Introduction for the Uninitiated
Starting at 6:00am on Monday, November 2, 2015, hundreds of customers lined up outside a Krispy Kreme (KK) shop in Houston with dreams of warm, glazed doughnuts glistening in their eyes. After a 26-hour wait, customers finally entered the new store, the manager lit up the franchise’s iconic “Hot Doughnuts Now” sign, and KK began luring in passersby with the sights, sounds, and smells of its signature Original Glazed.1
The Simple Beginning of a Business Model
After buying a proprietary recipe from a French chef in New Orleans, Vernon Rudolph, the founder of KK, opened an otherwise standard doughnut shop in North Carolina. As the story goes, passers-by were drawn to the unique scent and taste of his hot doughnuts, so he cut a hole in the wall, let the aroma permeate nearby streets, and began advertising “Hot Doughnuts Now.”2 For decades to come, his simple business model – sell delicious doughnuts hot out of the glaze – set KK apart from other bakeries and doughnut shops. In fact, even until the 1996 opening of its first Manhattan location, the company still had less than 100 stores, all focused narrowly on perfecting and selling the hot Original Glazed.3
Today, KK has 1000 stores across 24 countries, and it has added several more ingredients to its recipe for doing business.4 For example, starting in 2000, KK began selling flavored and shaped specialty doughnuts, and in 2011, it began selling flavored coffees and branded coffee mixers.5 In spite of headwinds from health trends and some skepticism from “purists” in KK’s customer community who disliked the idea of new products that wouldn’t be hot-off-the-line like the Original Glazed, the company continues to achieve top line and operating margin growth.6
The Evolution of an Operating Model
This story of growth and success is largely explained by the way KK’s operating model decisions have aligned with or even enabled changes in the business model.
KK built its reputation for quality and consistency by operating for decades as a fully vertically-integrated company that invested heavily in technology and process standardization. As early as 1950, the KK Laboratory on Ivy Avenue in Winston Salem began perfecting the art of manufacturing, bagging, testing, and distributing the company’s proprietary doughnut mix to local shops. The Laboratory developed proprietary equipment like the Automatic Ring King Junior Doughnut Machine, the predecessor to KK’s iconic Factory Store production lines, to ensure each doughnut was the same size and shape.7
Furthermore, as KK’s franchise network grew and the company decided to outsource distribution to Sysco, it invested in supplementary training and technology that continued to ensure franchisees had the materials and information required to uphold quality standards. For example, the company developed the 16-week KK University training program for franchisees, as well as an Information Services Department, which creates electronic tools, reports, and forms to give the Laboratory visibility into franchisees’ mix consumption.8 In these ways, even though the company is no longer fully vertically integrated, it can still ensure franchisees are ready to make doughnuts that are worthy of the KK name.
Of course, a discussion of KK’s operating model wouldn’t be complete without examining the Factory Stores themselves. With Factory Stores across the US, KK realized each location could be more than just a novelty retail store where customers watched doughnuts move through the finely-tuned production line, slide through glaze waterfalls, and meet them at the cash register. Specifically, the company set up satellite stores and wholesale partnerships to which Factory Stores could sell the specialty doughnuts that it made during off-peak times and weren’t served hot, anyway.9 This operational decision was highly strategic for the business, as specialty doughnuts justified premium prices and actually required less labor and machine content. KK engineered a process where the next doughnut type could be mixed while the first was on the production line, allowing stores to run machines and sell doughnuts up to 24 hours per day. A rough description of a store’s daily Production Plan is illustrated below.10
In summary, while KK has moved far beyond the Original Glazed and a literal “hole-in-a-wall” shop, it has achieved continued growth by unlocking opportunities in its business model through operating model innovations, and by keeping the alignment between those models as consistent as the taste of its doughnuts themselves.
1 Houston Chron, http://www.chron.com/business/article/Krispy-Kreme-reopens-in-Houston-for-first-time-in-6605700.php
2 Krispy Kreme website, http://krispykreme.com/about/Our-Story
3 Funding Universe, http://www.fundinguniverse.com/company-histories/krispy-kreme-doughnuts-inc-history/
4 Company 10K, 2014: http://d1lge852tjjqow.cloudfront.net/CIK-0001100270/8497a569-9ea8-4a00-a82d-af70af5d6c55.pdf
5 Krispy Kreme website, http://krispykreme.com/about/Our-Story
6 Company Press Release, Q2 2016 Results: http://investor.krispykreme.com/press-releases/press-release-details/2015/Krispy-Kreme-Reports-Financial-Results-for-the-Second-Quarter-of-Fiscal-2016/default.aspx
7 Smithsonian website, http://americanhistory.si.edu/collections/search/object/nmah_1215321
8 Krispy Kreme website, http://krispykreme.com/about/Our-Story
9 Company 10K, 2014: http://d1lge852tjjqow.cloudfront.net/CIK-0001100270/8497a569-9ea8-4a00-a82d-af70af5d6c55.pdf
10 Interview with Aaron Knapp, Franchise Manager for Mission Viejo, CA location, interviewed 12/9/2015