Krispy Kreme Doughnuts:

Rise and Fall

A Case Study

Anthony D. Davis, Sr.

Keiser University
MBA 532
Dr. John Fitzgerald
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August 5, 2010

America is the land of opportunity because only in America can you go to sleep a

poor man, and wake up rich. One of the ways this happens is when people play the

lottery. They buy a set of numbers on Wednesday, only to find out on Thursday morning

that they have hit all the numbers and suddenly they go from foreclosure to financial

freedom. This sudden rise to wealth has both a positive and a negative side. Initially, it

will appear that all the problems that one could have gone and that the road ahead is rosy

and full of positive outcomes. Yet on the other hand, history has shown us that things

that come quickly can also leave quickly. Sudden wealth brings with it a host of

responsibilities, and if a person is not aware of all that is required to maintain the wealth a

series of events could cause the wealth or notoriety to vanish.

Krispy Kreme doughnuts had its humble beginnings in 1933 after Vernon

Rudolph bought the namesake doughnut shop that had belonged to Joe LeBeau, lock

stock and barrel. In 1937 the first Krispy Kreme doughnuts opened up in Winston-

Salem, NC. It became a success in the late 1950’s and they opened 29 shops in 12 states

and were able to produce 500 dozen doughnuts and hour. Also Vernon Rudolph brought

on partner Mike Harding; to help them build the business. In 1960 business began to take

on a standardized look and thus creating the Krispy Kreme trademark. In 1973, when

Rudolph died, Harding became the chief executive officer. From its inception until this

time, Krispy Kreme grew from less than $1 million revenue in 1954 to over $58 million

by the time Harding retired in 1974. In 1976 Beatrice foods bought Krispy Kreme and

started making changes to bring about a more modern look for the company in 1982, for

$22 million. The company was bought from Beatrice by Joseph McAleer.
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The new owners brought back the original recipe that had been changed by

Beatrice foods and with that sales rebounded. Krispy Kreme was now operating

corporate stores as well as franchises with royalties being paid to the corporate office.

Revenues have grown 117 million dollars in 1989 and remained stagnant through the

early 1990’s. The company brought in Scott Livengood as President and COO.

Livengood had joined Krispy Kreme in1978. After he came on, in 1992 Livengood

realized that the company’s model of selling wholesale was not bringing out the best in

the company as there was no focus on the brand. Additionally, he realized that the focus

of the markets in the southeastern US were not taking advantage of the growth market.

He also realized that the large 7000+ foot stores were essentially too big to bring in a

significant profit.

In 1996, Krispy Kreme began a new initiative and strategy to reposition itself. It

was going from wholesale bakery to specialty retail company. They increase the donor

sizes and began to emphasize the “hot donut”. The second part of their strategy was to

increase the number of stores both retail and franchise in establishing a square footage

that was suited to the company's new position. By the 2000s, Krispy Kreme had grown

substantially to 33 franchise stores and had committed to opening another 130 stores in

the next few years. They were also operating 61 stores from the corporate headquarters

in broad revenues to over $220 million with profits at a record $6 million.

This new company went public in 2000 with an initial public offering or IPO of

3.4 5 million shares. From 2000 to 2004 the number of Krispy Kreme stores grew from

144 to 357 and posted donut sales from an average of three median to 7.5 mean they were
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now in the process of growing internationally. In 2004 they had an astonishing 30.6% of

the market for packaged donut sales compared to the 6.4% they had in 2002. From

practical purposes, Krispy Kreme had become an overnight sensation. No sooner than

new stores open crowds would line up just to taste Krispy Kreme doughnuts. By all

measures Krispy Kreme had done all that was necessary to become successful. They

were in charge of their own distribution, and they produced and built all of the machinery

that was placed in corporate and franchised stores. In 2001, Krispy Kreme purchased

digital Java small Chicago-based coffee company. With the purchase, their coffee sales

had increased 40%. During the same years, the Krispy Kreme franchise was growing and

new franchises across the nation were setting a sales record at new stores. The cost of a

new store was about $2 million in weekly sales at stores could range anywhere from

$100,000-$500,000 the first couple of weeks after the store opened. Krispy Kreme had

gone from a simple company bought in 1933 to the winning ticket. By all measures, they

were the golden child of the donut industry. Continuing on their buying spree Krispy

Kreme purchased Montana Mills bread Co. in 2003. At the time it was seen as a natural

outgrowth for the company. Yet in 2004, the Montana Mills brand generated $6.7

million but had expenses of 8.7 million, which resulted in a $2 million loss.

Krispy Kreme had its detractors. They came in the form of competitors like

Dunkin' Doughnuts, and Tim Horton’s. Two others of importance were Winchell’s

Donut House and LeMar’s Doughnuts. They were all viable competitor’s who had

corporate shops and franchises located in the United States, Canada, and abroad.

One of the problems the Krispy Kreme had was in growing so fast. In such a

relatively short period of time they were essentially one-dimensional; they sold
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doughnuts. And even though they entered the Java market, and subsequently the bread

market, they did not do so with the same care and strategic prowess as they had in

establishing themselves as a brand donut company. When you look at a company like

Dunkin' Doughnuts, although they specialized in doughnuts, they also have a full line of

breakfast products and are not limited to just selling doughnuts. Tim Horton's has a small

cult following from their Canadian hockey hero. Not to mention they also have a full list

of products to include sandwiches, bagels and muffins and croissants. This less Krispy

Kreme as a great donut retail establishment, but it also showed that against the

competition they did not have a plan B. . Everything they Krispy Kreme put together

from manufacturing to training, all centered on the production of doughnuts. And

although they had acquired a coffee company, it was not established enough to be a

standalone product like the many coffee products of a Starbucks. Additionally, their

purchase of the bread company, did little to add to the Krispy Kreme name or its bottom

line, and therefore became a deficit instead of an asset. Secondly, unknown to anyone,

was the inquiry on accounting practices from the repurchase of a delinquent franchise and

the effects they would have on public trust. This came at a time when the company was

already receiving backlash for serving doughnuts that had an extremely high fat content

in a world that was becoming more diet conscious. Krispy Kreme never saw their golden

child having an Achilles' heel. Who would have thought something so tasty, so delicious,

hot and melted in your mouth could suddenly be seen as an artery blocking heart attack

causing treat. The bottom line is, somebody should have recognized and seen that the

polls of America was shifting to becoming more health-conscious.

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It became apparent to Krispy Kreme, a company that had record sales and great

domestic and international growth that their operation was not enough to sustain people’s

loyalty. There are number of actions that Krispy Kreme doughnuts could have taken.

The first action that could have been taken was to realize that their success was rolled up

in one product and although the product came in different kinds i.e., glazed, and filled,

and coated, it was still seen as one product. So, as they became successful, they should

have used that opportunity to introduce other sustaining products bolster their product

line and could have taken time to determine if the acquisition of coffee and bread was

going to be enough to grow the business and if it was done at the right time. There was

no insight in the coffee purchase, only an assumption that that extending their beverage

line would broaden the audience. Regarding the financial irregularities, there should

have been some other checks and balances to ensure that part of the business was handled

through an outside agency or at a minimum audited. Another possible solution was for

Krispy Kreme to proactively educate the public about the nutritional value of their

product and how through moderation, everyone can enjoy a Krispy Kreme donut. That

would have been the opportunity for them to introduce low-fat doughnuts and other type

of donut treats, coffee and breads. While they were on top, they should have taken the

opportunity to tell America why they love Krispy Kreme doughnuts and invite America

to become part of the donut craze by introducing ideas or plans to make doughnuts

accessible to everyone from every walk of life. Lastly, Krispy Kreme became wrapped

up in its success and growth, and did not ensure its foundation was strong enough to

sustain a blowback. It was not prepared for the wind to be knocked out of his sails.
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I would have recommended to Krispy Kreme, that when the public began to take

hold of their product and bring their company from obscurity to notoriety that they began

to study their competition and take note of what worked for them. There was a lot going

on, doing the early 2000’s and if there was going to be an acquisition, they should have

looked for one that could have immediately added to their overall portfolio. It was

obvious all their competitors had a larger product line and so Krispy Kreme needed to

have more than a niche product. I would have done studies to find out the history of

single product companies, looking at what worked and didn't work for them. Growth is

good but out-of-control growth can be dangerous. The company was spending so much

time trying to keep up with opening new stores, they apparently failed to revisit and

refocus efforts on their core business. While designees of the company were responsible

for licensing and franchising, the CEO and the board of directors needed to continue to

study the model and tweak their short and long-range plans outside of the franchising

activities.

There comes a point to much of anything is not good for you. Krispy Kreme

doughnuts as a single product brand, and it's a good brand and good product; however, a

number of things happened quickly for the company and instead of being a three-legged

table, it was a one legged table that was balancing well, for a while. The company hasn't

suffered because its product was bad, the company has suffered, because it's planning

was bad. People love Krispy Kreme doughnuts and will continue to love Krispy Kreme

doughnuts, but the company must find a way to ensure their product can go from one

with high fat content to one that's healthy, while keeping the same taste and no doubt.

Krispy Kreme doughnuts will find prominence again.

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Reference:

Thompson A & Shah A (2005) Krispy Kreme Doughnuts in 2005: Are the Glory Days

Over? Taken from: Peter J & Donnelly J, (2009), Marketing Management:

knowledge and skills, 9th Ed, McGraw-Hill Irwin, p 688.