Krispy Kreme Doughnuts Case Study

The principal business of Krispy Kreme Doughnuts, which began in 1937, owned and franchising Krispy Kreme doughnut stores make and sell over 20 varieties of premium quality doughnuts, including the Hot Original Glazed. Each of the traditional stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Consequently, each factory store (stores which contain a full doughnut-making production line) has significant fixed or semi-fixed costs, and margins and profitability are significantly impacted by doughnut production volume and sales. Their doughnut stores are versatile in that most can support multiple sales channels to more fully utilize production capacity.

SALES AND OBJECTIVES

Responses from customers indicate that Krispy Kreme's doughnuts are enjoyable and an excellent reputation has developed. Inquiries form prospective customers suggest that there is considerable demand for their product. Krispy Kreme's marketing strategy is to aggressively enhance, promote and support the fact that their products are high quality and offer consumers a one-of-a-kind taste in this industry. Strategic insights are

1. Opening the door to International Sales in December 28, 2000 has proven a success for Krispy Kreme. Krispy Kreme currently has stores in Europe, Australia, Asia and New Mexico.

2. Krispy Kreme has expanded its market to include states other than the previously mandated southeastern states to include all but about eight of the 50 United States, including Hawaii.

3. Drive-through windows, along with discounted sales to community organizations that in turn sell our products for fundraising purposes.

4. Off-premises sales. Daily sales of fresh doughnuts on a branded, unbranded and private label basis to convenience and grocery stores and

5. Select co-branding customers. Doughnuts are sold to these customers on trays for display and sale in glass-enclosed cases and in packages for display and sale on both stand-alone display units and on our customer's shelves.

("Branded" refers to products sold bearing the Krispy Kreme brand name and is the primary source of off-premises sales. "Unbranded" products are sold unpackaged from the retailer's display case. "Private label" products carry the retailer's brand name or some other non-Krispy Kreme brand. Unbranded and private label products are a minor portion of our business.)

Krispy Kreme Doughnuts, Inc. announced on May 10, 2004, based on recent category dynamics, it expects fiscal 2005 diluted earnings per share from continuing operations, excluding certain charges, to be 10% lower than previously announced at 30% more than their 2004 profits of $665,592,000.

COMPANY RISK AND SETBACKS

The start up risk factors for Krispy Kreme franchises is the certain level of investment needed to open the new facilities. Also the fact that the demand for Krispy Kreme doughnuts may not increase at the desired rate therefore sales will be decreased. Investment in other locations will be another main risk.

In May 2004, executives claim the low-carb Atkin's Diet and South Beach Diet are cutting into the company's sales and threaten growth. Shares sink 22 percent. In May, Krispy Kreme said profits from continuing operations would be 10 percent lower this year than originally forecast. The company said increasing consumer interest in low-carbohydrate diets had hurt sales, especially packaged doughnuts in grocery stores. Krispy Kreme shares were trading at $16.60 late Thursday morning. The stock has traded between $17.01 and $49.74 during the last year.

"For several months, there has been increasing consumer interest in low-carbohydrate diets, which has adversely impacted several flour-based food categories, including bread, cereal and pasta," says Scott Livengood, chairman, president and chief executive officer. "This trend had little discernable effect on our business last year. However, recent market data suggests consumer interest in reduced carbohydrate consumption has heightened significantly following the beginning of the year and has accelerated in the last two to three months. This phenomenon has affected us most heavily in our off-premises sales channels, in particular sales of packaged doughnuts to grocery store customers." During the 12-week period ended April 18, Krispy Kreme experienced a 26.3% increase in system wide volume in U.S. packaged doughnuts, predominantly through the addition of new accounts, while all other brands in the doughnut category combined experienced a 7.2% decrease in volume, according to a report from Info Scan Reviews. The packaged doughnut market data is based