kk final ppt

Dexter Rodriguez

Jonnahille Taruc

Germarie Lamanilao

Armando Abogatal

Steven

Summary

• Introduction to Krispy Kreme• Krispy Kreme Downturn• Krispy Kreme Finances• S.W.O.T.• Alternatives• Our Recommendation

Introduction to Krispy Kreme

• Out the door• 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

History

1937 – Founded by Vernon Rudolph, KK opens first store in North Carolina.

- The Factory store

1940s-1950s - Build own mixing plant and distribution system.

- KK had 24 shops in 12 states.

1973 – Beatrice foods bought the company.- Expanded to more than 100 countries.

1980s – Beatrice put up the company for sales.

1982 – A group of franchisees led by Joseph Mcaleer bought the company for $24M.

- Revived the original doughnut formula and logo.- Introduced the “Hot Doughnut Now” neon sign.

1996 – company focused on its signature doughnuts and branded coffee.

1998 – Scott Livengood became the CEO and took the company public in April 2000.

- It gave the company a market capitalization of nearly $500M.

- Announced an aggressive strategy to expand from 144 to 500 stores for the next 5 years.

2004 – KK announced that earnings is expected 10% lower than anticipated.

Krispy Kreme Profile

Founded In 1937

Headquartered in Winston-Salem, North Carolina

Products – Doughnuts (30 kinds), soft drinks (espresso,

chillers), hot drinks (coffee)

Revenue – 510.21 million USD (2006)

Net Income - 88.45 million USD (2006)

Employees – 4,250

http://www.krispykreme.com/varieties.html

Store Layout/Design

Freestanding: Most free-standing Krispy Kreme stores are constructed with a long window between the customer area and the kitchen, allowing customers to watch the operation of the doughnut-making machines.

Smaller Stores: Most of the smaller stores get their donuts from other locations rather than producing them on-site.

Atmosphere: Very welcoming, with bright lighting. Seating is limited but available. Factory tends to pull curious customers inside.

Advertisement / Marketing Free doughnut strategy – “Hot Now”; free doughnut while

waiting in line.

TV ad campaign

Gifts/Accessories – shirts, sweatshirts, hats, boxers, coffee, mugs, toys.

Fundraising – helped schools raise over $30 million last year (selling doughnuts, coffee, certificates, and partnership cards).

http://www.krispykreme.com/tv/

Distinguishing Aspects

Store Layout: Factory inside the store where you can watch how the donuts are made.

Reputation: Krispy Kreme has always been known as and has had a reputation of being the best.

Hot Now: When the Hot Now sign outside the store is lit you can get hot and fresh original glazed donuts.

http://video.google.com/videoplay?docid=-1560531662653117022&q=krispy+kreme+donut+factory&hl=en

COMPARATIVE SWOT ANALYSIS

STRENGTHS Krispy Kreme Dunkin Donuts Starbucks

•Cost advantage

•Strong management team

•Strong brand equity

•Pricing

•Reputation management

•Large presence and established

•national brand

•Dunkin’ Donuts has a reputation for brewing high quality coffee for more than five decades.•Dunkin’ Donuts is America’s largest retailer of coffee-by-the-cup, serving nearly 1 billion cups of brewed coffee each year.•On an average day, Dunkin’ Donuts sells more than 30 cups of freshly brewed coffee each second.

•Starbucks Corporation is a very profitable organization, earning in excess of $600 million in 2004.The company generated revenue of more than $5000 million in the same year.•It is a global coffee brand built upon a reputation for fine products and services. It has almost 9000 cafes in almost 40 countries.

Krispy Kreme Dunkin Donuts Starbucks

•All residents are aware of the product offering and most know of at least one location

•Niche competitors, especially local retail chains, are quick to offer up new choices for dissatisfied customers.

•Dunkin’ Donuts uses 100% Arabica coffee beans and has its own coffee specifications, which are recognized by the industry as a superior grade of coffee.• •Dunkin’ Donuts serves nearly 1 billion cups of brewed coffee every year or approximately 2.7 million cups a day.• •Dunkin’ Donuts mails coupons to their customers.

•Starbucks was one of the Fortune Top 100 Companies to Work For in 2005. The company is a respected employer that values its workforce.

•The organization has strong ethical values and an ethical mission statement as follows, 'Starbucks is committed to a role of environmental leadership in all facets of our business.'

WEAKNESSESKrispy Kreme Dunkin Donuts Starbucks

•Bad communication •Not innovative •Weak, damaged brand •No major advertises 100% reliance on reputation. •Excellent management staff A lack of adequate knowledge of the customer base (demographics, behavioral profiles) could lead to the eventual deterioration of the brand.

•Dunkin’ Donuts uses media to advertise while Krispy Kreme has never spent any money on advertising.

•Starbucks has a reputation for new product development and creativity. However, they remain vulnerable to the possibility that their innovation may falter over time.


•Opening additional locations but no focus on increasing current store performance Increase switching costs for competitors

•The organization has a strong presence in the United States of America with more than three quarters of their cafes located in the home market. It is often argued that they need to look for a portfolio of countries, in order to spread business risk.•The organization is dependent on a main competitive advantage, the retail of coffee. This could make them slow to diversify into other sectors should the need arise.

OPPORTUNITIESKrispy Kreme Dunkin Donuts Starbucks

•Emerging markets and expansion abroad •Innovation•Product and services expansion •Local open kiosks and in-store locations in airports, bookstores, and other retail outlets.

•Franchises available.

•The opening of new stores.

•Starbucks are very good at taking advantage of opportunities. In 2004 the company created a CD-burning service in their Santa Monica (California USA) cafe with Hewlett Packard, where customers create their own music CD.•New products and services that can be retailed in their cafes, such as Fair Trade products.


•Product Diversification. New Markets. •Significant co-branding opportunities with local sports teams and movie theaters. •Though there are many complaints from local chains when a Krispy Kreme opens, aggregate doughnut sales increase.

•The company has the opportunity to expand its global operations. New markets for coffee such as India and the Pacific Rim nations are beginning to emerge.•Co-branding with other manufacturers of food and drink, and brand franchising to manufacturers of other goods and services both have potential.

Getting behind the numbers:Case Study: Krispy Kreme

Doughnuts, Inc.• Established in 1937.

• Today has more than 290 doughnut stores (company-owned plus franchised) throughout the U.S.

• Serves more than 7.5 million doughnuts every day.

• Strong earnings and consistent sales growth.

Revenue sources in 2002

65%

31%

4%

0%

10%

20%

30%

40%

50%

60%

70%

Compnaystores

Sales tofranchisees

Royalties

24

Comparative Balance Sheets Assets

Krispy Kreme’s Financials: Balance Sheet Assets

25

Comparative Income Statements: Krispy Kreme’s Financials

Includes a $9.1 million charge to settle a business dispute

Includes a $5.733 million after-tax special charge for business dispute

Sales increased from $220.2 million in 1999 to $491.5 million in 2002.Net income increased from $6 million in 1999 to $33.5 million in 2002.

Systemwide salesInclude sales from company owned and franchised stores.

26

Common Size AssetsKrispy Kreme’s Financials: Apply the analysis tool (Common Size

statement) to assets

$3.2 cash $105.0 assets

Each statement item is computed as a percentage of Total assets. 27

Trend AssetsKrispy Kreme’s Financials: Apply the analysis tool (Trend statement) to

Balance sheet assets

$7 cash in 2000

$3.2 cash in 1999

Each statement item is calculated in percentage terms using a base year number.28

Comparative Balance Sheets Liability

and Equity: Krispy Kreme’s Financials

29

Common Size Liabilities and Equity:

Krispy Kreme’s Financials: Apply the analysis tool (Common Size statement) to Balance sheet liabilities and equity

$13.1 accounts payable

$105.0 total liabilities and

equity

Each statement item is computed as a percentage of Total liabilities and equity.30

Trend Liabilities and EquityKrispy Kreme’s Financials: Apply the analysis tool (Trend statement)

to Balance sheet liabilities and equity

$8.2 accounts payable in 2000

$13.1 accounts payable in 1999

Each statement item is calculated in percentage terms using a base year number. 31

Krispy Kreme’s Financials:Abbreviated cash flow statements

32

Common Size Cash Flow Statements:Krispy Kreme’s Financials: Apply the analysis tool (Common Size

statement) to Cash Flow Statements

$93.9 capital expenditures

$491.5 sales

Each statement item is computed as a percentage of Sales. 33

Trend Cash Flow StatementsKrispy Kreme’s Financials: Apply the analysis tool (Trend statement)

to Cash Flow Statements

$93.9 capital expenditures in 2002

$10.5 capital expenditures in 1999

Each statement item is calculated in percentage terms using a base year number. 34

Calculating Return on Assets

Eliminate nonrecurring items

Eliminate interest expense

Effective tax rate35

How can ROA be increased?There are just two ways:

1. Increase the operating profit margin, or

2. Increase the intensity of asset utilization (turnover rate).

Assets turnover

Operating profit margin

NOPAT is net operating profit after taxes

36

ROA Decomposition and Analysis

How was Krispy Kreme able to increase it’s ROA from 7.1% to 12.1% over this period?

1. The expanded store base, along with increased sales, allowed the fixed costs be spread over a number of stores- The result was in an improved operating profit margin.

2. However, the asset based was considerably less productive in 2002 ( Asset turnover is 1.48) than it was in 1999 ( Asset turnover is 2.22) – More stores meant more resources ( assets) tied up operating cash, receivables, etc.

1. 2

37

ROA and competitive advantage:Krispy Kreme

Wendy’s, Baja Fresh, Café Express

S&P industry survey or other sources

Q: What was the key to Krispy Kreme’s success in 2002 ?

Answer: Krispy Kreme outperformed the competition by generating more sales perasset dollar.

38

Recent Activity

• KK went public in April 2000 at $21/share, and within a year that number doubled.

• All seemed well for a couple of years, in spite of a few renegade analysts declaring KK stock “too high, given its modest quarterly net income.”

• Merrill Lynch downgraded stock to “sell” in October 2002; J.P. Morgan cut the rating to “underperform” in August 2003.

Downward Spiral

• Many credible Wall Street names held on ‘til May 2004, when KK stock fell 29% in one day after KK issued a profit warning (they blamed the low-carb craze seizing the nation). By Sept ’04, the stock had plummeted 77%.

• Shares took another hit in late July ’04, when KK announced federal regulators were investigating the company.

• KK failed to file its SEC reports for over a year (failure to meet accounting and financial reporting obligations).

. . . and it gets worse . . .

• defaulted on loans• unable to borrow more money• two important franchises bankrupt (owed lots to KK)• class-action lawsuit by stockholders• CEO, COO & CFO unloaded shares at peak• caught boosting profits by extorting franchises• sold equipment and booked the revenue before payment

was received – “cooking the books”• “sweetheart deals”• independent auditors refuse to sign off on KK’s financial

statement• CEO and six key officers fired• rumors of de-listing on the NYSE

Below

Stock price of KK on the NYSE (name KKD) from initial opening in April 2000 at $21 per share, to its high of $49.74/share in August 2003, to its lowest of less than $4/share in early 2005, to its current of $8.41/share.

To The RightGraph of KK’s number of retail outets. As the number of stores nationwide increases, sales decreases.

Krispy Kreme’s Dilemma

Issues Faced by the Company

43

So what really happened? Krispy Kreme raised capital through large

issues on debt in 2002.

Doubled the number of new stores opened each consecutive year (49 stores)

Sales of the company’s products increased steadily during the expansion, but did not produce a profit jump at the rate originally projected by the company.

Fixed assets associated with the factory stores was approximately 70% of the stockholders net worth.

Halfway thru the F.Y. 2004, Krispy Kreme experienced (2.14) degree of operating leverage and (2.48) degree of combined leverage.

While on Financial Ratios:

1. Gradual decay in Activity Ratios

2. Significant change in Solvency Ratios

3. Interest coverage ratio rose rapidly from 2000 to 2002 when it peaked; the same declined in 2003

Issues/ Problems Encountered…

Recently, the company’s first losses were reported. “The quarter that ended October 31 produced a $3 million net loss, compared to a $14.5 million profit a year earlier”.

(Barnes 2004)


On May 2004, Krispy Kreme has gotten into legal trouble with lawsuits being filed against the company and the United States Securities and Exchange Commission (SEC) looking into its accounting methods.


By late December 2004, Krispy Kreme’s stock had fallen from $40.00 per share in March 2004 down to $10.00 - $13.00 per share.


Krispy Kreme’s shareholders have filed class-action lawsuits claiming that they were deliberately misled about the company’s financial position.

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 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.)


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


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 website www.krispykreme.com

The Triangle Business Journal www.bizjournals.com

Investopedia www.investopedia.com

Sources

http://www.krispykreme.com/

http://www.bizjournals.com/

http://www.investopedia.com/

Sources

• http://www.businessweek.com/2000/00_44/b3705148.htm

• http://www.businessweek.com/2000/00_44/b3705148.htm

• http://www.cfo.com/printable/article.cfm/4007436

• http://www.krispykreme.com (. . .duh. . .)

http://www.cfo.com/printable/article.cfm/4007436

http://www.krispykreme.com/

kk final ppt

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