Krispy Kreme Doughnuts, Inc.

EXECUTIVE SUMMARY

We have undertaken the task of determining whether Krispy Kreme Doughnuts, Inc. is worthwhile as an investment. For a healthy analysis of Krispy Kreme, it is appropriate to analyze (1) the health of the specialty foods industry in which the company competes and derives its revenues and (2) how well the company is competing and deriving revenues. To perform this analysis, we present a business analysis, with a focus on the industry and the Krispy Kreme approach to competition. We present an accounting analysis to assess whether the company's accounting procedures and disclosure policy are beneficial to stakeholders. Finally, we offer a financial analysis of Krispy Kreme, using relevant ratios to assess the position of the company.

We have determined through our research that Krispy Kreme Doughnuts, Inc. is not sound for new investment. Hopes of potential acquisition by McDonalds remain unrewarded. Investing in Krispy Kreme is highly risky because of volatile stock performance, poor financial results, and an indeterminate future. Krispy Kreme's high-growth strategy has reached a (perhaps temporary) limit, making the company seem out-of-favor relative to its once-lauded IPO. The company must rearrange its priorities to avoid losing what it has so diligently worked for in the past. Our recommendation to prospective investors is to look elsewhere for stellar performance, or hold out until Krispy Kreme starts producing more valuable figures.

BUSINESS ANALYSIS

Competitive Landscape

The specialty and fast-food restaurants industry is popular among middle-class America. Many companies in the industry have existed for decades; establishing significant customer loyalty and brand identity. They fill one of two needs for consumers: (1) the need for a quick meal on the go, or (2) the need for a tasty snack or treat. Many new companies have a difficulty in becoming quickly successful within the industry, since the industry is filled with large and established companies. Consumers value the ease of eating outside of home, whether it is at a full service restaurant or a fast food chain.

Krispy Kreme, in particular, has significantly expanded its geography, from a small North Carolina shop in 1937 to several hundred stores coast to coast today. Krispy Kreme provides equipment, services, and supplies to franchisees and doughnuts to consumers in a fashion similar to those of McDonalds and Yum! Brands. To better understand Krispy Kreme's business strategy, we first analyze the industry in which it operates through a Five Forces-based analysis (Exhibit A).

Bargaining Power of Customers

Customers do not pose a significant threat to Krispy Kreme because they are numerous and widely dispersed. Krispy Kreme franchises must buy from the franchising corporation, which guarantees some level of sales. As purchasers, franchisees still have only limited bargaining power because they are locked in through a large investment. Another significant factor is the value of the product to the customer. While food is essential for living, the products offered by Krispy Kreme are dispensable, and for leisure consumption only. However, increased profitability in the industry suggests that people are becoming more dependent on fast food and specialty restaurants than they have ever been.

Existing Rivalry

Large and small companies compete fiercely for market share in the industry. Therefore, the prices and perceived value of products are crucial to company performance. There are no significant exit barriers for firms in the industry. However, exiting the primary arena of competition is not feasible for most companies because of the large franchising base and the futility of abandoning core competencies derived from years of experience.

Bargaining Power of Suppliers

The industry has many suppliers of raw materials. In addition, many incumbent companies have established relationships with particular suppliers, moderating the bargaining power of suppliers. Many companies within the industry have vertically integrated their supply chains, eliminating the threat posed by high supplier bargaining power. In particular, Krispy Kreme has vertically integrated doughnut and coffee production through joint ventures and acquisitions in an attempt to control the high degree of supplier bargaining power within the industry, while maintaining a renowned level of quality.

Threat of Substitute Products

The threat of substitute products is high in the industry because many convenient choices are inventible and marketable. While Krispy Kreme boasts a taste that is "second to none," new consumer tastes leaning toward other products (consider tapioca milk tea "Boba" or smoothies) can pose a threat to Krispy Kreme and other fast food companies.

Threat of New Entrants

There are several barriers to entry including supplier relationships, significant capital investment, and brand development; all of which protect incumbent companies. Mom-and-pop shops can start up quickly and easily, but larger-scale entrants must invest large amounts of capital in order to compete with larger companies, like Krispy Kreme. Companies within the industry have established brand identity with both customers and non-customers, therefore making the threat of entry low. Although new companies can break into the industry with the appeal of new products and lower prices, they take a significant risk since companies that are already in the industry are more powerful and established.

Krispy Kreme within the Industry

Krispy Kreme has succeeded in building a strong brand identity among its customers throughout several decades of business. Krispy Kreme's goal was to bring its product outside of North Carolina to customers all over the United States, and management did so successfully, forging a strong company within a highly competitive industry.

Competitive Strategy

Krispy Kreme vertically integrates its operations through franchising. The company sells equipment to new franchises, and supplies ingredients, premixed dough, and roasted coffee beans for distribution to Krispy Kreme outlets. Krispy Kreme has adopted a marketing strategy that incorporates a high level of grassroots advertising, centered on a strong brand name and loyal customer base. The branding of Krispy Kreme is critical to the company's success in the American market. Considered a novelty by many, the doughnuts are marketed as "Hot & Fresh" in