Answered: Write a summary about the company’s…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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Write a summary about the company’s background using your own words. Briefly explain and describes the company’s background, including its industry and extent of its multinational reach for identifying expansion factors and corporate strategies.

Transcribed Image Text:Revenues and operating income by company-owned versus franchised stores are provided in Exhibit 3. Notice nice increases across the board, with international franchise lagging slightly. Krispy Kreme Doughnuts' revenues by retail versus wholesale are provided in Exhibit 4. Note that retail sales are the highest, accounting for 49 percent of 2014 revenues. However, collectively, wholesale sales accounted for 51 percent of total revenues led by grocers and mass merchants such as Walmart at 31 percent of total sales. Finance The fiscal year for Krispy Kreme Doughnuts ends in February. The company had an outstanding 2013 (ending February 1, 2014) on most financial areas. The firm's stock price was up over 100 percent, revenues increased 6 percent, and the company reported a 65 percent increase in net income. Much of the increases can be attributed to opening 80 new locations around the world, but KKD also reported 6.7 percent increase in comparable store sales. The company's CEO indicated in the spring of 2014 that overseas markets remain strong for the firm, with many new store openings having long lines for up to 3 months after opening. The CFO, Douglas Muir, retired in 2015, turning the reins over to Price Cooper. Also, KKD is increasing its $80 million stock buyback to $105 million in 2015. The company's most recent income statement and balance sheet are provided in Exhibits 5 and 6, respectively. External Isues The doughnut market in the United States is a $13 billion industry, with about 25 percent of sales coming from bulk doughnuts in the 1 dozen-size box and up. Another 40 percent of sales come from drinks with half of this being derived from coffee. Major rival Dunkin' Brands accounts for much of these sales with their popular coffee offerings. Yeast doughnuts account for about 10 percent of industrywide sales. Doughnut holes and other varieties account for about 10 percent. There are thousands of "mom-and-pop" doughnut and coffee shops globally. Eating Healthy Both in the United States and globally, people are becoming more health conscious in their diet and food choices. In addition, as society becomes more litigious, firms competing in the fastfood industry, including doughnut shops, have become much more mindful of product labeling and ingredients used. Low-carb diets are still extremely popular worldwide and many have even made low-carb eating a lifestyle. Some cities and other governments around the world, for example, are imposing laws that restrict portion sizes of soft drinks and other sugary-laden snack sizes. Competitors of KKD, including Dunkin' Brands and Starbucks, have already diversified their menu options to include healthier choices. However, still, when most people want a doughnut, they want it to taste good and view it as a treat, so the outlook for doughnut shops remains positive, especially outside of North America, where the market is not saturated. Coffee Prices Like many commodities, the price of coffee is subject to wild price fluctuations. Brazil accounts for about 40 percent of worldwide coffee production. Droughts in Brazil, fungal infections, and deforestation of the rain forest have caused prices to swing greatly. The fungal infection in 2014 accounted for $1 billion in lost revenues; coffee production could drop as much as 40 percent in the coming years. Also, a global acceptance to "fair trade" providing farmers a fair wage and educational programs for their farming efforts has also contributed to higher prices. In addition, a growing middle class in developing countries has provided upward pressure on coffee prices. In total, coffee prices doubled from 2013 to 2014. The good news for consumers is that coffee prices paid will not be felt much more than a nickel or dime per cup at a restaurant, according to most analysts. Competitors Top doughnut competitors are Dunkin' Brands, Tim Hortons, as well as Starbucks for coffee and other snacks. The global market looks promising for American donut firms and Canadian-based Tim Hortons. Dunkin' Brands accounts for about 54 percent of the total doughnut shop market share. Krispy Kreme and Tim Hortons each account for about 5 percent of the U.S. doughnut market share. Regarding coffee shops, Starbucks accounts for 35 percent, Dunkin' Brands for 25 percent, and Tim Hortons and KKD 2 percent each of the U.S. coffee shop market share in total revenues. Exhibit 7 shows the summary financial information for KKD and its rival firms. Dunkin' Brands Group (DNKN) Headquartered in Canton, Massachusetts, Dunkin' Brands is a global distributor of coffee, baked goods, and their famous ice cream served under the Baskin Robbins name brand. There are 11,000 Dunkin' Donuts restaurants in 40 states and 32 foreign countries, as well as 7,300 BaskinRobbins restaurants in 43 states and 46 foreign countries. Many Dunkin' Donuts restaurants also contain a Baskin-Robbins within them, and all but 36 Dunkin' Donuts and Baskin-Robbins stores are franchisee owned. About two thirds of all Dunkin' restaurants in the United States have a drive-through that caters to customers, especially morning customers on their way to work. The majority of Dunkin' Donuts and Baskin-Robbins stores outside the United States are located in Asia and the Middle East, with South Korea and Japan having the most stores. After an infusion of cash from going public with its IPO in 2011, Dunkin' started to aggressively expand within the United States and internationally, opening 700 Dunkin' Donuts and Baskin-Robbins worldwide in 2014 alone. Dunkin' is opening 65 stores in Brazil between 2014 and 2016. The company is also introducing a European flavor to over 100 restaurants that now offer soft seating areas with low tables in earthy colors and contemporary lights. Implemented in 2014 was a company rewards program that enables Dunkin' to understand its customers better and learn ways to meet their demand and desires more efficiently With 99 percent of all Dunkin' Donuts stores under the franchisee system, most of Dunkin's revenues are derived from a 5.4 percent royalty payment franchisees pay on gross sales to the company. Baskin-Robbins franchisees pay around 5.0 percent. These numbers are U.S.-based only, as international based Dunkin' and Baskin-Robbins pay 2.1 percent and 0.7 percent royalty rates, with Baskin-Robbins stores also paying for certain ice cream products. U.S.-based stores also pay advertising fees of 5 percent of gross sales. Financially, 2014 was a banner year for Dunkin' Brands with revenues increasing 5 percent to $748 million, buoyed by 790 new restaurants that were opened worldwide in 2013 with 439 of these outside the United States. With new additions and improving business and prospects in foreign markets, Dunkin', like KKD, also experienced a large increase in net income of around 17 percent in 2014. Also noteworthy of late is Dunkin's increases in royalty income, franchise fees, and higher margins on Baskin Robbins ice cream products. Tim Hortons Tim Hortons is the largest doughnut and coffee retailer in Canada. Founded in Hamilton, Ontario, in 1964, the firm sells premium coffee, espresso, teas, and many other hot and cold beverages including fruit smoothies. Food items sold include soups, sandwiches, wraps, and many other choices. The company's mainstay, however, is donuts for which the firm was founded. There are over 850 Tim Hortons locations throughout the United States. The company also offers its products in self-service kiosk machines. In 2014, the company generated over $634 million in the United States alone. Tim Hortons was recently acquired by Burger King Worldwide. Starbucks Starbucks is the world's largest specialty coffee retailer with over 18,000 stores in 60 different countries. In addition to offering a variety of hot and cold coffee drinks, Starbucks also offers pastries, muffins, cookies, and other dessert-type items. As of 2014, Starbucks expanded its line of products to include beer, wine, chocolate fondue, and even chicken skewers at around 40 of its locations. The company also owns Seattle's Best Coffee and Torrefazione Italia coffee brands. Customers frequently purchase Starbucks coffee and ready-made coffee drinks at grocery stores, gas stations, and department stores. An important way Starbucks has historically differentiated itself from rivals KKD and Dunkin' Brands was by its perception as a more premium coffee offered in a variety of flavors. With Dunkin' Brands responding similarly with its product line, Starbucks is now using sales of beer, wine, and upgraded snacks and food as a means of attracting customers in the late afternoon and early evening-a time when sales are historically slower. Starbucks also maintains its position as more of a sit-down-and-relax establishment, unlike most KKD and Dunkin' Donuts stores. Starbucks has enjoyed over a 100 percent stock price increase from January 2013 to the summer 2015 and a new income increase of 50 percent from fiscal year end 2012 to fiscal year end 2014. Future Krispy Kreme Doughnuts is slowly shifting its focus from wholesale to more of a retail presence. Currently around 50 percent of revenues are derived from each source. However, KKD has always prided itself on hot fresh doughnuts that customers purchase directly from factory stores. As a result, the firm is building smaller- sized factory stores to better serve the retail customer directly. The company is also expanding its footprint internationally. In December 2014, KKD opened its 100th store in South Korea, a 3,200-square-foot doughnut theater facility with the full viewing

Krispy Kreme Doughnuts, Ic., 2015
Headquartered in Winston-Salem, North Carolina, Krispy Kreme Doughnuts (KKD) serves doughnuts and coffee as well as other snack items.
The company has locations in 23 different countries. Many Krispy Kreme shops are factory shops where customers can watch doughnuts being
made and purchase fresh hot doughnuts as well. The factory stores are responsible for servicing local grocery stores and convenience stores.
The KK Supply Chain provides raw materials for both franchise and company-owned stores in the doughnut- making process. Krispy Kreme
storeowners must purchase all materials from KK Supply Chain. Krispy Kreme reported total revenues in fiscal year end February 2015 of
$490 million (up from $460 million the prior year) with about 90 percent of revenues derived from the United States. For the fiscal first quarter
(Q1) of 2015, Krispy Kreme's revenue rose 9 percent yearover-year to $132.5 million, driven almost entirely by a 17.3 percent increase in
Krispy Kreme's store count. For that quarter, the company's domestic same-store sales rose 5.2 percent, but its international franchise same-
store sales declined 1.7 percent. Overall for Q1 of 2015, the company's adjusted net income was $16.6 million, or $0.24 per share. The
company's EPS number was up at least by the KKD buying back 391,300 shares of its stock for $7.4 million. Copyright by Fred David Books LLC.
www.strategyclub.com (Written by Forest R. David) history Krispy Kreme traces its roots back to 1933 when Vernon Rudolph bought a doughnut
shop in Paducah, Kentucky. After selling doughnuts in Kentucky, Tennessee, and West Virginia, the store known today as Krispy Kreme was
moved to Winston-Salem. Krispy Kreme doughnuts were sold to grocery stores at first, but became so popular with customers that they
requested the option to buy the doughnuts fresh and hot from the store, thus launching the doughnut factory retail store and selling directly
to the public. Krispy Kreme grew quickly over the next four decades before being sold to Beatrice Foods Company in 1976. Shortly after the
purchase by Beatrice, in 1982, several Krispy Kreme franchisees purchased the company back from Beatrice Foods and quickly established the
current Doughnut Theater style of factory stores where by customers can watch doughnuts being made. It was not until 1996 that KKD finally
expanded outside the Southeast by opening a store in New York City, followed in 2001 by opening its first store outside the United States, in
Canada. The company went public with its IPO launch in April 2000. In the United Kingdom, KKD just concocted a single, gigantic box that holds
2,400 doughnuts. The box (11.4 feet by 3 feet) was filled with doughnuts and required eight KKD employees to deliver it to 360 Resourcing
Solutions. The box was part of a promotion for the new "Krispy Kreme Occasions" division that customizes doughnut offerings for corporate
events or special occasions such as weddings and other celebrations. The division sells doughnut "towers" for special events or even
personalized doughnuts with customized, chocolate nameplates or corporate logos. The company has no plans to create another box, but it is
happy to sell 100 of the so-called double-dozen boxes for about $2,600. Krispy Kreme opened its first store in India in 2013 in Bangalore,
Karnataka, and now there are seven in that city. Also in 2013, KKD began opening stores in Colombia, with a total of 25 planned, as the first
South American country for the company. In late 2013, KKD opened its first store in Taipei, Taiwan. In 2014, KKD opened its first shop in
Chennai in southern India. Internal Issues Vision/Mission Krispy Kreme Doughnuts does not appear to have a published vision statement. The
company's mission statement, however, is given as follows: Consumers are our lifeblood, the center of the doughnut There is no substitute
for quality in our service to consumers Impeccable presentation is critical wherever Krispy Kreme is sold We must produce a collaborative
team effort that is unexcelled We must cast the best possible image in all that we do We must never settle for “second best;" we deliver on
our commitments We must coach our
ever-better results. (Source: Company docu
Distribution Krispy Kreme doughnuts are
sold in KKD stores, grocery stores, convenience stores, gas stations, Walmart, and Target stores in the United States. Internationally, the
doughnuts are sold in Loblaws supermarkets, Petro-Canada gas stations, and as freestanding stores in Canada, along with BP Service Stations
and BP Travel Centers and 7-Eleven stores in Australia. In the United Kingdom, Tesco supermarkets, Tesco Extra, and most Tesco service
stations carry KKD products, and service stations Moto, Welcome Break, and Road Chef also carry self-service KKD cabinets. Today, KKD has
locations in the United Kingdom, Australia, Turkey, the Dominican Republic, Kuwait, Mexico, Puerto Rico, Taiwan, South Korea, Malaysia,
Thailand, Indonesia, the Philippines, Japan, China, the United Arab Emirates, Qatar, Saudi Arabia, Bahrain, Hong Kong, and Ethiopia.
Organizational Structure As illustrated in Exhibit 1, KKD basically has two segments: USA and International. Note the company does not have
a Chief Operating Officer (COO), Chief Administrative Officer (CAO), or Chief Strategy Officer (CSO). However, KKD reports revenues by
geographic region, but is not structured geographically. In fact, the company appears to be structurally functionally, rather than divisionally.
Strategy Krispy Kreme Doughnuts has long prided itself on hot fresh doughnuts and a one of a kind taste. As you can easily watch at a KKD
factory store Doughnut Theater, the original glazed doughnut is fried before it heads toward a glazing waterfall to be covered in a sugary
signature glaze. There is only one supplier of KKD's signature glaze. In addition to entertaining guests, KKD feels the Doughnut Theater also
reveals the firm's commitment to quality and freshness. To help attract customers into the store, the original hot doughnuts sign is lit during
peak production hours, generally early in the mornings and late at night, when customers are most likely to visit the stores. In essence, KKD's
strategy is hot fresh doughnuts, but the firm also sells its products in gas stations, grocery stores, and other retail outlets. About 50 percent of
all KKD revenue is derived from wholesale outlets, so the firm plans to work on ways to improve the freshness and quality of its doughnuts
sold in various retail locations. The company is transitioning toward smaller factory shops that will focus on retail rather than wholesale
customers. This strategy appears more in line with the firm's new marketing approach. Many new stores in the southeastern United States
will be company owned, whereas new smaller factory stores outside the southeast are more likely to be operated under franchisee
agreements. Krispy Kreme Doughnuts has long helped the communities with fund-raisers, even offering special packaging at times. Fund-
raisers are under the firm's "local relationship marketing" strategy. The company does a good job attracting customers from local businesses
and families. About 55 percent of all domestic transactions are for doughnut orders of 1 dozen or more. However, this is also partly explained
by the volume discount provided for such orders. International orders of a dozen or more doughnuts at a time are a significant portion of sales
as well, indicating that doughnut consumption habits are more homogeneous globally than some may believe. The company likes to mention
homogeneity as a part of its "sharing concept," which is a key aspect of the firm's global marketing strategy. In early 2014, KKD and Keurig
Green Mountain Coffee agreed to create both decaf and regular Krispy Kreme coffee for Keurig coffee makers. Customers can purchase the
products at both Keurig and KKD websites as well as at KKD factory stores, grocery, retail, and other channels throughout the United States.
Krispy Kreme also has a new line of iced coffee. About 89 percent of all KKD's retail sales are derived from doughnuts, with the industry average
closer to 50 percent of sales being derived from doughnuts. KKD is late to capitalize on selling coffee and other drinks, but the company is
making efforts. Segment
spy Kreme Doughnuts is broken down into (1) Company Stores, (2) Domestic Franchise, (3) International Franchise,
and (4) KK Supply Chain. Company Stores and Domestic Franchise stores are similar, only differing in ownership. Both Company Stores and
Domestic Franchise Stores consist of full factory stores and satellite stores. International Franchise Stores are designed the same way as
Company Stores and Domestic Franchise with 125 factory stores and 449 satellite shops in foreign markets. KK Supply Chain supplies both
Company and Franchise stores, which all are required to purchase its products from KK Supply Chain. As of February 2015, there were 278 KKD
stores operating domestically in 38 states and in the District of Columbia, and another 523 shops in 23 other countries around the world. The
company has plans to grow international stores to 900 by January 2017. Krispy Kreme Doughnuts' revenue by geographic region is provided
in Exhibit 2. Note the nice increases everywhere except in the Other Americas.

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