As mentioned before, Krispy Kreme is running into problems because they are unable to
effectively control costs. One of the biggest reasons that they are having trouble controlling costs
is that historically they have focused too heavily on expansion and not enough on increasing
same store sales. In addition, their expansion was based on large, expensive factory stores which
have not only been expensive to open and operate, but they fail to provide enough locations to
reach a wide consumer base. These large factory stores require a large amount of fixed costs
causing the break-even points to be quite high. In order to prevent the closure of more stores and
ensure future survival Krispy Kreme must focus on more effectively managing costs and
Recommendations
Recommendation One
Since their initial public offering in 2000 Krispy Kreme has focused on aggressive
expansion and it hasn’t been until more recently that the company’s management has realized
that they need to focus on growing same store sales and rationalizing supply routes. According to
Krispy Kreme’s 10k reports one factory store can supply several outlet stores using a hub and
spokes distribution system. While a potentially effective idea, setting up this t ype of store system
is very expensive and there are a great deal of fixed costs associated with continuing operations.
The bottom line is that Krispy Kreme is still having trouble controlling their costs and one of the
best ways for them to eliminate cost at this point could be to downsize.
The first recommendation for Krispy Kreme is to begin a compan ywide analysis of all
corporately owned stores to determine which ones are generating the greatest amount of sales
and more importantly the highest return on investment. Next, management should find the
locations that are consistently underperforming and sell them off. Sellin g those locations that are
simply sucking revenue from the company will generate money that can be used to make more
profitable investments. Additionally, selling off underperforming stores will allow Krispy Kreme
to focus more attention on their operations in areas where they are profitable which will help
focus management’s attention on same store sales and reducing costs.
Recommendation Two
Krispy Kreme’s business model emphasizes an enjoyable customer experience. For
example, all of their factory store locations feature the ―Doughnut Theater‖, or a viewing
window that allows customers to see the donut making process. In the past this business model
customers are only willing to drive a short distance for doughnuts and developing a few large
stores is much less effective at reaching customers.
The second recommendation is to simply implement a new store model based on smaller
factory stores in all new business locations. Smaller stores require less real estate and lower fixed
costs while providing the ability to serve a wider customer base with more locations. Krispy
Kreme’s current management has been experimenting with smaller factory store locations which
still feature the ―Doughnut Theater‖; in this way they are preserving the same enjoyable
customer experience that Krispy Kreme’s customers have come to depend on, but making it
more convenient for consumers to reach stores.
Recommendation Three
The third recommendation involves changing Krispy Kreme’s menu a little bit to better meet the changing needs of consumers; in today’s market more and more consumers are focusing
on health conscious products. Despite the company’s previous attempt to alter products to be
more health conscious by removing all trans fats, doughnuts are still not very healthy and are
generally considered a snack food. For example, many people may not want to go to Krispy
Kreme simply because they are looking for a meal and not just a doughnut. One way they could
improve their same store sales and appeal to a wider customer base would be to add a few
healthier lunch items to their menu. Right now the majority of their daily sales, at 35%, occur
during the period of 6 a.m. to 11 a.m. simply because doughnuts are typically consumed in the
morning; in contrast, the lowest percentage of their daily sales, at 13%, occurs between 11:00
a.m. to 2:00 p.m. because they do not offer a diverse enough menu that includes lunch items.68
Competitors have realized what Krispy Kreme clearly has not as Dunkin’ Donuts currently offers
their selection; it’s about time for Krispy Kreme to adjust their menu to adap t to consumer needs
before they get left behind by competitors who have already done so.
Implementation Plan
We feel that at this time the best recommendation for Krispy Kreme is to develop some
healthy lunch options for their menu. These lunch items need to be easy to prepare using the
resources that are already available within the Krispy Kreme store as it would be far too costly to
add additional kitchen space to all Krispy Kreme store locations. The most feasible items then
would be sandwiches or similar products which are good because they do not require additional
kitchen space and because they are generally perceived as healthy.
The company’s current management may have a couple problems with this suggestion.
First being that they may feel adding lunch menu items would fundamentally change Krispy
Kreme’s business model. While they have already discussed altering the menu, the extent to
which they would be willing to do so is still unknown. Another problem management may have
is that it would be too costly to change Krispy Kreme stores in order to accommodate a lunch
menu; however, considering the alternatives this would be the cheapest option that would
generate the most desperately needed revenue for the company. They can easily add a few lunch
menu items without changing the store front at all so it will not be very costly as long as they
focus on adding menu items that complement their current store model. Additionally, most
customers that appreciate Krispy Kreme for their doughnuts will not even realize that the
company has changed as it will still offer the same traditional products; however, those who had
negative, unhealthy views of Krispy Kreme will be more willing to purchase healthier lunch
Employees will probably not see many changes though it will be important to provide
them with adequate training to prepare these new menu items properly. In addition, it would be a
good idea to make sure all store employees have the opportunity to try the new menu items so
that they can make valid recommendations for their customers.
This strategy will be noticed by Krispy Kreme’s competitors; however, since many of
their competitors have already implemented similar strategies it will not make too man y ripples
in the pond. In order to avoid simply copying the competition though they will need to offer
lunch menu items that are different. The customers will be the ones who really benefit from this
strategy because they will still enjoy the same great customer experience except now they will be
able to choose from a wider variety of menu items.
Certainly this strategy will require some investment on the part of Krispy Kreme so the
best way to implement this strategy without incurring large upfront cost is to experiment by
adding the new menu items in only a few larger store locations at first. New menu items may call
for Krispy Kreme stores to purchase additional refrigerators and new serving tra ys or containers
as well require some research and development expense to find what items may attract
consumers. Additionally, some coordination with new or existing suppliers will need to be made
which may be difficult. As Krispy Kreme’s own supply chain currently supplies most of the
necessary ingredients to stores, they will have to either contract with new suppliers or produce
their own supplies for the new menu items as well. It may be easier to have outside suppliers
bake the bread and produce the meats necessary for the new menu items. While this is something
that will require a great deal of thought and planning by the management team, Krispy Kreme
will be able to implement this recommendation without incurring a great deal of additional
Appendix A
Krispy Kreme Income Statement
All numbers in thousands
Period Ending Jan 31, 2010 Feb 1, 2009 Feb 3, 2008
Total Revenue 346,520 385,522 429,319
Cost of Revenue 297,185 346,545 380,014
Gross Profit 49,335 38,977 49,305
Operating Expenses
Research Development - - -
Selling General and Administrative 23,467 24,959 26,316 Non Recurring 5,903 548 47,143
Others 8,191 8,709 18,433
Total Operating Expenses - - -
Operating Income or Loss 11,774 4,761 (42,587)
Income from Continuing Operations
Total Other Income/Expenses Net (183) 3,146 (11,411) Earnings Before Interest And Taxes 11,103 7,121 (54,931) Interest Expense 10,685 10,679 9,796 Income Before Tax 418 (3,558) (64,727) Income Tax Expense 575 503 2,324
Minority Interest - - -
Net Income From Continuing Ops (645) (4,847) (67,051) Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -
Net Income (157) (4,061) (67,051)
Preferred Stock And Other Adjustments - - -
Net Income Applicable To Common Shares ($157) ($4,061) ($67,051) Source: Yahoo® Finance
Appendix B
Starbucks Income Statement
All numbers in thousands Period Ending Sep 27, 2009 Sep 28, 2008 Sep 30, 2007 Total Revenue 9,774,600 10,383,000 9,411,497
Cost of Revenue 4,324,900 4,645,300 3,999,124
Gross Profit 5,449,700 5,737,700 5,412,373
Operating Expenses
Research Development - - -
Selling General and Administrative 4,142,500 4,531,200 3,999,274 Non Recurring 332,400 153,300 - Others 534,700 549,300 467,160 Total Operating Expenses - - -
Operating Income or Loss 562,000 503,900 945,939
Income from Continuing Operations
Total Other Income/Expenses Net 36,300 9,000 2,419 Earnings Before Interest And Taxes 598,300 512,900 1,056,364 Interest Expense 39,100 53,400 - Income Before Tax 559,200 459,500 1,056,364 Income Tax Expense 168,400 144,000 383,726
Minority Interest - - -
Net Income From Continuing Ops 512,700 315,500 672,638 Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -
Net Income 390,800 315,500 672,638
Preferred Stock And Other Adjustments - - -
Net Income Applicable To Common Shares $390,800 $315,500 $672,638 Source: Yahoo® Finance
Notes
1
http://finance.yahoo.com/q/pr?s=KKD+Profile. (accessed November 12, 2010). 2
―Krispy Kreme Doughnuts and Coffee.‖ http://krispykreme.com/about-us/mission-and-vision. (accessed November 12, 2010).
3
―Company History.‖ Krispy Kreme Website.http://krispykreme.com/about-us/history. (accessed November 9, 2010).
4
―Krispy Kreme Doughnuts, Inc.: Company History.‖ http://www.fundinguniverse.com/company-histories/Krispy Kreme-Doughnuts-Inc-Company-History.html. (accessed November 11, 2010).
5
―Krispy Kreme Doughnuts, Inc.: Company History.‖ http://www.fundinguniverse.com/company-histories/Krispy Kreme-Doughnuts-Inc-Company-History.html.
6
―SEC probes Krispy Kreme.‖ CNN Money. 29 July 2004.
http://money.cnn.com/2004/07/29/news/midcaps/krispykreme_sec/index.htm. (accessed November 10, 2010).
7
2010, Krispy Kreme 10K Annual Report 8
Schneider, Joe. Bloomberg . http://www.bloomberg.com/news/2010-11-10/krispy-kreme-shuts-24-australian stores-after-appointing-administrators.html?cmpid=yhoo. (accessed November 12, 2010).
9
Dunkin’ Donuts.https://www.dunkindonuts.com/aboutus/products/. (accessed November 9, 2010). 10
Starbucks. http://www.starbucks.com/menu/food. (accessed November 9, 2010) 11
Thomson, James.Smart Company. http://www.smartcompany.com.au/retail/20101108-poor-site-selection-caused kripsy-kremecrash-sumo-salad-founder-luke-baylis-says.html. (accessed November 11, 2010).
12
Kopylovsky, Dmitry. ―IBISWorld Industry Report 31181 Bread Production in the US.‖ IBISWorld . (September 2010): 4. http://ntserver1.wsulibs.wsu.edu:2384/industryus/default.aspx?indid=261. (accessed November 4, 2010). 13 Kopylovsky, 27. 14 Kopylovsky, 29-30. 15 Kopylovsky, 13-14. 16 Kopylovsky, 4. 17 Kopylovsky, 12. 18 Kopylovsky, 21. 19 Kopylovsky, 21. 20 Kopylovsky, 20. 21 Kopylovsky, 19. 22 Kopylovsky, 9. 23 Kopylovsky, 14. 24 Kopylovsky, 9. 25 Kopylovsky, 16. 26 Kopylovsky, 17. 27 Kopylovsky, 12. 28 Kopylovsky, 14. 29 Kopylovsky, 24. 30 Kopylovsky, 21. 31 Kopylovsky, 24. 32
Dunkin’ Donuts Website. https://www.dunkindonuts.com. (accessed November 9, 2010). 33
Dunkin’ Donuts Website.
34
Dunkin’ Donuts Press Kit.http://news.dunkindonuts.com/press_kits.cfm?presskit_id=2. (accessed November 10, 2010).
35
Dunkin’ Donuts Press Kit.
36
Dunkin’ Donuts Website.
37
Dunkin’ Donuts Press Kit.
38
Company Profile for Starbucks Corp (SBUX). http://www.hoovers.com/company/Starbucks_Corporation/rhkchi- 1-1njg4g.html. (accessed November 11, 2010).
39