Krispy Kreme Doughnuts, Inc

Marketing Case AnalysisCourse: MBA 524

Instructor: Mary A. HigbyDate: 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

Krispy Kreme U.S.

Krispy Kreme Worldwide

Krispy Kreme Stock

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

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 FinanceIss 4/6/2000: $9.6012/28/2001: $45.751/31/2003: $30.418/18/2003: $49.3711/5/2003: $44.315/5/2004: $32.375/10/2004: $20.3010/27/2005: $4.051/16/2007: $11.421/16/2008: $2.23

4/18/2008: $3.11

Krispy Kreme Finance–Income Statement

　 2007 2006 2005 2004 2003

Revenue 461.2 543.36 707.77 649.35 490.73

Total Revenue 461.2 543.36 707.77 649.35 490.73

Cost of Revenue, Total 389.38 474.59 598.28 493.65 380.64

Gross Profit 71.82 68.77 109.49 155.7 110.08

Selling/General/Administrative Expenses, Total 48.86 67.73 55.3 45.23 30.07

Depreciation/Amortization 21.05 28.92 31.93 22.31 14.68

Unusual Expense (Income) 28.49 90.9 161.85 -0.53 9.08

Operating Income -26.58 -118.77 -139.6 88.68 56.26

Interest Income (Expense), Net Non-Operating -19.55 -23.44 -7.72 -5.85 -2.01

Other, Net 5.11 5.67 -0.06 0.16 -3.47

Income Before Tax -41.03 -136.54 -147.38 82.99 50.78

Income Tax - Total 1.21 -0.78 9.67 33.15 19.72

Income After Tax -42.24 -135.76 -157.05 49.85 31.06

Total Extraordinary Items 0 0 -41.29 -1.28 0

Accounting Change 0 0 -1.23 0 0

Discontinued Operations 0 0 -40.05 -1.28 0

Net Income -42.24 -135.76 -198.34 48.56 31.06

KK Finance–Balance Sheet (Asset)　 2007 2006 2005 2004 2003

Assets 　 　 　 　 　

Cash and Short Term Investments 36.24 16.98 27.69 21.03 55.18

Cash & Equivalents 36.24 16.98 27.69 21.03 32.2

Short Term Investments 0 0 0 0 22.98

Total Receivables, Net 62.57 73.8 45.71 71.82 48.28

Accounts Receivable - Trade, Net 27.6 37.68 44.77 63.09 45.44

Accounts Receivable - Trade, Gross 29.51 39.18 40.64 46.09 35.83

Provision for Doubtful Accounts -2.75 -13.66 -11.38 -1.27 -1.45

Notes Receivable - Short Term 0 1.15 0.94 0.75 0

Receivables - Other 34.97 34.97 0 7.97 2.85

Total Inventory 21.01 23.76 28.59 29.82 24.37

Prepaid Expenses 0 0 0 0 3.48

Other Current Assets, Total 12 32.49 17.38 14.83 9.82

Total Current Assets 131.82 147.03 119.36 137.5 141.13

Property/Plant/Equipment, Total - Net 168.65 205.58 309.21 287.49 202.56

Goodwill, Net 28.09 29.18 32.69 197.16 0.2

Intangibles, Net 0.84 1.11 1.69 0 49.15

Long Term Investments 3.22 8.6 5.97 14.58 11.22

Note Receivable - Long Term 0 0.04 2.12 6.56 1

Other Long Term Assets, Total 16.86 19.32 9.23 13.31 5.23

Other Assets, Total 0 0 0 0 0

Total Assets 349.49 410.86 480.28 656.6 410.49

KK Finance – Balance Sheet (L+S)　 2007 2006 2005 2004 2003

Liabilities and Shareholders' Equity 　 　 　 　 　

Accounts Payable 7.87 8.9 17.44 19.11 14.06

Accrued Expenses 125.25 140.48 43.62 23.3 20.98

Notes Payable/Short Term Debt 0 0.11 8.48 8.12 12.28

Current Port. of LT Debt/Capital Leases 1.73 4.43 48.1 8.14 3.3

Other Current Liabilities, Total 0.02 0 0 0 9.08

Total Current Liabilities 134.87 153.92 117.64 58.67 59.69

Total Long Term Debt 105.97 118.24 90.95 137.11 57.19

Long Term Debt 105.97 118.24 90.95 137.11 57.19

Deferred Income Tax 0 0.85 3.91 0 9.85

Minority Interest 0 0 0.39 2.15 5.19

Other Liabilities, Total 29.69 29.18 26.45 22.26 5.22

Total Liabilities 270.53 302.18 239.34 220.19 137.14

Redeemable Preferred Stock 0 0 0 0 0

Preferred Stock - Non Redeemable, Net 0 0 0 0 0

Common Stock 310.94 298.26 295.61 294.48 173.11

Additional Paid-In Capital 0 0 -0.2 -0.38 -0.56

Retained Earnings (Accumulated Deficit) -233.25 -191.01 -55.25 143.09 102.4

Other Equity, Total 1.27 1.43 0.78 -0.77 -1.61

Total Equity 78.96 108.67 240.94 436.41 273.35

Total Liabilities & Shareholders’ Equity 349.49 410.86 480.28 656.6 410.49

KK Finance – Cash Flow　 2007 2006 2005 2004 2003

　 　 　 　 　 　

Net Income/Starting Line -42.24 -135.76 -198.34 48.56 31.06

Depreciation/Depletion 21.05 28.92 31.98 22.81 14.68

Deferred Taxes -0.01 -1.89 10.12 -3.49 0.06

Non-Cash Items 39.65 102.87 213.2 40.32 21.03

Accounting Change 0 0 1.23 0 0

Unusual Items 28.52 87.76 198.54 0.94 0.93

Equity in Net Earnings (Loss) -6.47 4.34 1.62 2.24 2.09

Other Non-Cash Items 17.6 10.77 11.8 37.14 18.01

Changes in Working Capital 3.66 7.73 27.97 -25.53 -14.92

Accounts Receivable 0.5 3.86 10.98 -18.73 -6.98

Inventories 2.56 4.12 2.14 -4.07 -8.52

Other Assets 6.85 -2.97 -4.06 -0.97 -0.33

Payable/Accrued -9.05 0.44 8.28 -7.12 0.74

Taxes Payable 0 0 7.97 1.03 0.57

Other Liabilities 2.8 2.28 2.65 4.32 -0.41

Cash from Operating Activities 22.11 1.87 84.92 82.67 51.91

Krispy Kreme Finance – Cash Flow　 2007 2006 2005 2004 2003

Capital Expenditures -4.01 -10.38 -74.31 -78.32 -81.7

Purchase of Fixed Assets -4.01 -10.38 -74.31 -78.32 -81.7

Other Investing Cash Flow Items, Total 16.64 -2.32 29.92 -91.63 -9.94

Acquisition of Business -2.9 0.43 -3.62 -108.4 -4.97

Sale of Business 2.5 2.54 0 0 0

Sale of Fixed Assets 9.66 7.33 28.66 0.46 2.14

Sale/Maturity of Investment 9.59 0 0 33.14 33.1

Purchase of Investments -0.82 -12.22 -3.47 -13.96 -41.14

Other Investing Cash Flow -1.4 -0.4 8.35 -2.87 0.93

Cash from Investing Activities 12.63 -12.7 -44.39 -169.95 -91.64

Financing Cash Flow Items -0.43 -1.57 -0.18 -1.96 1.4

Other Financing Cash Flow -0.43 -1.57 -0.18 -1.96 1.4

Total Cash Dividends Paid 0 0 0 0 0

Issuance (Retirement) of Stock, Net 0 0.15 1.18 19.52 7.14

Issuance (Retirement) of Debt, Net -15.05 1.55 -35.21 58.55 41.5

Cash from Financing Activities -15.48 0.14 -34.21 76.11 50.03

Foreign Exchange Effects 0 -0.01 0.34 0 0

Net Change in Cash 19.26 -10.71 6.66 -11.17 10.3

Net Cash - Beginning Balance 16.98 27.69 21.03 32.2 21.9

Net Cash - Ending Balance 36.24 16.98 27.69 21.03 32.2

Krispy Kreme FinanceKrispyKrispyKremeKreme

DoughnutsDoughnutsStarbucksStarbucks TimTim

Horton’sHorton’s CaribouCaribou RestaurantsRestaurantsIndustryIndustry

SpecialtySpecialtyEateriesEateriesIndustryIndustry

Market Cap:Market Cap: 201.84M201.84M 12.81B12.81B 6.29B6.29B 53.85M53.85M 204.46M204.46M 1.29B1.29B

Employ ees:Employ ees: 3,8753,875 172,000172,000 525525 1,6031,603 4.70K4.70K 759759

Qtrly Rev Growth Qtrly Rev Growth (yoy)(yoy):: -11.70%-11.70% 17.50%17.50% 10.50%10.50% 5.20%5.20% 7.10%7.10% 20.90%20.90%

Revenue (ttm):Revenue (ttm): 430.56M430.56M 9.82B9.82B 1.86B1.86B 256.83M256.83M 402.90M402.90M 1.07B1.07B

Gross Margin (ttm):Gross Margin (ttm): 11.21%11.21% 57.24%57.24% 26.82%26.82% 16.13%16.13% 28.56%28.56% 32.41%32.41%

EBITDA (ttm):EBITDA (ttm): 19.00M19.00M 1.47B1.47B 461.55M461.55M 25.57M25.57M 41.75M41.75M 147.18M147.18M

Oper Margins (ttm):Oper Margins (ttm): 0.10%0.10% 9.72%9.72% 20.42%20.42% -3.47%-3.47% 5.72%5.72% 1.14%1.14%

Net Income (ttm):Net Income (ttm): -59.65M-59.65M 675.74M675.74M 264.34M264.34M -30.66M-30.66M 8.81M8.81M -22.36K-22.36K

EPS (ttm):EPS (ttm): -0.944-0.944 0.8880.888 1.4001.400 -1.586-1.586 0.590.59 N/AN/A

P/E (ttm):P/E (ttm): N/AN/A 19.8919.89 24.2224.22 N/AN/A 19.9219.92 23.9123.91

PEG (5 yr expected):PEG (5 yr expected): N/AN/A 11 1.471.47 N/AN/A 1.101.10 1.211.21

P/S (ttm):P/S (ttm): 0.470.47 1.311.31 3.453.45 0.200.20 0.540.54 1.211.21

Strengths of Krispy Kreme• Signature hot Original Glazed doughnut• People know Krispy Kreme• Hot light• January 28,2007, 395 Store worldwide, of whic

h 113 were owned, 282 were owned by franchisees

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, packaging, ingredients, etc)

• Corporate Structure (CEO retired)

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

Threats to Krispy Kreme

• Dunkin’ Donuts, Tim Horton’s, Starbucks, 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

What is the Problem?

How will Krispy Kreme return to profitability?

- Competitiveness

- Efficiency

- Franchisee relations

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, bags, etc.)

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.)

• Krispy Kreme Club w/ emails, games, coupons, events

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

A4 – Advantages and DisadvantagesAdvantages

• 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,

it may not have big help

• May be too late to plan for Olympics

• Olympic sponsors and partners were chosen years ago

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

Krispy Kreme Doughnuts, Inc

Marketing Case Analysis

Course: MBA 524Instructor: Mary A. Higby

Date: April 22, 2008

Presented by: Jack Szczepaniuk Chun-Chiang Chan

Sources

Krispy Kreme website www.krispykreme.com

The Triangle Business Journal www.bizjournals.com

Investopedia www.investopedia.com