut was hot. “One of the great things about Krispy Kreme is its randomness—whether you’re lucky enough to hit it when the doughnuts are hot. Just like life and baseball, it’s not fair. And that’s the beauty of it,” one customer said (Harris, 1999, ¶3).

If cold doughnuts are satisfactory for customers, maybe impostors will be as well. 7-Eleven attempted to replicate the light, sugary-sweet textures made by Krispy Kreme Doughnuts. They claim that they can make exactly the same product with the same quality without having to share sales and profits with a high-profile partner (Covert, 2002, ¶5).

Coffee has become a thriving product in the business of Krispy Kreme. The major coffee chains are strategizing new ways to get people to buy coffee. Much of these strategies are being driven by the nation’s doughnut giants like Dunkin’ Donuts and Krispy Kreme. Also, amenities such as free wireless internet access or softer chairs are being offered in hopes that customers will stay longer (McLaughlin, 2003, ¶1-2).

Krispy Kreme’s signature coffee line is fairly new to the company. It features four drip coffees: Smooth, Rich, Bold, and Robust Decaf. All of these are made from high-quality coffee beans and roasted by Krispy Kreme’s own Roastmaster to exact specifications.

The Krispy Kreme beverage program also includes a line of espresso-based drinks, frozen beverages, and milks. One flavored coffee duplicates the flavor and aroma of Krispy Kreme’s signature Hot Original Glazed doughnuts (Boynton Beach Is Ready To ‘Get Hot’ With New Krispy Kreme Store, 2003, ¶5).

Conclusion

The food industry has been affected by a recent trend toward healthier eating habits. Mirroring this trend has been a desire by many to indulge in unhealthy foods. Krispy Kreme has capitalized on this trend by positioning doughnuts as a popular, on-the-go food. Krispy Kreme’s success has hinged on consistency throughout its locations and by delivering a high quality product. Future growth opportunities include expanding franchises as well as penetrating alternate distribution channels. As Krispy Kreme analyzes potential growth opportunities within alternate distribution channels such as convenience stores and grocery chains, it must determine whether doing so will sacrifice brand equity and product quality. Expanding beyond its own stores will require the marketing of the doughnut in a cold format. As research has shown, Krispy Kreme’s success has come from factors other than the serving temperature of its products. I believe that Krispy Kreme can be successful in launching its product in new markets without establishing physical locations. Alternative channel distribution will help bring the Krispy Kreme product to millions of potential customers who have yet to experience the taste of America’s best doughnut.

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