Introduction
Krispy Kreme is an American fast-food giant founded in 1937 by Vernon Rudolph in Winston-Salem, who had a secret recipe for making yeast-raised doughnuts. Beatrice Foods purchased it in 1982 as a group of franchises. The company expanded greatly in the 1990s, and in 2003, Fortune Magazine named Krispy Kreme as ‘American Hottest Brand’. After the initial public offering in 2000, Krispy Kreme shares traded at $50. As of 2015, the company had 173 stores in the US and 758 international franchise stores (Putri et al., 2020). Even though management inefficiencies contributed largely to its fall in the 2000s, other factors contributed to Krispy Kreme’s decline before its rise again. First, the company engaged in aggressive expansion strategies that were not unsustainable in the long run. Krispy Kreme had a large number of large-format stores that were not only expensive to maintain but also made the franchise dependent on wholesale sales, the 2000 wave healthy consciousness wave that saw many people shift to healthier foods with low carbohydrates, questionable accounting practices, especially buybacks and flawed market research for adding new franchises. Despite the fall, the company has managed to make a turnaround by focusing on attractive branding globally, reducing large format stores while increasing the number of mobile kiosks in the process, sustainable and organic international expansion, and expanding its available menu. Krispy Kreme Doughnut proves that despite failing, a business can rise to even greater heights than before
The fall of Krispy Kreme Doughnuts
After the initial rise of the Winston-Salem doughnut giant up to the year 2004, the company started experiencing downward trends in 2005 that saw it report about 55 % decline in earnings for the second quarter. First, Krispy Kreme pursued unsustainable aggressive growth strategies. Analysts claim that these ineffective and overzealous growth strategies are the genesis of the fall of Krispy Kreme. These strategies solely focused on popularity, ignoring all other parameters when adding franchises. Spicer (2016) notes that during the early years, the rare taste of warm delicacies had served as a great hook for customers who watched their beautiful doughnuts being created in front of their eyes. Krispy Kream executives chose to capitalize on this popularity and tried to sell the brand massively, ranging from gas stations to kiosks. However, this massive expansion diluted the appeal of the core product as the doughnuts from the new stores tasted different.
Secondly, the company allowed too close proximity among franchisees and the overall result was less profit for each individual owner. For example, between 2003 and 2004, the overall quarter revenues for the company averaged about 15%, while some stores only had a 0.1% incremental increase in revenues. Analysts argue that the number indicated an oversaturation of the market where many franchises felt left out and many of them started pushing for sell-outs (Terry et al, 2018). The oversaturation had brought about unexpected and unnecessary competition among the franchisees leading to unhealthy internal competition. Besides, these clustering made franchisee owners feel that the company valued its growth more than their store profits.
Thirdly, the early-2000 low carbohydrates consciousness adversely affected sales. After the turn of the millennium and Krispy Kreme going public, there was a global wave where people started to slowly shift to healthier foods. This threatened the hot and fresh glazed doughnuts people had become accustomed to in Krispy Kreme. A majority of them still wanted to enjoy the hot doughnuts some perceived to have high carbohydrates concentration. Throughout the period of rapid expansion, many customers were facing the dilemma of shifting to low carbohydrates doughnuts in some stores, and people started to complain that Krispy Kreme doughnuts were losing their “uniqueness.” The healthy consciousness made some governments ban some ingredients, which they considered unhealthy. Notably, when the company tried to move away from its original fresh doughnuts, in line with the current trends, its stock plummeted by about 16%. This forced the company to revert to its original model that its customers loved.
Further, the company focused on buybacks of several dealerships with its franchises. The buybacks occurred when the Franchiser indicated that it has sold goods to the franchisee to increase their sales then later come and pick them (Chawla & Chakraborty, 2021). This financial imprudence came to light in 2004 after the then company CEO Scott Livengood decided to blame low-carbohydrate diets that he claimed made the company miss its quarterly targets for the first time since its initial public offering. Analysts argued that the CEO’s blame on the Atkins diet was a cover-up for the company’s desperation and management mismanagement. Terry et al (2018) asserts that the buybacks scandal led to the Securities and Exchange Commission commencing investigations in 2004. This public inquiry affected the company’s image, which translated to lost investor confidence. Besides, the failure of the firm to file reaffirmed financials led to the company trading at an all-time low of $6 in 2005. These buybacks were intended to create an imaginary illusion that Krispy Kreme was performing better than it was. They were recorded as sales to show investors can perceive that the company is making some profits.
Not to mention, most Krispy Kreme franchises accused the company of ‘channel stuffing.’ The aggressive growth strategies adopted forced the franchises to take up more inventory than necessary to bolster profits. The result was increased operational costs that adversely affected the profits of the franchises. Besides, the company also started forcing the franchises to buy equipment and supplies from the headquarters. The mark-up placed on the equipment and supplies led to the franchises perceiving the company as greedy and one that only focused on short-term profit generation. Further, this practice caught the attention of the SEC, who launched investigations into the company because the management was misleading investors as the company’s financial reports did not provide a true and fair view of the state of events.
Also, Krispy Kreme had flawed marketing research that resulted in unsustainable expansions. The company embarked on an extensive national expansion based on non-scientific data. For example, the company opened a franchise store in “Montana Mills” because the then CEO Scott Livengood had a ‘good feeling’ that the short-shelf life products were essential for the vertical expansion trajectory. According to Hoffman (2021), if a proper market search had been conducted, the company would have identified a general trend among customers of moving towards products that had reduced carbohydrate levels. Besides, the company failed to undertake a market study on customer satisfaction that would have helped them identify critical pain points such as complaints of different tastes for the same product. As a result, the company incurred a loss of 2 million dollars by the end of the fiscal year 2014.
Even more, Krispy Kreme had an over-reliance on large store formats measuring about 300 to 5500 square feet. These stores operated both as packaged goods distributors and as quick service restaurants. The result was limited market densities, especially in real estate, where the competition was stiff. On the downside, these stores required a high initial investment cost, and their fixed costs were relative (Spicer, 2018). This, together with the company’s desire to manufacture its own equipment, meant that the company was had a high operating margin. There was extra space considering the stores were only required to make about 600 doughnuts per hour. The result was Krispy Kreme relied heavily on wholesale sales for whole company profits, which saw their stores fail in store quality in strategic markets. This changed the usual perception of customers about Krispy Kreme as a normal routine to just a “destination’ which led to Dunkin Donuts and Starbucks surpassing it as quick service retail.
Turnaround of the Krispy Kreme Doughnuts
Despite the previous decline in earnings witnessed from around 2005 to 2009, Krispy Kreme has managed a turnaround that has driven it to a 1.35 billion dollar valuation. The turnaround has been a long process facilitated by a number of factors. First, through intensive and attractive branding, the company has been able to bring back the charming feeling of enjoying the Krispy Kreme doughnuts again. According to Spicer (2016), The company has transformed its licensing agreements to ensure that Krispy Kreme doughnuts worldwide are branded the same. The gas station stores and convenience stores display the Company colors brightly, increasing the company’s visibility to the customers. Besides, the company has also improved its distribution model, enabling it to fulfill customers\ cravings, reclaiming the ‘hot fresh doughnut ‘tag. The additional locations are required to sell fresh doughnuts, promoting the uniformity of products offered. Through this model, customers have increased confidence in enjoying a fresh hot doughnut at any Krispy Kreme store.
Secondly, improved supplier power. Krispy Kreme is the main supplier for its mixes and equipment to its franchises. Only labor has higher costs when compared to mixes and equipment. This has enabled the company to get ingredients in the desired original glaze to facilitate the freshness of its doughnuts (Terry et al, 2016). In the restaurant industry, supplier power is a significant force as it determines the availability of ingredients and the cost of procuring them. Thus, the increased supplier power has enabled Krispy Kreme to mitigate ingredient price fluctuation and enjoy forward purchases and future contracts. Historically, suppliers have regularly changed prices threatening profitability. Stability of ingredient supply is essential for planning purposes to avoid stockouts, which may lead to foregone sales that may damage the company’s image and push customers to competitors’ hands.
Thirdly, just like Starbuck, the company has added other tasty food items to their main core item. Considering that, the company had lost a sizable part of its customer base to the competitors during its decline period. When Scottt Livengood took over as the CEO, he understood that the company needed to conquer new markets to facilitate growth. The company decided to expand its menu to include food items such as sandwiches and smoothies. These items were to complement the main business: doughnuts. Spicer (2016) claims Scott Livengood decided to expand into new markets while still making being king in the doughnut business is their main source of profits. The expansion has brought on board sizable revenue from individuals who may not necessarily like doughnuts but can enjoy a sandwich or coffee. Besides, this has given the company a ground of being perceived as a worthy competitor by expanding into the major business line of its main competitor Starbucks.
Besides, the overseas expansion allowed them to tap into international markets ahead of their competitors. The 2005 SEC investigation forced the company to stop any domestic expansion until it had cleaned up its finances and published financials that represent a true and fair view. Thus, after being named CEO in 2006, Darly Brewster embarked on aggressive international expansion but with stricter rules and a sustainability mindset when taking onboard new franchises (Kostyuchenko et al, 2019). Krispy Kreme raised extra funds needed for operations through the new franchises, especially in the USA, where it sought national dominance. Also, the international expansion provided an opportunity to test their new models ranging from market research, growth, research, and development. This was crucial as it enabled the company to have previous mistakes of conducting no market research in expansion.
Further, Krispy abandoned the large format stores and started selling their product through third-party retailers. Mobile kiosks have risen to be a crucial intermediary in the distribution channel, and many retail giants such as Starbucks use them. After a successful pilot study, Krispy Kreme began networking through third-party networks such as mobile kiosks where customers would come (Terry et al, 2018). Each mobile kiosk is then stocked with fresh doughnuts. This has enabled the company to access a wider market without intensive capital investment. Notably, removing the large format stores has helped Krispy Kreme save about 15 million dollars in leases and 1 million dollars on labor. Also, analysis of some international markets such as the United Kingdom indicates that UK customers’ culture favors mobile kiosks over Large format stores (Putri et al., 2020). Therefore, the mobile kiosks helped solve one of Krispy’s major issues: logistics. With the smooth delivery of its fresh doughnuts, Krispy Kreme was able to maintain its charm of being a routine and not a “destination.” Krispy Kreme has invested heavily in market research. Flawed market research was one of the leading causes of company decline, as some franchises store was bought based on just “gut feelings.” The marketing department has been greatly enhanced to provide concrete market data that can substantially gauge the success of expansion programs.
Moreover, instead of solely focusing on franchising using the previous skewed models, the current Krispy Kreme management has added acquisitions as a key growth approach.
Recently, the company made an important acquisition of a well-established Birmingham, Alabama, Franchisee. Analysts argue that the move comes along with bright growth prospects. This form of expansion is sustainable when compared to the initial franchising strategy. The company has also launched self-supporting shops that support the major stores to support this move (Kostyuchenko, et al., 2019). These shops do not directly compete with the stores but act as supportive agents to the major stores in the proximity. They enhance the existing distribution channel and reduce lead-time between the franchises and company factories because they can be used as storage points to supply the franchise shops.
Lastly, it is important to note the company has revolutionized its organizational structure into three reportable segments: Krispy Kreme Manufacturing and development (KKM &D), franchise operations, and company store operations. The KKM&D was created to ensure that the doughnuts offered to customers in all stores are of uniform quality by facilitating buying and processing key ingredients for doughnut mixes (Chawla & Chakraborty, 2021). The KKM& D unit manufactures all Krispy Kreme doughnut-making equipment that all stores should buy. This has eliminated the incidences of different doughnut tastes in different stores. The franchise operations include an associate program that ensures the franchise operations are synchronized. Lastly, the company store operations focus on sales distribution channels. Through this structure, the company seeks to develop improved distribution channels that will ensure convenience in delivery.
Conclusion
In conclusion, Krispy Kreme doughnuts faced more than managerial inefficiencies during the period leading to its fall. Nonetheless, the company CEOs embarked on aggressive growth strategies that valued the franchise more than the acquired franchises. Healthy consciousness led to reduced sales in the 2000s as some rushed to healthier foods. Conversely, some company CEOs have facilitated the turnaround, especially through international expansion, adding more tasty meals to the existing menu, revolutionizing organizational structure, and developing a new sustainable expansion model supported by intensive market research.
References
Chawla, M., & Chakraborty, A. (2021). A SUCCESS STORY. Delhi Business Review, 22(1), 103-109.
Hoffman, A. J. (2021). Management as a calling. Stanford University Press.
Kostyuchenko, M. N., Kosovan, A. P., Shaposhnikov, I. I., & Martirosyan, V. V. (2019, January). The bakery products market in the globalization economy conditions: institutional сhanges and trends in the development of consumer behavior and competitive strategies. In 2nd International Scientific conference on New Industrialization: Global, national, regional dimension (SICNI 2018) (pp. 500-504). Atlantis Press.
Putri, A. R. A., Nisa, I. K., Yee, L. H., Kee, D. M. H., Min, K. H., Yi, L. S., & Xin, L. J. (2020). J. CO Coffee & Donuts marketing strategy. Asia Pacific Journal of Management and Education (APJME), 3(1), 72-81.
Spicer, R. (2016). Explanatory case study on factors that contribute to the Commission of Financial Fraud. Northcentral University.
Terry, D., Harwood, E., Magacs, H., Sharber, E., & Zimmerman, K. (2018). Case Commentaries. Transactions: The Tennessee Journal of Business Law, 19(1), 1-26.
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