Krispy Kreme

Doughnuts,
Inc
Marketing Case Analysis
Course: MBA 524
Instructor: Mary A. Higby
Date: 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 Finance

Iss 4/6/2000: $9.60
12/28/2001: $45.75
1/31/2003: $30.41
8/18/2003: $49.37
11/5/2003: $44.31
5/5/2004: $32.37
5/10/2004: $20.30
10/27/2005: $4.05
1/16/2007: $11.42
1/16/2008: $2.23
4/18/2008: $3.11

Krispy Kreme FinanceIncome

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

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

-26.58

-118.77

-139.6

88.68

56.26

-19.55

-23.44

-7.72

-5.85

-2.01

5.11

5.67

-0.06

0.16

-3.47

-41.03

-136.54

-147.38

82.99

50.78

1.21

-0.78

9.67

33.15

19.72

-42.24

-135.76

-157.05

49.85

31.06

Total Extraordinary Items

-41.29

-1.28

Accounting Change

-1.23

Discontinued Operations

-40.05

-1.28

-42.24

-135.76

-198.34

48.56

31.06

Cost of Revenue, Total

Operating Income
Interest Income (Expense), Net Non-Operating
Other, Net
Income Before Tax
Income Tax - Total
Income After Tax

Net Income

KK FinanceBalance Sheet
(Asset)
2007

2006

2005

2004

2003

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

22.98

62.57

73.8

45.71

71.82

48.28

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

1.15

0.94

0.75

Receivables - Other

34.97

34.97

7.97

2.85

Total Inventory

21.01

23.76

28.59

29.82

24.37

3.48

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

28.09

29.18

32.69

197.16

0.2

Intangibles, Net

0.84

1.11

1.69

49.15

Long Term Investments

3.22

8.6

5.97

14.58

11.22

0.04

2.12

6.56

16.86

19.32

9.23

13.31

5.23

349.49

410.86

480.28

656.6

410.49

Assets

Short Term Investments

Total Receivables, Net
Accounts Receivable - Trade, Net

Notes Receivable - Short Term

Prepaid Expenses
Other Current Assets, Total

Goodwill, Net

Note Receivable - Long Term

Other Long Term Assets, Total
Other Assets, Total
Total Assets

KK Finance Balance Sheet

(L+S)
2007

2006

2005

2004

2003

Accounts Payable

7.87

8.9

17.44

19.11

14.06

Accrued Expenses

125.25

140.48

43.62

23.3

20.98

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

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

0.85

3.91

9.85

Minority Interest

0.39

2.15

5.19

29.69

29.18

26.45

22.26

5.22

270.53

302.18

239.34

220.19

137.14

Redeemable Preferred Stock

Preferred Stock - Non Redeemable, Net

310.94

298.26

295.61

294.48

173.11

-0.2

-0.38

-0.56

-233.25

-191.01

-55.25

143.09

102.4

1.27

1.43

0.78

-0.77

-1.61

78.96

108.67

240.94

436.41

273.35

349.49

410.86

480.28

656.6

410.49

Liabilities and Shareholders' Equity

Notes Payable/Short Term Debt

Other Liabilities, Total

Total Liabilities

Common Stock
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)
Other Equity, Total
Total Equity
Total Liabilities & Shareholders Equity

KK Finance Cash Flow

2007

2006

2005

2004

2003

-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

1.23

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

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

-9.05

0.44

8.28

-7.12

0.74

7.97

1.03

0.57

2.8

2.28

2.65

4.32

-0.41

22.11

1.87

84.92

82.67

51.91

Net Income/Starting Line

Accounting Change

Accounts Receivable

Payable/Accrued
Taxes Payable
Other Liabilities
Cash from Operating Activities

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

-2.9

0.43

-3.62

-108.4

-4.97

2.5

2.54

Sale of Fixed Assets

9.66

7.33

28.66

0.46

2.14

Sale/Maturity of Investment

9.59

33.14

33.1

-0.82

-12.22

-3.47

-13.96

-41.14

-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

Issuance (Retirement) of Stock, Net

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

-0.01

0.34

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

Acquisition of Business
Sale of Business

Purchase of Investments
Other Investing Cash Flow

Foreign Exchange Effects

Krispy Kreme Finance

Krispy
Kreme
Doughnuts

Starbucks

Tim
Hortons

Caribou

Restaurants
Industry

Specialty
Eateries
Industry

Market Cap:

201.84M

12.81B

6.29B

53.85M

204.46M

1.29B

Employees:

3,875

172,000

525

1,603

4.70K

759

Qtrly Rev Growth (yoy):

-11.70%

17.50%

10.50%

5.20%

7.10%

20.90%

Revenue (ttm):

430.56M

9.82B

1.86B

256.83M

402.90M

1.07B

Gross Margin (ttm):

11.21%

57.24%

26.82%

16.13%

28.56%

32.41%

EBITDA (ttm):

19.00M

1.47B

461.55M

25.57M

41.75M

147.18M

0.10%

9.72%

20.42%

-3.47%

5.72%

1.14%

-59.65M

675.74M

264.34M

-30.66M

8.81M

-22.36K

-0.944

0.888

1.400

-1.586

0.59

N/A

P/E (ttm):

N/A

19.89

24.22

N/A

19.92

23.91

PEG (5 yr expected):

N/A

1.47

N/A

1.10

1.21

P/S (ttm):

0.47

1.31

3.45

0.20

0.54

1.21

Oper Margins (ttm):

Net Income (ttm):
EPS (ttm):

Strengths of Krispy Kreme

Signature hot Original Glazed doughnut

People know Krispy Kreme
Hot light
January 28,2007, 395 Store worldwide, of
which 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 Hortons, 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
Hortons and Starbucks
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
Disadvantages
Disadvantages
Advantages
Increase the visibility on
market
Increase sales
Increase celebrity/icon
marketing possibilities
More helpful on
increasing the
international market

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 524

Instructor: 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