Krispy Kreme Analysis

Name of Business: Krispy Kreme

Marketing Analysis:

Anyone who craves a hot doughnut, cup of coffee, or just carries curiosity toward the doughnut making process, will create the demand for this company. This demand does not appear to be seasonal, but may be somewhat cyclical due to the nature of the product. Most people do not view this product as a necessity, therefore when the economy falls short, the demand for Krispy Kreme could follow in its path.

In year 2000, Krispy Kreme announced that they will be going public and within one day were funded with nearly $500 million dollars. With this funding in place, Krispy Kreme set future goals to expand from 144 to 500 stores within a 5-year time frame, while also taking the company international. With this expansion in process, the company rapidly grew in sales from $220,243 (in 2000) to $665,592 (in 2004). The closest competition to Krispy Kreme is Dunkin Donuts, which actually is not as similar as one may assume. The majority of Dunkin Donuts sales are from their coffee; while Krispy Kremes glazed donut still holds 60% of their sales volume. One unique difference that puts Krispy Kreme at an advantage in their industry is the experience that comes with a visit to their "factory stores". All of these stores have a "doughnut theater" which allows customers to watch the donuts being made in-store. Each store provides between 4,000 Ð'- 10,000 dozen doughnuts per/day which are distributed to local grocery and convenience stores for further sales. Overall, the market position of this company is improving with rapid growth from 2000 to 2004. One concern lies in the first quarter of 2004 where there is a sudden decrease in net income and retained earnings, after an announcement from the CEO telling investors that earnings will be 10% less than expected due to the new low-carbohydrate trend.

Operations Analysis:

Krispy Kreme is vertically integrated with control in all stages of their business process. They generate revenues through four major areas: On-premise sales (27%), off-premise sales (40%), manufacturing and distribution (29%), and franchise royalties and fees (4%). The on-premise sales include purchases through franchised and company-owned "factory stores", the off-premise sales from grocery and convenience stores, the manufacturing/distribution income through franchisee equipment purchases, and the franchise royalties and fees are collected in exchange for company-provided advertising, marketing, and accounting practices. Due to the vertical integration of the company, the requirement for more assets is associated with this case. As expansion grew from 2000 to 2004, the total asset turnover cut in half from 2.1 (in 2000) to 1.0 (in 2004) along with a steady increase in fixed assets over those years. This proves that the company is becoming more asset intensive by the year. From a payables standpoint, Krispy Kreme has become more efficient reducing their payable days from 25 (in 2000) to 12-14 days the following three years. Their inventory turnover has stayed relatively stable through this 4-year span, while the same can be said for the receivable days with an average of just over a month for credit collections. One critical factor affecting this company was announced in May 2004, explaining that they will be divesting $40 million of Montana Mills stock, while also closing a total of five stores. This definitely