Krispy Kreme Doughnuts: The Sweet Success of Business and Operational Alignment
The alignment of business and operating models rarely align as sweetly as they do in Krispy Kreme’s glaze waterfalls, melt-in-your-mouth doughnuts, and finely tuned production lines.
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
Student comments on Krispy Kreme Doughnuts: The Sweet Success of Business and Operational Alignment
When Krispy Kreme opened in Portland, there were people waiting in lines for hours, even several months after the initial opening. The fact that the donuts were fresh attracted people to drive up to 20-30 minutes to get in line, and also enabled it to out-compete chains such as Dunkin Donuts. Before reading this post, I didn’t think about the fact that Krispy Kreme had to engage in a different operating model to be able to deliver their signature fresh donuts (e.g., it requires more vertical integration, or on-site preparation for O&O stores). Does Dunkin Donuts operate under a similar model?
On the point of franchising, Krispy Kreme ran into a lot of trouble in the early 2000’s because they grew too fast. It sounds like the company was pretty careful, from an operations perspective, to train their franchisees well, suggesting it was a market over-saturation issue and not an operational issue.
Wow has this post generated some attention! I think all of us in Section G have a sweet tooth that this post must be appealing to…
I wanted to answer the question about Dunkin Donuts’s distribution model. DD makes their doughnuts in a central bakery facility, then ships those out to the franchise stores within the local area. The DD employees actually add the icing and colorful toppings to the doughnuts at the store in the morning before opening. (I know this because my family frequents the DD in our neighborhood and we are friends with the manager there!) So, the distribution model is not necessarily what is different between KK and DD, as both use a single facility to make doughnuts for multiple stores. What is different is that KK makes that production of fresh doughnuts a central part of their appeal, while DD (in spite of its name) really does not compete on doughnuts but on coffee. So while DD will sell you doughnuts that are 12-hours old, they will pour out 1-hour old coffee to re-brew and serve a fresh cup. To me this difference between KK and DD demonstrates how two companies selling the same product will differ in their treatment of it because of differences in their business model: at KK, it’s selling the best abd freshest doughnuts, while at DD, it’s selling the best and freshest coffee.
It is total genius that they use their store real estate as a manufacturing operation during off-peak hours. I am definitely going to be thinking of other businesses this is applicable to.
Adam – great post! I think it’s interesting how the operating procedures for a company like KK are standardized so that the consumer has a similar experience at any store, but just as important, the standardized productions allows the franchisee owners an almost cookie cutter infrastructure that’s scalable and minimizes variability across operators. As franchisee owners often look for ways to improve their own store profitability and processes, I wonder how much leeway they are actually given from corporate to innovate their individual operations (my guess is very little, if any…).
I’m curious as to the investment required by each individual store if it is also simultaneously a manufacturing site. I’m assuming the machinery required is not cheap, so the fixed costs of opening up a store might be higher. Furthermore, it seems to take up a lot of real estate, how does KK do so in cities were real estate is more expensive?
Great post, @agassin! I used to help manage KK’s Mexico 130+ store Master Franchise so I’ve gotten to know and admire the brand.
TLDR version: Two other important elements that I think help keep the company’s operations aligned with its business model (goal: create the world’s best doughnuts) center around growth process discipline. First, KK enters a new market with only a factory store for a period of time, and second, KK only opens satellite stores if it can get fresh doughnuts there within ~3 hours.
Longer version: Not sure if Houston was a new market when they opened the factory store you mention in your post, but the line of people waiting outside for the opening is pretty commonplace when a new factory store opens. Witnessing the doughnuts being created, the anticipation that builds as you enter one of these stores as you smell the fresh dough, and finally enjoying warm doughnuts fresh off the press all create a powerful magnet for crowds, in particular when Krispy Kreme didn’t have a presence in the area before. Then, KK keeps operates only the factory store for a number of months – in Mexico we waited about 6 – before opening non-factory standalone stores and kiosks, making their doughnuts a coveted product with limited geographic availability. Standalone stores and kiosks usually rely on factory stores for their prime products, although some large markets will also have a centralized production facility in addition to factory stores. By the time standalone stores and kiosks start popping up in more convenient locations, people are already familiar with the brand and are happy that they can easily get Krispy doughnuts in more locations. Finally, KK won’t open satellite stores in a neighboring cities with no factory stores, even if these have high potential, if getting doughnuts there would take more than ~3 hours. This ensures that whether you purchase at a factory store, a standalone store, or a kiosk, your doughnuts will always be fresh!
As someone who has frequently partaken in a still-hot KK, this is a great post!
In particular, I have always thought that KK’s operating model was a key driver of their value creation. Quite literally, by manufacturing the donut mix and making the actual donuts in-store, KK is able to reduce certain operational costs, such as transportation, storage, and spoilage loss, while increasing consumer perception that KK is a premium product and hence enabling KK to charge premium prices. I’d be curious to know more about the human capital costs associated with this operational model, since the decentralization of donut production may cause KK to incur additional costs. Is turnover, on average, high or lower than for KK’s competitors? What is the annual expense, per factory store, of training staff? Is there additional corporate overhead? Furthermore, given the incremental expense of the donut making machines required in each store, is the premium charged for fresh donuts sufficient?
In all, a very interesting operating model to consider. Thank you for sharing!
Adam! Thank you for making me extremely hungry and taking me back to my childhood as a KK addict. I can remember the fascination that I had as a child watching this incredible line pump out these delicious donuts. In TOM, we studied the efficiencies/productivity gains that come along with certain operational choices that a company makes. We really didn’t explore the sales gains of grabbing the attention of your consumer because of your beautiful assembly line.
This is a very insightful post! Actually I loved Krispy Kreme Doughnuts in Japan. They have excellent operation and attract lots of customers even though they have to wait for 30 minutes or sometimes an hour in my favorite store. On the other hand, they are a lot of competitors not only in doughnuts but also in other sweets, and the demand is volatile: sometimes I had to wait for an hour, while sometimes I could buy without waiting. I am curious about how they manage this variability given that the doughnuts is a kind of boom and the demands fluctuate over the time (sometimes month by month).