Executive Report

Krispy Kreme believes that they have the ability to gain market share on a global scale. First, they plan to infill markets that they are already in by expanding existing franchise partners and growing existing Company-owned markets. They believe this approach will permit them to leverage supply chain efficiencies and capitalize on their strong brand awareness. Second, they intend to pursue expansion opportunities with new franchisees to grow their shop footprint in both underpenetrated and new markets. Third, they plan to evaluate new markets, regions, and areas where Krispy Kreme has limited or no existing market presence. They expect to announce new development agreements in the future as they seek to increase the number of new shops that franchisees have contractually committed to open. In the past two fiscal years, they have announced new shop development agreements with domestic franchisees in Dallas, Houston, Maryland, northern Virginia, Arkansas, and southern California; and internationally in South Korea, Colombia, Taiwan, Bangladesh, and Russia. In addition, the Company opened new shops in a number of existing Company markets. They have a suite of shop formats to fit individual market needs, which they believe will facilitate Company and franchisee shop expansion. Their goal is to achieve annual, double-digit percentage growth in their system wide unit count over the next several years.

New competition within any industry is a threat for every company. With the ease of entry of new companies into the market; they, however, don't straightforwardly affect Krispy Kreme’s business. On the other hand, their entrance builds the general competition in the industry, which decreases price control in the market. One of the biggest concerns with Krispy Kreme’s competitors is that they have greater resources; which allow them to react faster to the quick-changing food service industry. Another concern with new competitors is a more aggressive price range with a wider range of products for customers to choose from.

One weakness for Krispy Kreme is a portion of their revenues come from franchisees that are independently owned and operated. These franchisees could take action that harms their business. Even though Krispy Kreme takes steps to properly train and support their franchisees, those franchisees operate their restaurants independently. Franchisees may operate their business in a manner that is not consistent with laws and regulations or in accordance with Krispy Kreme’s standards and requirements; which inevitably puts Krispy Kreme’s image and reputation in jeopardy. Is the previous sentence really true? Most franchise agreements have an ethics and standards clause. Franchisees are usually required to follow specific recipes, use specific supplies and sometimes are required to use specific suppliers. KK image could be damaged if a franchisee operates outside the agreement but then it’s grounds for terminating the contract and franchisors can either take over the store or close it down. Another weakness that is currently being addressed is the possible security risk for guests, web-site users, and team members because of aging information technology. Krispy Kreme is currently working to improve their information technology system in order to protect valuable information.

The company does not usually pay the dividends in cash, it aims at employing the generated cash to further investments. This means that the shareholder does not usually get money in the end; but instead the business gives them a chance to buy more shares with the proceeds derived from dividends. The common stock in the last financial year yielded less than it did in the previous year. For instance, the common stock of the fiscal year ending February 2014 was $26.63, and $21.08 for the fiscal year ending February 2015. Are you saying the dividend was $26 and $21 respectively, or the share price was? I think it was the share price. When you use terms like “yield” it suggests interest rate or dividend so be careful there. The other weakness is that at the end of the financial year, Krispy Kreme had less working capital of around $77 million, which was less than the previous year of $81million. In conclusion, the acquisition of Krispy Kreme may give Dunkin’ Donuts a chance to have more working capital to operate in different markets and activities.

The weakness in terms of operation can be traced to how its products are being achieved (received, not achieved) by consumers. Some argue that the doughnuts usually have high fat content. With the increasing worries about fat related diseases, the company may not yield as much from sales if such information reaches consumers. In California, providers of prepared foods are required to provide nutrition content upon request of the consumer so the information does reach consumers. This should signal donut shops to offer healthy alternatives in order to retain and grow customer base. Furthermore, though it has a wide network, there are still some areas that have not been fully covered, hence leaving a potential market uncovered.

Krispy Kreme does have some risks where profitability is vulnerable to cost increases. Some of the more impactful are the increased cost of raw materials, fuel, and financing by franchisees. Yep, good comment. The access of financing available to Krispy Kreme franchisees with reasonable terms is something that could adversely affect their potential to grow and increase profitability.

Other top contenders, such as McDonald's, Starbucks, and Burger King, are a long way ahead in the classification of creative drink and nourishment foods on their menu. The organization has nearly an 8% share in the breakfast market, much behind McDonald's. What is McDonald’s share? Although, in the course of the last couple of years, the Dunkin’ brand has picked up notoriety due to its operational quality and steady exertion towards consumer loyalty.

Krispy Kreme faces pressure from new or current competition to lower prices of products, and to offer more of a variety of products. Since other companies offer different types of products to accommodate more tastes at once, inevitably, competitors will draw in more people than Krispy Kreme. Another example of how pressure from competitors can reduce Krispy Kreme’s sales is the amount of stores available. Krispy Kreme doesn’t offer as many places for customer to purchase products as others in the industry, therefore, reducing sales and profits.

The consumption of coffee and donuts is on the rise in the Middle East due to the increase in disposable income of the working force in China, Malaysia, and Singapore. These countries are in the Far East. By opening more than 20,000 locations in these regions, with the hope of expanding them to more than 30,000 locations, the market will saturate and thus (did you mean to finish a thought here?)

A number of factors have affected, and will continue to have a significant impact on Krispy Kreme’s sales numbers. Customer trends and preferences, economic conditions, and competition from competitors are factors that have a high impact on this industry because it creates unpredictable fluctuations in sale volume. Other factors, such as changes in laws and regulations, and the cost of raw materials, may be more predictable but can be still as detrimental to the business. Another possible threat that Krispy Kreme may encounter is information technology failure, which could lead to customer’s identifiable data being compromised.

Another challenge Krispy Kreme is facing is the upward trend of a healthier lifestyle among the people in the world. This trend is making people be more cautious of high calorie, sugary foods. This was mentioned above. Secondly, another serious threat is that local cafeterias and bakeries pose completion (competition, not completion) to the market since there is no clear cut legislation barring entry of companies into the market.

The company celebrated its 75th birthday in 2012. The company has a strong brand, and is already known worldwide. Krispy Kreme is already in 24 countries, which may bring new light to the special bond Dunkin’ Donuts has already created with existing and potential customers.

“Our market research indicates that Krispy Kreme’s breadth of appeal extends across all major demographic groups, including age and income. In addition to their taste, quality and simplicity, Krispy Kreme doughnuts are an affordable, indulgent sweet treat. Many of our customers are accustomed to purchasing our doughnuts by the dozen for their office, clubs and family” (KKD Corporation, 2015)

The acquisition will bring in many opportunities such as fundraising, and developing the untouched domestic locations. It will add diversity and expand Dunkin Donuts product line along with adding a competitive advantage in the market. How will acquiring KK add diversity and/or expand the product line? DD has a glazed donut. It might not be the same recipe but it is a close substitute rather than an alternative choice. The company has a wide distribution channel with over one thousand shops. The network serves to show how far it has gone to reach all the potential customers. With such a wide channel, it has been able to administer to its market and feed it successfully. It has further been able to explore new markets. The accelerated growth is a promising feature for Dunkin Donuts, which gives assurance of further growth. The company is also pursuing franchise interests in order to handle the markets that have not been satisfied. Yes, this is the main reason for DD to consider acquiring KK. Rapid expansion into markets DD is not currently serving. Such interest makes the acquisition a more plausible one. Moreover, through technology, the mobile guest has enabled communication with its clients, hence getting fast feedback. In addition, it has maximized brand awareness and continues to maximize in their ability to handle both wholesale and retail business. Such channels are effective in making sure that the information concerning the brands is able to grow far and wide.

Krispy Kreme has many opportunities to grow and expand because of their ability to operate in four different business segments: Company Stores, Domestic Franchise, International Franchise and The Krispy Kreme Supply Chain. Selling products in different business segments allows their products to reach many different customers and to maximize brand awareness. Another big opportunity for Krispy Kreme is their state of the art technology and their steps to enhance their core menu. This will draw in more customers and keep them coming back.

People have begun using Krispy Kreme donuts as a tool to fundraise, which has shown steady growth since 1955. By 1963 production had changed in methodology, where machines had become the new source for product making. Ten years later, the company has grown to a total of 60 shops in the southeast. Unfortunately the founder of the company died and the company was held in trust by a bank. Years later the first retail-only store opened in 1989. The famous hot light was developed in 1992, which informs customers that fresh, glazed donuts are onsite. In keeping with the new age, Krispy Kreme invented the hot light app, a variation of the hot light, in 2012. A year earlier, in 2011, the company launched their signature coffee blends, bringing in more loyal customers. Furthermore, Krispy Kreme stayed inline with their growth goal by opening their 1,000th store in 2015.

Krispy Kreme currently makes and sells a wide variety of high-quality doughnuts, including their signature Original Glazed Doughnut. Their shops typically offer 16 or more doughnut varieties, including eight varieties that are offered at all Krispy Kreme shops. Sales of doughnuts comprises approximately 89% of total retail sales, with the rest in beverage sales. Sales of yeast-raised doughnuts comprise approximately 75% of total wholesale sales, with cake doughnuts and all other product offerings comprising approximately 25% of total wholesale sales.

Krispy Kreme continues to develop and leverage complementary products to meet consumer need for convenience, regional taste preference, and variety. What are some of those products specifically? Beverages play a large role in providing convenience and satisfaction for guests, including coffee, which has been part of the brand for many decades. They have a complete beverage program which includes drip coffees, iced coffees, both coffee-based and non-coffee-based frozen drinks, juices, milks, water, frozen/blended beverages, and packaged or fountain beverages..

Krispy Kreme has experienced a 6.5% growth in revenue over the last two fiscal years, making it to $490.3 million in 2015. Also, the company’s adjusted net income increased to almost 12% to $48.3 million. In addition, the cash flow generated by the business amounted to over $60 million. The debt of the company at the end of the year was less than $10 million, and cash at the end of the year was almost $51 million for 2015. Such a debt level is reasonable, and shows the commitment that the company has in reducing the debt levels. The earnings per share of the company increased to almost 15% to $0.70. Such increase augurs well to the shareholders, who can thus be able to invest more in the company. Financially, it can be said to be a promising acquisition that will not hamper growth in Dunkin Donuts.

Impairment charges and lease termination costs were $955,000 in the fiscal year 2015, compared to $1.4 million in 2014. The components of these charges are set forth in the following table:

The Company tests long-lived assets for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. These events and changes in circumstances include: store closing and refranchising decisions, the effects of changing costs on current results of operations, observed trends in operating results, and evidence of changed circumstances observed as a part of periodic reforecasts of future operating results, and as part of the Company’s annual budgeting process. Impairment charges generally relate to company stores expected to be closed or refranchised, as well as to store management; which should not generate sufficient future cash flows to enable the Company to recover the carrying value of the stores’ assets. When the Company concludes that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), the Company records impairment charges to reduce the carrying value of those assets to their estimated fair values. The fair values of these assets are estimated based on the present value of estimated future cash flows, on independent appraisals, and in the case of assets, the Company currently is negotiating to sell, based on the Company’s negotiations with unrelated third-party buyers. Impairment charges related to Company Stores long-lived assets were $901,000 in fiscal 2015. Such charges relate to an underperforming store which management believed would not generate sufficient future cash flows to enable the Company to recover the carrying value of the stores’ assets, but which management had not yet decided to close. The store’s impaired assets consist of a building constructed on leased land and certain other equipment.

Lease termination costs represent the estimated fair value of liabilities related to unexpired leases, after reduction by the amount of accrued rent expense, if any, related to the leases, and are recorded when the lease contracts are terminated or, if earlier, the date on which the Company ceases use of the leased property. The fair value of these liabilities were estimated as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases. The provision for lease termination costs also includes adjustments to liabilities recorded in prior periods arising from changes in estimated sublease rentals and from settlements with landlords.

With the swift healthcare bill sweeping across the nation, the companies are listening carefully to the demands of the customers and the changes in lifestyle so that they remain relevant in the business. I do not understand the correlation between the ACA, listening to customer demand and remaining relevant. High attention also opens minds, which will lead to creativity and innovation. High attention to what specifically leads to innovation? The expansion of the market base abroad in China, India, and Malaysia helps to focus on what people attitudes are and what they need. Market research focuses on consumer attitudes and needs. Expanding into the market is what happens after a market is identified as ripe.

Krispy Kreme has also thrived by embracing product differentiation. The menu keeps expanding and improving. With Dunkin’ promising to venture into tea products in the future, they are sure to command a large market share by offering a unique menu for its customers, and gain a competitive advantage over its competitors. Product differentiation in the donut business is tough. There are taste and ingredients. A company could try to formulate a recipe for a healthier donut and/or a unique taste, such as maple-bacon flavor, but beyond that, differentiation will be at the company and menu level. Competing in this space will hinge on convenience, breadth of menu selections, quality and service. DD has expanded into the breakfast sandwich menu. This is good because it brings more customers through the door who might have originally just wanted a sandwich for breakfast but added a donut for a later snack by impulse. This strategy is an attempt to increase the “revenue per customer” amount. Smart.

The report comprises of the strengths and weaknesses of the target company Krispy Kreme. The wide network combined with the pre-existing Dunkin’ Donuts, will mean that more channels of distribution will be available. Dunkin’ Donuts will be able to have more market share, as well as capture a potential one. The infrastructure will give Dunkin’ Donuts a chance to exploit new markets and sell its products where they have not previously reached. Yes, exactly. The promising financial information, such as revenue growth, means that Dunkin’ Donuts will not be starting from scratch once investing in the new acquisition. Krispy Kreme’s network will assist in easier penetration into new markets, and will further assist positive financial figures. By focusing on the known weaknesses, Dunkin’ Donuts will be in a position to acquire a new venture without any operational or financial hitches. Good. Take a hard look at the supply chain. Donuts depend on basic ingredients like sugar, the price of which could be affected by relationships with countries who export sugar to us and also by natural disaster. Chocolate, coffee and nuts are also price sensitive. A major weather event could drastically increase the price of raw materials, which would eat into the profits of both these companies. If a consumer pays about $9.00 per dozen donuts, how much of a price increase would the market bear if raw materials shot up? Having contingencies built into the supply chain is huge.

References Böhm, A. (2009). The SWOT Analysis. München: GRIN Verlag. Cowan, L., & Jargon, J. (2011). Premium IPO: Dunkin' Brands Surges 47%. The Wall Street Journal, 64. Ferrell, O., & Hartline, M. (2012). Marketing Strategy. New York: CengageLearning. KKD Corporation. (2015). Krispy Kreme. (E. online, Editor) Retrieved July 14, 2015, from Financial Information : http://investor.krispykreme.com/phoenix.zhtml?c=120929&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwMTkwNjU1JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3 Yahoo Finance. (2015). Krispy Kreme Doughnuts, Inc. Profile. Retrieved July 20, 2015, from http://finance.yahoo.com/q/pr?s=KKD+Profile