Krispy Kreme: A Fresh Hot Mess
Why Krispy Kreme’s signature hot glazed doughnuts was not enough to satiate investors’ appetites.
Founded 1937 in Winston-Salem, NC, Krispy Kreme began as a doughnut wholesaler serving primarily local grocery stores. Passers-by smelled the sweet scent of fresh doughnuts being made and asked to buy hot doughnuts directly from the factory. Company management took notice of the market demand for fresh, hot doughnuts and continued to grow the business through the factory-store model. Today, Krispy Kreme has over 1,000 stores systemwide and can be found in 24 countries.1
Krispy Kreme primarily sells doughnuts, complimentary products such as coffee, and packaged sweets. The company earns revenue from retail, wholesale and franchising Krispy Kreme stores.2
Retail: Customers purchase products directly at a factory or satellite store. The major appeal at factory-stores is being able to purchase freshly made doughnuts. Satellite stores heat unglazed doughnuts and finish them using a warm glaze waterfall on premise.
Wholesale: Fresh doughnuts and other packaged sweets are distributed to various retail partners, such as grocery and convenience stores. The wholesale distribution business is largely limited to the domestic US and make up approximately 49% of company-owned store sales.2
Franchise: Krispy Kreme has also licensed out its products and brand to franchise partners. As of August 2015, there were 173 domestic franchise stores and 758 international franchise stores.3
While Krispy Kreme continually draws customers en masse to its store openings worldwide4,5,6 , flaws in its operating model have led to store closures7 and disappointing profits8 in recent history.
Large Store Formats: Traditionally, Krispy Kreme factory-stores have been large 2,800 to 5,500 square foot facilities, operating as both quick service restaurants and packaged goods distributors. The large size of the stores limit the density of stores in many markets where real estate is competitive. These stores require high initial investment and operate with high fixed costs driven by the company’s desire to manufacture their own equipment. Some stores are able to produce up to 600 dozen doughnuts per hour, but often operate with excess capacity.2
Krispy Kreme’s operational choices forced the company to be reliant on wholesale to earn a profit from their factory-stores. As a result, their retail business suffered from the lack of store density in strategic markets. Consumers began to think of Krispy Kreme as a “destination” location, rather than as part of their normal routine.2 Since their retail business signals demand on wholesale, both businesses became hindered by the company’s operational model. Meanwhile, competitors such as Dunkin Donuts and Starbucks sprinted ahead to ensure their foothold in quick service retail.
Distribution: Wholesale customers are served through a fleet of company-owned delivery trucks. Doughnuts are delivered daily and packaged goods every other day. In contrast, Krispy Kreme delivers fresh doughnuts to its satellite stores twice-daily to maintain product quality at its own retail locations.2 The lower frequency of delivery to wholesale customers has created a hierarchy among retail locations where factory-stores sit at the top, satellite stores in the middle, and wholesale partners at the bottom. Subsequently, astute consumers purchase fewer Krispy Kreme doughnuts at grocery and convenience stores. Since the yeast-based doughnuts spoil in two days, Krispy Kreme is forced to absorb the cost of spoiled, unsold products.9
Weak profits and low market penetration forced Krispy Kreme to rethink its strategy. It was clear the larger store formats did not work and they needed to disentangle the retail and wholesale business into separate operations. To do so, Krispy Kreme is pursing smaller retail-only locations, measuring about 2,300 square feet. The new store will continue to produce fresh, hot doughnuts, but at a lower capacity of 65 to 100 dozen doughnuts per hour.10 Stores will be cheaper to operate and require lower initial investment for both Krispy Kreme and its franchisees. Lower overhead enables more locations to be opened, which will hopefully shift the brand from being a “destination” concept to higher accessibility.11
Did it work?
Unfortunately, the focus on retail has come at a cost to the wholesale business. Shares of Krispy Kreme plummeted 16 percent following weak quarterly results in packaged goods and lowered guidance.12 It’s not clear the company has developed a strong enough product line of packaged goods or a sustainable operating model for its wholesale business.
Even in retail, the pace of smaller factory-store openings domestically has also been moving at a snail’s pace. Only 24 new stores in this format have opened since the company’s shift in strategy three years ago.2 International expansion appears to be more attractive to Krispy Kreme where there is a very low percentage of wholesale.13
Can Krispy Kreme figure out how to do both retail and wholesale? Do you think the factory-store model makes sense against the success of Dunkin Donuts and Starbucks?
1 Krispy Kreme company website
2 Latest Company 10-K, filed April 2, 2015.
3 Latest Company 10-Q, filed September 11, 2015.
4 Delaware Business Now. Krispy Kreme Opening Draws Army of Doughnut Lovers, July 3, 2014.
5 China Post. Krispy Kreme flagship opening attracts long lines, December 13, 2013.
6 Seattle Times. Crowds go doughnuts for Krispy Kreme, October 31, 2001.
7 Franchise Times. Downward spiral, November, 2007.
8 USA Today. Krispy Kreme sinks 15% on disappointing profit, August 30, 2013.
9 Business Insider. Krispy Kreme Donuts Don’t Last Long Enough, September 13, 2013.
10 Bloomberg Business. How Krispy Kreme Plans to Sell Even More Glazed Doughnuts, September 12, 2013.
11 Fortune. Behind the Krispy Kreme Turnaround, June 27, 2013.
12 The Wall Street Journal. Krispy Kreme Shares Plunge as Guidance Is Cut and Results Miss Views, September 9, 2013.
13 The Wall Street Journal. Krispy Kreme Takes Chance on International Flavor, September 8, 2013.
Student comments on Krispy Kreme: A Fresh Hot Mess
I love where this is going…
Awesome post! I am so hungry now. 🙂
Would love to comment but need to run off and find a doughnut somewhere!! 🙂
I’ve been to Krispy Kreme locations before, so can totally resonate with the post! I agree– a lot of it’s stores occupy huge spaces, have under-capacity production, and incur high fixed costs. I wonder if they are able to turn it around by maintaining their smaller retail-only stores and have large production centers dedicated to only servicing the wholesalers. Perhaps this will help them maintain their in-store freshness experience and not lose a significant portion of their operating revenues?
I agree that they should separate their retail vs. wholesale production. One of the problems is that they’ve trained their customers so well on expecting fresh doughnuts that I think their wholesale approach needs to be re-imagined for it to survive the higher customer scrutiny that comes with retail expansion.
This is a great post. I really like the insights in the distribution section in particular. Agreed that Krispy Kreme really missed out on the rise of complementary, convenience-driven products (coffee specifically) … and I think that explains their decision to keep larger-format locations. When walking into a Dunkin Donuts now, I’m always amazed that doughnuts account for such a small fraction of the total products available.
To answer your questions, I don’t think they can do both retail and wholesale. Dunkin Donuts has a huge head start with 10x the number of stores, and I think the franchise business model works much better to expand rapidly. But the factory stores can’t drive enough volume since people have switched to conveniently located stores for their morning coffee and/or doughnut. In short, fully agreed that they’re in a tough position!
Thanks for your comments Will! I completely agree with you that Dunkin Donuts has done a great job diversifying their product offerings at retail. Krispy Kreme has been attempting to do that with coffee, but it’s been a slow uphill battle to get consumers to associate the chain with good coffee. If they can replace their wholesale revenues with these doughnut complimentary products, they might just hit their stride!
I really enjoyed reading this post. My only personal experience with a Krispy Kreme was a store on the upper east side in manhattan, and it closed years ago. After reading about their operating model, I can now understand why that happened. I think Dunkin Donuts is way ahead of the cheap retail game. But I also believe that DD’s quality is slipping–or it can just be that doughnuts don’t taste as good as an adult ;). But if I were KK, I would start focusing on “high end doughnut retail”- there has been a huge resurgence of quirky bakeries producing interesting new flavors of doughnuts. There are even successful doughnut food trucks that sell at a significant mark-up to DD. In other words, doughnuts look like they are making a fancy comeback, so that’s what I would capitalize on.
Great insights, Rina! Not sure how economically feasible it would be for the entire KK chain to re-position as “high end”, but I wonder if they could launch a sub-brand. Also, you’ll have to show me what these new fancy doughnuts look like sometime! They sound so good!
Great post!! Thank for sharing this interesting case! This definitely reminded me of how people in Taipei used to stand in line for 5 hours just to get a freshly baked Krispy Kreme donut. I agree that the retail and wholesale model cannot exist at the same time, and that choosing retail model resonates more with consumer behavior. Do you think the current poor performance of Krispy Kreme is the short term loss they have to take in order to shift to the right strategy though?
I think you’re spot on. There’s going to be a transition period for Krispy Kreme as they figure out their business and operating model alignment. I believe they’re pursuing the right changes, but they need to move faster and shut down some of their traditional storefronts.
Krispy Kreme is a great example of a company with a superior product (yum!) and a weak execution strategy. As you have laid out very clearly, its strategy of entangling its retail and wholesale businesses may be one cause.
To further evaluate the company, it would be interesting to see how Krispy Kreme’s strategy and financial performance has compared to competitors such as Dunkin Donuts and Starbucks.
Questions / comments:
What are the margins in the retail vs whole business? Which one should Krispy Kreme have focused on?
Is Krispy Kreme a breakfast offering or a dessert offering? If breakfast, it makes sense for Krispy Kreme to be more accessible. If dessert, maybe it makes sense for Krispy Kreme to focus on distribution?
Production – Are there advantages of producing on-site? Is it more economical to product on-site or to open additional plants?
Real estate – With the new store format, was Krispy Kreme able to open in more attractive/high traffic locations? Is being a “destination” location necessarily a con? Will being more accessible detract from the brand?
Distribution – Should Krispy Kreme have kept the larger stores but built out its distribution network to increase quality of delivered products?