Krispy Kreme

Krispy Kreme

Introduction:

This is a case study of Krispy Kreme Doughnuts and changes in management strategy to address stagnant sales. The first Krispy Kreme Doughnut shop was opened in Winston-Salem, North Carolina, by Vernon Rudolph. Vernon first sold his doughnuts (which were made with a secret yeast-raised recipe) to grocery retailers; however, due to their quick popularity, he opened his own retail shop. In 1954, Mike Harding became a partner in the company and he and Rudolph grew revenue from less than $1 million to $58 million by 1974.

Case Overview

Rudolph and Harding had a vision to expand business by controlling every step of the doughnut-making process. They built an equipment department, a plant for blending doughnut mixes and standardized all Krispy Kreme shops. The standardized look of their shops and the melt-in-your mouth taste became a trademark during this period. When Beatrice Foods bought Krispy Kreme in 1976 and made changes to the recipe and the company's signs, it quickly became apparent this was a problem. Customer reaction was negative and business declined.

Sales rebounded when a group of franchisees bought the company from Beatrice Foods in 1982 and restored the original recipe and sign appearance. While this acquisition temporarily revived Krispy Kreme, high interest rates on the debt incurred for the buy-out influenced their ability to have funds to expand. To work with limited funds, their strategy was to grow revenue from both company-owned and associate stores by wholesaling Krispy Kreme and private label doughnuts to local groceries and supermarkets. With sales focused only in the southeast and little focus on the brand, sales eventually flattened.

In 1992, President Scott Livengood decided the business model wasn't working. He and his management decided they should focus more on the brand and move away from selling in wholesale channels. Their new strategy was to focus sales at their company's own retail outlets, emphasize the "hot doughnut experience," and expand the number of both franchisee and company-owned stores nationally. They would have to raise additional money to implement this strategy.

In April 2000, the company decided to go public to raise funds. The proceeds from the IPO allowed the company to remodel or relocate older stores, repay debt, make joint venture investments in franchised stores and expand its capacity to make doughnut mix.

Their business model generated revenues from (1) Sales at company-owned stores; (2) Royalties from franchised stores and franchise fees from new store openings; and (3) Sales of doughnut mixes, customized doughnut-making equipment and coffees to franchised stores.

Analysis and Evaluation:

While management placed strong emphasis on their differentiated product and were confident they could be a leader in any market they entered, they failed to take note of their competitors, as well as changing customer desires. Differentiation is good to use when a buyer's needs and preferences are too diverse for a standardized product, and they are willing to pay a higher price for unique features. If the buyer doesn't perceive the value of a unique product, or if differentiating means the product is not priced competitively, this strategy will fail.

Through the acquisition of Digital Java, they added premium coffee to their vertically integrated supply chain. This supply chain allowed them to control and ensure the quality of their products. However, vertical integration requires a higher capital investment and company risk. When a value chain activity can be performed at a lower cost, outsourcing that activity should be closely evaluated.

They were very innovative and customer-focused. Their vision was based around a doughnut "experience." The stores were designed as "theaters" so customers could watch the doughnuts being made and the dйcor had a 1950s vintage look. Some stores had drive-through windows and dining areas. Production stores featured a "HOT DOUGHNUTS NOW" sign. When lit, the sign was an indicator that freshly made glazed doughnuts was available for immediate purchase. Their stores were