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Case Notes Prepared by: Dr. Mernoush Banton Case Authors: ohn Burbridge
A.
Case Abstract
Krispy Kreme. !""".#rispy#reme.$om% is a $omprehensi&e business po'i$y and strategi$ management $ase that in$'udes the $ompany(s )is$a' year-end anuary* 2009 )inan$ia' statements* $ompetitor in)ormation and more. +he $ase time setting is the year 2009. ,u))i$ient interna' and e-terna' data are pro&ided to enab'e students to e&a'uate $urrent strategies and re$ommend a three-year strategi$ p'an )or the $ompany. .ead/uartered in 0inston ,a'em* North Caro'ina* Krispy Kreme is traded on the Ne" 1or# ,to$# 2-$hange under ti$#er symbo' KKD.
B.
+o be the g'oba' 'eader in doughnuts and $omp'ementary produ$ts "hi'e $reating magi$ moments "or'd"ide.
C.
0e Be'ie&e . . . Consumers are our 'i)eb'ood* the $enter o) the doughnut +here is no substitute )or /ua'ity in our ser&i$e to $onsumers 3mpe$$ab'e presentation is $riti$a' "here&er Krispy Kreme is so'd 0e must produ$e a $o''aborati&e team e))ort that is une-$e''ed 0e must $ast the best possib'e image in a'' that "e do 0e must ne&er sett'e )or 4se$ond best56 "e de'i&er on our $ommitments 0e must $oa$h our team to e&er-better resu'ts
"hi$h "e operate through donations and )undraising )or $hur$hes* s$hoo'* and other businesses !B%. 8. 2. 9. ;. ?. :. >. B. 9. Customer Produ$ts or ser&i$es Mar#ets +e$hno'ogy Con$ern )or sur&i&a'* pro)itabi'ity* gro"th Phi'osophy ,e')-$on$ept Con$ern )or pub'i$ image Con$ern )or emp'oyees
D.
External Audit
Critical Success !actors Mar#et ,hare Pri$e @inan$ia' Position Produ$t Cua'ity Produ$t Di&ersity Consumer Doya'ty 2mp'oyees ,a'es distribution <'oba' 2-pansion 2-$ommer$e &otal
"ei# $t 0.8? 0.80 0.8? 0.80 0.80 0.8? 0.0? 0.0? 0.80 0.0? '.((
%atin # 2 2 2 2 8 9 8 8 8 8
KKD "ei#$te d Score 0.90 0.90 0.8? 0.90 0.20 0.;? 0.80 0.8? 0.;0 0.80 ).*+
Starbuc s %atin "ei#$te # d Score ; 8 ; ; 9 ; 9 9 ; 9 0.:0 0.90 0.:0 0.;0 0.90 0.:0 0.20 0.8? 0.;0 0.8? ,.-(
Dun in Donut %atin "ei#$te # d Score 9 9 9 9 2 2 2 2 2 2 0.;? 0.90 0.;? 0.;0 0.90 0.;? 0.80 0.80 0.80 0.8? )..(
/pportunities 8. 2$onomy is gro"ing o&erseas in $ountries su$h as China and 3ndia. 2. 0ea# E, do''ar ma#es E, produ$ts and te$hno'ogies more a))ordab'e in 2urope and Asia 9. Popu'arity o) premium $o))ee drin#s is gro"ing ;. <ro"ing popu'arity o) $anned $o))ee drin#s* espe$ia''y in apan and China
?. Consumers demand more )oods made out o) organi$ produ$ts :. 3n$reasing popu'arity o) diets "hi$h do not p'a$e stri$t 'imitations on 'o"er )at* $arbohydrate* and sugar $ontent &$reats 8. ,'uggish E, e$onomy is $ausing a de$rease in $onsumer spending 2. <ro"ing hea'th $on$erns and $orre'ation bet"een higher ris# o) diabetes and heart prob'ems $aused by e-$essi&e "eight 9. ,tarbu$#s operates 9*28> $ompany-operated stores and >*:;9 'i$ensed retai' stores "or'd"ide ;. Due to rise in the )ue' $ost* the pri$e o) ra" materia's su$h as sugar* $o))ee* "heat* $oo#ing oi' are on the rise ?. 3n$rease in energy pri$es $auses an in$rease in operationa' e-penses :. Dun#in Donuts and other $ompetitors di&ersi)ied their menus and be&erages that they are o))ering to their $ustomers External !actor Evaluation 0E!E1 Matrix
"ei#$t
%atin#
"ei#$ted Score
; 9 9 ; 9 9
9. Popu'arity o) premium $o))ee drin#s is gro"ing ;. <ro"ing popu'arity o) $anned $o))ee drin#s*
espe$ia''y in apan and China
0.0B
0.0B
0.09
0.09
0.0: 0.09
2 8
0.82 0.09
&otal
'.((
).,)
Positionin# Map
Number o) ,tores !.igh%
,tarbu$#s
Dun#in Donut
Narro" Produ$t Dine 7))ering 0ide Produ$t Dine 7))ering
Krispy Kreme
E.
3nternal Audit
Stren#t$s 8. +he $urrent ratio impro&ed to be appro-imate'y F9: mi''ion or 8.98 at the end o) )is$a' year 200B. 2. As o) @ebruary 2009* the $ompany operated in ?29 stores in the Enited ,tates* Austra'ia* Bahrain* Canada* .ong Kong* 3ndonesia* apan* Ku"ait* Debanon* Me-i$o* the Phi'ippines* Puerto Gi$o* Catar* ,audi
Copyright A 2088 Pearson 2du$ation* 3n$. pub'ishing as Prenti$e .a''.
9. ;. ?. :.
Arabia* ,outh Korea* the Enited Arab 2mirates* and the Enited Kingdom ,trong sa'es $hanne's in some retai' stores* $on&enien$e stores* gro$ery stores or other re'ated )ood ser&i$e or institutiona' a$$ounts Manu)a$turing )a$i'ities ha&e high produ$tion $apabi'ities KKD stores are e/uipped "ith o&ens and heating e/uipment* a''o"ing the $onsumers to ha&e hot doughnut e-perien$e ,trong and re$ogni=ed brand in the E.,. mar#et* se''ing around ;2 bi''ion doughnuts in 200>
"ea nesses 8. C'osing o) se&era' )ran$hise 'i$enses in <reat Cir$'e @ami'y @ood and other 'arge $on&enien$e store $hains 2. 7perating 'osses )or the 'ast three )is$a' years 9. +he $ompany(s sa'es ha&e been de$'ining in the 'ast $onse$uti&e years in E.,. ;. KKD 3s p'anning to open an additiona' 8>0 stores "hi$h $ou'd drain the $ompany(s )inan$ia' resour$es during this e$onomi$ do"ntime ?. Dimited in produ$t o))erings re'e&ant to donuts and drin#s :. Ge/uires 'arge $apita' in&estment "hen KKD opens its indi&idua' store >. Current'y* there are on'y t"o distribution $enters !0inston ,a'em and Dos Ange'es% $ausing the distribution $osts to high B. 7&era'' sa'es has dropped by o&er F;0 mi''ion )is$a' year 200B to 2009 !inancial %atio Anal2sis !No&ember 2009% 4ro5t$ %ates 6 ,a'es !Ctr &s year ago /tr% Net 3n$ome !1+D &s 1+D% Net 3n$ome !Ctr &s year ago /tr% ,a'es !?-1ear Annua' A&g.% Net 3n$ome !?-1ear Annua' A&g.% Di&idends !?-1ear Annua' A&g.% Price %atios Current PH2 Gatio PH2 Gatio ?-1ear .igh PH2 Gatio ?-1ear Do" Pri$eH,a'es Gatio Pri$eHBoo# Ia'ue Krisp2 Kreme -82.20 -89.:0 98.B0 -9.9> NA NA Krisp2 Kreme NA NA NA 0.?B 9.;2 3ndustr2 8.90 88.?0 22.B0 >.:; 8>.:> 28.2B 3ndustr2 8?.> ?.> 9.2 2.?> :.2; S7P +(( -?.20 -B.80 2;.>0 82.9> 82.90 88.BB S7P +(( 2:.: 8B.; 9.; 2.80 9.;9
Pri$eHCash @'o" Gatio Profit Mar#ins 6 <ross Margin Pre-+a- Margin Net Pro)it Margin ?1r <ross Margin !?-1ear A&g.% ?1r Pre+a- Margin !?-1ear A&g.% ?1r Net Pro)it Margin !?-1ear A&g.% !inancial Condition DebtH2/uity Gatio Current Gatio Cui$# Gatio 3nterest Co&erage De&erage Gatio Boo# Ia'ueH,hare
Adapted )rom """.money$entra'.msn.$om
?:.90 Krisp2 Kreme 82.9 -0.> -8.2 89.; -8?.: -8:.8 Krisp2 Kreme 0.BB 8.: 8.2 0.> 2.B 0.92
88.80 3ndustr2 92.2 8.> 89.? 92.B 8;.9 80.0 3ndustr2 8.2: 8.0 8.0 2;.8 2.9 80.::
89.80 S7P +(( 9B.2 9.9 :.9 9B.8 8:.? 88.? S7P +(( 8.88 8.? 8.2 2>.2 9.? 28.?B
9et Profit Mar#in 061
Av# P8E
Price8 Sales
Price8 Boo
02H09 02H0B 08H0> 08H0: 08H0? 02H0; 02H09 02H02 08H08 08H00
-8.8 -8?.: -9.2 -2?.0 -22.2 >.> :.9 :.> ;.9 2.>
3nterest Covera#e
"ei#$t
%atin#
"ei#$ted Score
0.0B 0.0>
; 9
0.92 0.28
0.0B
0.2;
0.0: 0.0:
9 9
0.8B 0.8B
0.8
0.;
2. 7perating 'osses )or the 'ast three )is$a' years 9. +he $ompanyJs sa'es has been de$'ining in the 'ast
$onse$uti&e years in E.,. ;. KKD 3s p'anning to open an additiona' 8>0 stores "hi$h $ou'd drain the $ompanyJs )inan$ia' resour$es during this e$onomi$ do"ntime ?. Dimited in produ$t o))erings re'e&ant to donuts and drin#s
0.0: 0.0>
2 2
0.82 0.8;
0.0;
0.0;
0.0? '.((
0.8 ).+
&otal
!.
S"/& Strate#ies
Stren#t$s 8. +he $urrent ratio impro&ed to be appro-imate'y F9: mi''ion or 8.98 at the end o) )is$a' year 200B. 2. As o) @ebruary 2009* the $ompany operated in ?29 stores in the Enited ,tates* Austra'ia* Bahrain* Canada* .ong Kong* 3ndonesia* apan* Ku"ait* Debanon* Me-i$o* the Phi'ippines* Puerto Gi$o* Catar* ,audi Arabia* ,outh Korea* the Enited Arab 2mirates* and the Enited Kingdom 9. ,trong sa'es $hanne's in some retai' stores* $on&enien$e stores* gro$ery stores or other re'ated )ood ser&i$e or institutiona' a$$ounts ;. Manu)a$turing )a$i'ities ha&e high produ$tion $apabi'ities ?. KKD stores are e/uipped "ith o&ens and heating e/uipment* a''o"ing the $onsumers to ha&e hot doughnut "ea nesses 8. C'osing o) se&era' )ran$hise 'i$enses in <reat Cir$'e @ami'y @ood and other 'arge $on&enien$e store $hains 2. 7perating 'osses )or the 'ast three )is$a' years 9. +he $ompany(s sa'es ha&e been de$'ining in the 'ast $onse$uti&e years in E.,. ;. KKD 3s p'anning to open an additiona' 8>0 stores "hi$h $ou'd drain the $ompany(s )inan$ia' resour$es during this e$onomi$ do"ntime ?. Dimited in produ$t o))erings re'e&ant to donuts and drin#s :. Ge/uires 'arge $apita' in&estment "hen KKD opens its indi&idua' store >. Current'y* there are on'y t"o distribution $enters !0inston ,a'em and Dos Ange'es% $ausing the distribution $osts to high B. 7&era'' sa'es has dropped by o&er F;0
e-perien$e :. ,trong and re$ogni=ed brand in the E.,. mar#et* se''ing around ;2 bi''ion doughnuts in 200> /pportunities 8. 2$onomy is gro"ing o&erseas in $ountries su$h as China and 3ndia. 2. 0ea# E, do''ar ma#es E, produ$ts and te$hno'ogies more a))ordab'e in 2urope and Asia 9. Popu'arity o) premium $o))ee drin#s is gro"ing ;. <ro"ing popu'arity o) $anned $o))ee drin#s* espe$ia''y in apan and China ?. Consumers demand more )oods made out o) organi$ produ$ts :. 3n$reasing popu'arity o) diets "hi$h do not p'a$e stri$t 'imitations on 'o"er )at* $arbohydrate* and sugar $ontent &$reats S;/ Strate#ies 8. 7))er &o'ume dis$ount )or o))i$e meetings H e&ents by ordering it on'ine and then be ab'e to pi$# up the bo-es "ithout "aiting at the store !,2* ,?* 79%. 2. Continue to e-pand outside the E,* espe$ia''y in 3ndia* China* Gussia !,8* ,2* 78* 72* 7;%. 9. 3ntrodu$e ne" produ$ts su$h as 'o"-)at and 'o"sugar doughnuts and )ro=en drin#s !,8* ,2* ,9* ,;* ,?* ,:* 78* 72* 79* 7;* 7?* 7:%.
";/ Strate#ies 8. Create a ne" 'ine o) doughnuts made out o) organi$ $omponents !)'o"er* )ruit additi&es% and o))er them as a ne" spe$ia' organi$ menu !09* 0;* 7:%. 2. ,tart up the strategi$ a''ian$e "ith $ompanies su$h as Burger King H M$Dona'd(s and o))er premium $o))ee and doughnuts as part o) their menu !02* 09* 79%.
S;& Strate#ies 8. ,'uggish E, e$onomy is 8. 2-pand by opening 90 $ausing a de$rease in more stores in high $onsumer spending demand mar#ets su$h 2. <ro"ing hea'th as Asia* 2urope or ,. $on$erns and Ameri$a !,8* ,2* +8* $orre'ation bet"een +9%. higher ris# o) diabetes 2. 2stab'ish additiona' and heart prob'ems $hanne's "ith mass and $aused by e-$essi&e popu'ar retai'ers in "eight mar#ets su$h as Asia* 9. ,tarbu$#s operates 2urope or ,. Ameri$a 9*28> $ompany!,2* ,9* +9% operated stores and
";& Strate#ies 8. C'ose a'' under per)orming stores in the E, as the additiona' $ost K$utting measure !08* 02* +?%.
>*:;9 'i$ensed retai' stores "or'd"ide ;. Due to rise in the )ue' $ost* the pri$e o) ra" materia's su$h as sugar* $o))ee* "heat* $oo#ing oi' are on the rise ?. 3n$rease in energy pri$es $auses an in$rease in operationa' e-penses :. Dun#in Donuts and other $ompetitors di&ersi)ied their menus and be&erages that they are o))ering to their $ustomers
4.
SPACE Matrix @,
Conservative
> : ? ; 9 2 8
Aggressive
C,
3,
-> -: -? -; -9 -2 -8 -8 -2 -9 -; -? -: 8 2 9 ; ? : >
Defensive
->
Competitive
2,
!inancial Stabilit2 0!S1 Geturn on 3n&estment De&erage Di/uidity 0or#ing Capita' Cash @'o" !inancial Stabilit2 0!S1 Avera#e Competitive Stabilit2 0CS1 Mar#et ,hare Produ$t Cua'ity Customer Doya'ty Competition(s Capa$ity Eti'i=ation +e$hno'ogi$a' Kno"-.o"
8 9 : : ? *.)
Environmental Stabilit2 0ES1 Enemp'oyment +e$hno'ogi$a' Changes Pri$e 2'asti$ity o) Demand Competiti&e Pressure Barriers to 2ntry Environmental Stabilit2 0ES1 Avera#e 3ndustr2 Stabilit2 03S1 <ro"th Potentia' @inan$ia' ,tabi'ity 2ase o) Mar#et 2ntry Gesour$e Eti'i=ation Pro)it Potentia'
-; -9 -8 -? -8 ;)..
-2 -2 -2 -; -9
; ? 8 9 ;
;).<
,.*
=.
Quadrant III
Quadrant IV
8. 2. 9. ;. ?.
3.
3I
3I
I3
I33
I333
3N
>.
?SPM
2stab'ish additiona' $hanne's "ith mass and popu'ar retai'ers in mar#ets su$h as Asia* 2urope or ,. Ameri$a
3ntrodu$e ne" produ$ts su$h as 'o")at and 'o"sugar doughnuts and )ro=en drin#s
Ke2 !actors /pportunities 2$onomy is gro"ing o&erseas in $ountries su$h as China and 3ndia. 0ea# E, do''ar ma#es E, produ$ts and te$hno'ogies more a))ordab'e in 2urope and Asia Popu'arity o) premium $o))ee drin#s is gro"ing <ro"ing popu'arity o) $anned $o))ee drin#s* espe$ia''y in apan and China Consumers demand more )oods made out o) organi$ produ$ts 3n$reasing popu'arity o) diets "hi$h do not p'a$e stri$t 'imitations on 'o"er )at* $arbohydrate* and sugar $ontent &$reats ,'uggish E, e$onomy is $ausing a de$rease in $onsumer spending <ro"ing hea'th $on$erns and $orre'ation bet"een higher ris# o) diabetes and heart prob'ems $aused by e-$essi&e "eight ,tarbu$#s operates 9*28> $ompany-operated stores and >*:;9 'i$ensed retai' stores "or'd"ide Due to rise in the )ue' $ost* the pri$e o) ra" materia's su$h as sugar* $o))ee* "heat* $oo#ing oi' are on the rise 3n$rease in energy pri$es $auses an in$rease in operationa' e-penses Dun#in Donuts and other $ompetitors di&ersi)ied their menus and be&erages that they are o))ering to their $ustomers &/&A@ Stren#t$s +he $urrent ratio impro&ed to be appro-imate'y F9: mi''ion or 8.98 at the end o) )is$a' year 200B. As o) @ebruary 2009* the $ompany operated in ?29 stores in the Enited ,tates* Austra'ia* Bahrain* Canada* .ong Kong* 3ndonesia* apan* Ku"ait* Debanon* Me-i$o* the Phi'ippines* Puerto Gi$o* Catar* ,audi Arabia* ,outh Korea* the Enited Arab 2mirates* and the Enited Kingdom ,trong sa'es $hanne's in some retai' stores* $on&enien$e stores* gro$ery stores or other re'ated )ood ser&i$e or institutiona' a$$ounts Manu)a$turing )a$i'ities ha&e high produ$tion $apabi'ities KKD stores are e/uipped "ith o&ens and heating e/uipment* a''o"ing the $onsumers to ha&e hot doughnut e-perien$e ,trong and re$ogni=ed brand in the E.,. mar#et*
"ei#$t
0.8 0.0B 0.09 0.0> 0.0B 0.09
AS 9 9 ; ; ; ;
AS ; ; 2 9 9 9
0.0> 0.8
2 ; ; 2 8 ;
; 8 2 ; 9 2
0.0B 0.09
0.0: 0.09
'.((
0.0B 0.0>
; 2
0.92 0.8;
2 9
0.8: 0.28
0.0B
2 ; 9 ;
; 9 8 2
0.0: 0.0:
0.8
se''ing around ;2 bi''ion doughnuts in 200> "ea nesses C'osing o) se&era' )ran$hise 'i$enses in <reat Cir$'e @ami'y @ood and other 'arge $on&enien$e store $hains 7perating 'osses )or the 'ast three )is$a' years +he $ompanyJs sa'es has been de$'ining in the 'ast $onse$uti&e years in E.,. KKD 3s p'anning to open an additiona' 8>0 stores "hi$h $ou'd drain the $ompanyJs )inan$ia' resour$es during this e$onomi$ do"ntime Dimited in produ$t o))erings re'e&ant to donuts and drin#s Ge/uires 'arge $apita' in&estment "hen KKD opens its indi&idua' store Current'y* there are on'y t"o distribution $enters !0inston ,a'em and Dos Ange'es% $ausing the distribution $osts to high 7&era'' sa'es has dropped by o&er F;0 mi''ion )is$a' year 200B to 2009 SAB&/&A@ SAM &/&A@ A&&%AC&3VE9ESS SC/%E
----8 9 ; ----8
----9 8 8 ----9
0.0?
'.((
K.
%ecommendations
3ntrodu$e ne" produ$ts su$h as doughnuts and $o))ee drin#s that are 'o"-)at and 'o"-sugar* using nature ingredients. +he $ompany shou'd p'an to introdu$e at 'east 80 ne" produ$ts in 2080* and then gro"ing the ne" produ$t introdu$tion by ?O )or the ne-t 9 years.
L.
EPS/EBIT Analysis
F Amount Needed: F>? mi''ion ,to$# Pri$e: F9.8; +a- Gate: 8;.0O !Due to 'osses reported by the $ompany% 3nterest Gate: ?O P ,hares 7utstanding: :>*?0>*0;8
Common Stoc !inancin# Recessio n Normal Boom F?*000*000 F90*000*000 F:0*000*000 0 0 0 ?*000*000 90*000*000 :0*000*000 >00*000 ;*200*000 B*;00*000 ;*900*000 2?*B00*000 ?8*:00*000 98*992*998 98*992*998 98*992*998 (.(+ (.). (.+< Debt !inancin# Recession F?*000*000 9*>?0*000 8*2?0*000 8>?*000 8*0>?*000 :>*?0>*0;8 (.() Normal F90*000*000 9*>?0*000 2:*2?0*000 9*:>?*000 22*?>?*000 :>*?0>*0;8 (.,, Boom $60,000,000 3,750,000 56,250,000 7,875,000 48,375,000 67,507,041 0.72
-( Percent Stoc ; ,( Percent Debt Recessio n F?*000*000 9*000*000 2*000*000 2B0*000 8*>20*000 B;*22:*>B: (.()
-( Percent Debt ; ,( Percent Stoc Normal F90*000*000 9*000*000 2>*000*000 9*>B0*000 29*220*000 B;*22:*>B: (.). Boom F:0*000*000 9*000*000 ?>*000*000 >*9B0*000 ;9*020*000 B;*22:*>B: (.+. Recession F?*000*000 >?0*000 ;*2?0*000 ?9?*000 9*:??*000 >;*:>2*:;: (.(+ Normal F90*000*000 >?0*000 29*2?0*000 ;*09?*000 2?*8??*000 >;*:>2*:;: (.,* Boom $60,000,000 750,000 59,250,000 8,295,000 50,955,000 74,672,646 0.68
M.
Epilo#ue
Krispy Kreme $ontinues to strugg'e during this e$onomi$ time. Many )ran$hise stores ha&e $'osed due to e-tending themse'&es too thin )inan$ia''y. Despite their announ$ement that the $ompany "i'' be opening 20 ne" )ran$hise 'o$ations in +hai'and o&er the ne-t ? years* their sto$# topped the 'ist o) biggest per$entage pri$e de$'ines among $ommon sto$#s on the Ne" 1or# ,to$# 2-$hange on No&ember 2?* 2009. 7n No&ember 2009* brie)ing.$om* $iting no one in parti$u'ar* posted that 0endy(s Arby(s <roup may be potentia''y ta#ing o&er Krispy Kreme Donuts.