c c University of the Philippines Cebu College Management Division Lahug, Cebu City
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c c c c Mgt 190 Case Analysis # 1 Krispy Kreme Doughnut ± 2008
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c c c c c Date Due: December 16, 2010 Date Submitted: December 16, 2010
Submitted to: Professor Jesus C. Cinco, Jr.
Submitted by: Group 2 Krystel Kaye Lee ± Team Leader Regie May Berou Anya Camille Gabucan Bea Marie Jaen Glorabelle Resma
c c ^ ^^c c c Krispy Kreme envisions itself to become one of the world¶s best and well-known doughnut companies. To reach this, they have to capitalize on their key strengths to combat the changes in the macroenvironment. Competition in the industry is fierce with dominating players and their ability to respond to the growth opportunity in the international scene. The U.S. market is also rapidly trending toward healthier food products which Krispy Kreme does not currently offer. For the past years, they have been incurring net losses despite their turnaround strategy. Total revenues for the company stores and supply chain have been decreasing since 2005. Becausethey failed to update their Uniform Franchise Offering Circular, they are suffering from opportunity losses in domestic franchisees. Their current production capacity is also underutilized because of a larger number of factory stores over satellite stores. After the internal and external factor evaluation, its best move is to hold and maintain. This will be achieved by implementing the market penetration strategy which focuses on aggressive marketing and increasing franchisees in the existing markets. This is the best strategy because it entails the least cost for Krispy Kreme and they can utilize their current resources for implementation. However, in this fastgrowing industry and fierce competition, they may be left behind. The company will utilize a mix of 25% debt and 75% equity. The generic strategy of the firm is Focused Best-Value provider. This will encompass the market penetration strategy for a fully-effective implementation.
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c List of Appendices c c c c× ccc c c c c c× ccc c c c c c× cc c c c P ccc c c c c! c c" c" c c c# c× ×cc c$% c c c& c 'c( &c c) c" *% cc c" $ cc c( + c )c c,× c% c× c-$% .c ,c c, c% c× c-/ c0#c1 .c 2c c2 c$ c× c c c c' 'c( c c c c c % c( cc-34"c( . c c c c % c( cc-'c( . #c c c c'+ % c( c &c c c c c )c c # c5
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^c^^ccccccc c lhat would be the best strategy for Krispy Kreme to pursue in order to increase revenues and recover from financial losses?
P cc c c c To be one of the world¶s best and well-known doughnut companies.
c c c n Krispy Kreme, ôc le bake mouthwatering doughnuts that appeal to the taste of the children and young adults all
over the world. ôc lith our special doughnut-making equipment and doughnut-making theaters, we regularly
produce one-of-a-kind doughnuts that are always sought after by our customers. ôc le commit to deliver increasing value to our stakeholders by producing better-than-average
returns and taking advantage of the opportunities that come our way. ôc le will continue to develop, motivate and reward our employees for their job security and
career growth. ôc le will continuously give back to the community by helping out organizations and launching
different activities for their benefit. ôc le capitalize on integrity and trust to achieve success for the whole organization.
c ^^c c c- c c c .c ôc To have a positive and increasing return on equity targeting at least 10% increase annually.
c c- c c c .c ôc To increase the frequency of customer walk-ins by at least 15% annually and have improved customer feedback. ôc To increase the number of franchises and satellite stores by putting up at least two stores per month annually in both domestic and foreign markets. ôc To get at least 10% of the area population as website members annually. ôc To launch at least one advertising campaign per quarter.
ôc To employ team building activities for employees at least once a year.
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cc c c c c c c^ c A total FE score of 2.77 indicates that Krispy Kreme is relatively internally strong with significant P ccc competitive strengths that can be used to address its response ability to the changes in the external environment. Their doughnut-making equipment and process which give them a large capacity to produce doughnuts is one of their distinctive competencies, along with their one-of-a-kind taste, special flavor offerings for certain seasons, and a unique franchise program. Customers can also enjoy watching the entire doughnut-making process through their store theaters. As core competencies, Krispy Kreme offers a variety of doughnuts and beverages to go with them. Also, they have access to many different distribution channels in both domestic and international markets. However, Krispy Kreme has not succeeded in their turnaround strategy where they failed to generate income and a positive return on equity (ROE).
D From the computation of Krispy Kreme¶s ratios, they are performing relatively well mainly because of their massive cost-cutting. However, they are still unable to reach optimal financial performance because of failure to attain positive figures. Krispy Kreme¶s current ratio increased from 95.52% in 2006 to 97.74% in 2007. Their quick ratio also increased from 68.24% to 78.34% in 2007. This shows that they are able to cover their short-term debts and obligations with the use of their liquid assets such as cash. This is also supported by the decrease of 15% and 10% respectively, in their short-term and long-term debts from 2005 to 2007. However, another important note is that Krispy Kreme had an increasing amount of cash from 2005 to 2007 that is not proportionate to their decreasing total revenues. This shows that they are tying up so much cash in working capital. Krsipy Kreme¶s inventories have decreased 8% from 2005 to 2007, showing that they have been saving on storage costs for doughnuts. However, they are not able to sell these quickly as shown in the decrease of their inventory turnover from 27 days to 32 days in inventory. This may be the cause of the company¶s decision to increase its cash in working capital because inventories are not moving quickly. Fixed asset turnover increased from 2.11 times to 2.46 times in 2007 which means they are utilizing their fixed assets effectively to generate sales. This is also the result of closing poor performing stores. Total asset turnover remained relatively the same at 1.21 times. This can be improved when sales are increasing and when some underutilized assets are disposed, or both actions are done. Their debt ratio has increased from 73.55% in 2006 to 77.41% in 2007. Although potential creditors do not prefer high debt ratios, stockholders want more leverage from debt because it increases expected earnings. Times-interest-earned ratio has increased to -0.98 times which shows that the company has now more capability to pay its annual interest charges. However, it still needs to improve this performance to achieve a positive figure; otherwise, Krispy Kreme will face difficulties when it decides to borrow additional funds in the future. Their gross profit margin has increased to 15.77% from 12.66% in 2006, and their basic earning power also went up to -4.30% which is a significant increase from -21.38% in 2006. Net profit margin has also increased to -8.98% wherein the company¶s net income became less negative. These significant improvements are mainly the results of their effective cost-cutting practices as shown in the 84.43% decrease in their cost of revenues from 2005 to 2007. The company¶s return on assets also increased
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cc c from -29.50% to -10.89%. The bottom-line ratio, return on equity, significantly increased from -75.18% to -44.12% which can be a result of their cost-cutting and debt leverage.
On the primary activities of the value chain, Krispy Kreme has notable considerations in their operations, specifically production and store count, and in marketing and sales.
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Their current production capacity is at 4,000 to 10,000 dozens daily per factory store. Although factory stores are reducing in number since fiscal 2005, the increase in satellite stores is not yet enough to take advantage of this production. Factory stores still comprise 74.9% of the total number of stores systemwide. t is good to note that satellite stores by area developers increased to 286.4% from 2005 because not only can the company save itself from the development and operations costs, but also area developers are contractually required to develop a certain number of stores. Similar in the international scene, there has been an increasing number of area developers which can offer the company better results and more stores to operate. As for the secondary activities, the general management of Krispy Kreme is relatively efficient. Their structure complements their strategy with different executive heads for each important function. However, issues in the human resources department may have been one of the number of factors that caused the failure of their turnaround strategy. Employees may still have been demoralized after the recent layoff of employees by 31.8% and the retirement savings dispute back in 2005. Employer brand image may have decreased significantly. One of their distinctive competencies is their automated doughnut-making equipment which gives them the capacity to produce up to 10,000 dozens daily. This technological innovation has given them the opportunity for notable economies of scale.
c ^ c^ c cccccc c Krispy Kreme has an EFE rating of 2.22 which means that they are relatively externally weak. They are not able to take advantage of opportunities well and are not able to avoid significant threats. The company has a great opportunity to enter the international market, especially in Asia and the Middle East. However, many companies are also expanding to favorable foreign countries which can lessen Krispy Kreme¶s success in these markets and hinder its potential growth. The U.S. population, which was the primary market of the company, now prefers healthy food products and this decreases the customer base of Krispy Kreme doughnuts.
c G The socio-cultural changes in Krispy Kreme¶s international environment contribute a better capability to increase ROE than the domestic environment. The availability of favorable foreign countries allows the company to decrease its marketing costs because of acceptability and increase its revenues because of their love for sweets. However, they will encounter problems in succeeding in the European market, especially in Britain, because of cultural differences. The domestic market is now becoming relatively unfavorable because of the growing trend for healthier food choices. Demographics in the U.S. show that the number of working Americans are increasing thus, it gives rise to the number of people eating out. Nonetheless, this market is shifting toward healthier choices with the rate of overweight and potential obesity, and the preference for casual dining. This change can
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cc c lower the company¶s ROE because of decreasing revenues. The global market is now intensified with the global presence of a growing number of fast-food companies which lowers the company¶s ability to generate better-than-average ROE. Only the economic trends are in favor of Krispy Kreme. Not only is the industry¶s stock performance improving but also the food product price inflation is leading to an increase in RO.
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The doughnut industry is currently highly unattractive in general. The competition among firms is fierce with a few dominating players who are playing in a slow-growing industry. Plus, because of the nature of its product, storage costs are significantly high which increases the fierceness of competition. These players are also considering entering the international market which is now getting crowded with many participants. n addition, end consumers have low switching costs since they can choose from many brands but still get the same product ± doughnut. Also, there is a growing trend of substitutes to snack products as the U.S. market poses a trend toward healthy choices and the British, among others, are accustomed to their own choices. The industry remains unattractive in the next 3-5 years. Once the domestic market hits its saturation point, the players will be more aggressive to stay in the industry to protect their market share. Plus, there will be a surge in the number of companies competing in the international market. Low-calorie and low-sugar substitutes will also be strongly marketed and preferred as the need for healthier products increase. lith this trend, calorie-packed doughnuts will be forced to go out of business or shift to developing healthy foods.
Dunkin¶ Donuts is the leader among the four dominating players in the doughnut market while Krispy Kreme comes in third. n terms of U.S. presence, Dunkin¶ Donuts and Starbucks rank first with thousands of stores across the country. Krispy Kreme and Tim Hortons only have approximately 200 to 300. Krispy Kreme also has the lowest variety of product offerings compared to the other three because they only sell doughnuts and beverages while Dunkin¶ Donuts and Tim Hortons offer breakfast and lunch choices, respectively. Tim Hortons is rated the weakest in global presence as they are only crowding one area which is Canada. Krispy Kreme, compared to Dunkin¶ Donuts and Starbucks, has a significantly lower number of stores as the two giants have thousands in different foreign countries.
^! c c The chosen generic strategy is Focused Strategy with Best Value. lith this generic strategy, the following are several alternatives for Krispy Kreme. Alternative # 1: Market Penetration focusing on increased market share through greater marketing effort and opening of satellite stores in current geographical areas The main source of Krispy Kreme¶s advantage is their distinctive product that invited generations of loyal customers for its one-of-a-kind taste and its special flavor offerings. Considering their financial status, stability would be an intensive strategy for Krispy Kreme since they are incurring net losses for the past several years. Marketing efforts would allow the product to be pushed to the market
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cc c aggressively. Moreover, more stores will be opened in their existing domestic and international areas. lith the increasing food product price inflation in the U.S., development costs are being pulled down to improve return on investment. Also, there is an increasing number of two-income households that increases doughnut consumption. The international market, especially Asia and the Middle East, also poses a great opportunity because they are both fond of sweet snacks and openness to lestern brands which is what Krispy Kreme is.
P cc#c The drawback with this alternative is that competitors are fast growing and becoming rapidly global in scope. Krispy Kreme might be left behind since greater opportunity for further growth and profitability are seen in the untapped international market. For this alternative, Krispy Kreme should invite more franchisees to increase its satellite stores in both of its current domestic and international markets. They must update their UFOC regularly to attract these franchisees in the U.S. market. Since they already have future stores opening from their development agreement with six countries mainly found in Asia, they can easily push these area developers to open more satellite stores than factory stores. This strategy provides KKD to have a major competitive advantage among others through increasing economies of scale. t takes advantage of the present capacity of the Krispy Kreme factories of 4,000 to 10,000 dozens daily, which can be sold at numerous satellite stores. ntensive advertising and strong marketing campaigns to its existing markets, especially in the unsaturated international market, will give the product the exposure it needs. This will be a defensive strategy toward the U.S. casual dining sector which is growing more rapidly than the quick-service industry. This would later on relate to a significant increase in market share and total revenues once effectively implemented. Alternative # 2: Product Development in the U.S. market, creating a healthier doughnut line lith the improving stock prices in the quick-service industry, Krispy Kreme can better serve the U.S. market by providing a new, healthier doughnut menu. The U.S. market is also moving toward healthy food choices. lith lower calorie content of Dunkin¶ Donuts, Krispy Kreme needs to reduce their calorie content to match or beat its major competitor. They can also increase the variety of their current doughnuts. Through this, Krispy Kreme doughnuts will be comparable with Dunkin¶ Donuts¶ and consumers will be forced to think twice on which brand is of more value. The main drawback for this alternative is the high cost to be incurred on the research and testing of the appropriate mix and the new taste of the product. Moreover, the company will face more costs in changing the process of doughnut-making and introducing this concept to their employees who might resist this change. lith their existing presence in the domestic market where they have thousands of retail outlets including off-premise channels, it will be much easier for Krispy Kreme to introduce and sell this new line. Moreover, Krispy Kreme already has a vertically integrated structure. Thus, they do not need to create another supply chain for this new line. Alternative # 3: Related Diversification focusing on adding new food products such as sandwiches, bagels, lunches, and more beverages As the casual-dining sector is gaining share from fast-food chains, it has posed a threat to Krispy Kreme. The doughnut company should opt to diversify their product offerings. They can add new related products such as sandwiches, bagels, lunches, and more beverages to their menu as what their competitors Dunkin¶ Donuts and Tim Hortons are doing. Krispy Kreme has made a name in the doughnut industry and they could use this to their advantage where loyal customers no longer need to go to other restaurants. At the same time, Krispy Kreme can
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cc c attract more customers with their diversified menu. These new products can significantly improve the sales performance of the company. The drawback of this alternative is that Krispy Kreme would have to exert more effort to effectively market this new menu. Training cost for employees is also very high because they will have to orient them to the diversified menu. They also have to hire professionals who will recommend the products and recipes to prepare. There is also a small possibility of cannibalization where they may lose their image as a doughnut company.
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Alternative # 4: Market Development in the international market focused on introducing present products into new geographical areas This alternative is developed from the opportunities in the international scene. As their U.S. market is going toward the saturation point, Krispy Kreme will face difficulties in achieving growth relative to their competitors. The existence and demand from the international markets, especially in Asia, gives the company the growth opportunity it needs. They are currently serving 10 foreign countries, five of which are in Asia. Therefore, there are still many untapped geographical markets that may lead to increased market share and revenues. The total capacity of their production will be fully utilized once they open new factory stores and a proportionate number of satellite stores in untapped countries. Through market development, the company will be able to introduce their one-of-a-kind doughnut to new markets specifically those areas where they have not entered yet. UK, Germany, and Spain are also favorable markets that can offer growth and profitability to the company. Countries such as China are favorable in terms of its population and fondness of sweets. Not only sales will increase with their population, but exposure and market share will also go up. High-income countries such as Singapore will also be a favorable market because people have the financial capacity to spend on products such as snack foods. The major drawback of this alternative is the high expenses to be incurred for expansion. There will be significant costs for marketing, licensing, and building new stores in totally new geographical areas, to name a few. Given the company¶s current financial position, the company will have many challenges and difficulties in getting the funds for implementing the strategy. lith their increasing debt-to-asset ratio, they are not very attractive to creditors. Moreover, the risk is high because of the differing economic conditions of the countries to be tapped.
^! c^ c Due to consistent losses that KKD had incurred for the past three years, the company is placed in a weak financial position. lith that, a rating of one is given to alternative four since entering a new market will require higher investment. On the other hand, a rating of four is given to alternative one since marketing the same product to the existing markets would not be that costly relative to the other alternatives. Alternative two is rated as three because cost would be incurred for research and development. lhile alternative three is rated as two because aside from research and development, training would also be given to employees in order to produce such new products entailing additional cost. For the feasibility of human resource, alternative one is rated as four since KKD would not require much hiring and training of new employees and they could readily utilize their existing human resource. Alternative four is rated as three because KKD has already gone through different processes required to enter a new market. Alternative two is given a rating of two since KKD would need a professional to make the new product menu. Alternative three is rated as one because the current human resource has no experience yet of producing and selling the new products.
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cc c For technology feasibility, Alternative one is rated as five because they no longer need to acquire new technology to implement the strategy. Alternative four is given a four because KKD has the existing technology to enter new markets. Alternative two and three is rated as one because this would require additional technology to produce the new products. n terms of long-term profitability, Alternative three and four has the highest rating since it has the best P cc)c potential for maximizing returns in a fast-growing industry. Also, having a diverse product offering would generate more revenues for the company. lhile Alternative one and two is rated as three since these alternatives may only be good for a specific period of time. ntense marketing efforts may not necessarily mean long-term sales growth and developing a new product in the domestic market would not maximize their returns in the future because they are known for selling sweet doughnuts. Moreover, these alternatives cut their potential for growth since they are tied up with their existing market knowing the greater potential in the international market. n terms of competitive advantage, alternative one ranks the highest since it uses their existing competence in providing doughnuts with one-of-a-kind taste. Alternative four is rated as four since the culture and taste preference of new geographic markets may not match the products they offer. Alternative two and three is rated as one because it would not capitalize on their competitive advantage. Alternative two and four is rated three to consonance or response ability. This is due to the growing number of health-conscious individuals which alternative two can address and the fast-growing doughnut industry for alternative four. On the other hand, alternative one and three is rated as two because both alternatives do not directly respond to the changes in the environment. n terms of consistency, Alternative four has the highest rating which is four because it is in line with Krispy Kreme¶s vision. This alternative is a stepping stone for Krispy Kreme to reach its vision while upholding its mission. Alternative two has been rated as four because even if it is just for the domestic market, it is still in line with the company¶s mission. Alternative one has been rated three because it still upholds its mission in producing distinctive doughnuts but its scope is not that large to be one of the world¶s best and well-known doughnut makers. Alternative three is rated as two since this alternative does not focus on the core product that KKD offers.
^! c ^^ c c To support the activities in Alternative 1, Krispy Kreme will utilize 25% debt and 75% equity. The company shall undertake the following actions to improve its over-all performance: ôc Strengthening Brand Name through Marketing KKD should strengthen and broaden its brand name by being more visible in their existing markets domestically and internationally. Advertising through billboards, posters and other aggressive print advertising using the different leading publications within those areas, word of mouth and sponsorship of events are powerful tools for driving top-of-mind awareness of Krispy Kreme products. The company will have to complete one advertising campaign per quarter.
Billboard and Posters KKD should put up billboards in populated areas like city capitals of their existing markets countries. These advertisements will be placed outside major malls and popular places like parks and arcades or gaming centers where families and young adults frequent to relax and to have fun. These advertisements should highlight the distinctive taste of its doughnuts and the areas where they can be bought.
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cc c Print Advertising For KKD to save on advertisement costs, the company should consider print advertisements rather than TV advertisements where they will place their ads in newspapers or magazines available nationwide for each of their geographic markets. This will be much affordable than advertising on regional or international publications.
P cc,c lord of Mouth To further save on advertisement costs, the company must capitalize on the power of word of mouth and the six degrees of separation. lith their continuous improvement of processes and customer relations, KKD customers will turn into loyal customers and promote Krispy Kreme to their social circles. The theory of six degrees of separation explains ³that a very small number of people are linked to everyone else in a few steps, and the rest of us are linked to the world through those special few (Gladwell, 2000).´ lord of mouth will help significantly increase the number of customer visits and repeat transactions. Krispy Kreme can boost customer experience and satisfaction by providing free newspapers, magazines, and other reading materials to dining customers. They will also introduce mobile feedback systems where customers can send their feedbacks, comments, and suggestions through their mobile phone or event through telephone. This can provide convenience to the customers since they do not have to spend time filling up forms and can also benefit the company with cost savings for printing papers. Moreover, employing team building activities at least once a year for employees will help boost their morale and at the same time, update their employees with the current business processes and policies. The employees are considered to be the first customer circle of the company; therefore, once the inner circle is improved and empowered, they can easily create and strengthen relationships with end consumers ± the outer circle. This will make all customers ± employees and end consumers ± feel that they are being valued by the company and can spread a great experience that other doughnut companies could not provide. Sponsorship of events KKD will sponsor events especially those that are related to their target market such as parties and launchings. This will enhance the company¶s exposure to reach a larger customer base thus increasing total revenues. n addition, Krispy Kreme will also co-sponsor events with businesses that are rapidly growing. This way, they can share the costs of pushing their products and at the same time, they will be able to use the partner company¶s image to increase Krispy Kreme¶s own image. ôc Using e-commerce to increase brand popularity and possibly increase Market Share
The company can gain more sales and popularity through venturing into internet marketing and selling. They can use the power of e-commerce which is available anytime, anywhere and removes geographical boundaries to reach a significant number of customers at very low cost and shortest time. Krispy Kreme can create a website that advertises and sells their products online to be done through automatic and free membership registration. The company will aim to acquire memberships of at least 10% of each area population in the U.S. and in foreign countries. Members with bulk orders who are located within an estimated kilometer radius can enjoy free delivery. Otherwise, they can simply order online and pick their orders up at the nearest stores without the hassle of lining up, waiting for orders, and the possibility of stockouts for their favorite flavors. lith this convenience, more people are being pulled to Krispy Kreme.
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cc c To attain this, Krispy Kreme will have the web design and web development outsourced to attain greater value (benefit over cost). But they will still have to train their staff and crew in using computer software and tools to access and manage this online venture within two months prior to the launching of the website.
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ôc ncrease franchise stores in existing markets
To improve the company¶s presence in the market they are currently serving, KKD will increase the number of franchise stores, preferably satellite stores targeting at least two stores per month in a year for both domestic and international areas. This increase in franchise stores will enable the company to increase their revenues. Expanding in their existing markets will entail lesser cost than expanding to other countries because they have already established their name and have already done their research and analysis in the macroenvironment of these countries. More stores also mean convenience for customers in seeking and purchasing Krispy Kreme doughnuts which can increase customer satisfaction and revenues. Procedures for Assessing Strategy: ôc Checking, analyzing, and taking actions according to customer feedback. ôc Annual systemwide meetings to debrief the past fiscal year and to brief the entire workforce for the coming fiscal year. Quarterly systemwide meetings to address key changes. Monthly systemwide meetings to make sure the company¶s goals are met. leekly company meetings to monitor operational activities. lith these regular meetings, they can be more effective in addressing key changes and create strategies around these changes. ôc Check financial reports quarterly to determine financial progress.
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cc c Appendix 1: Vertical Analysis of ncome Statements
Total Revenues Cost of Revenue Gross Profit Operating Expenses Research & Development Selling & Administrative Non-recurring Others Total Operating Expenses Operating ncome ncome from Continuing Operations Total Other ncome/Expenses Net EBT nterest Expense EBT Tax Expense Minority nterest Net ncome from Continuing Op. Non-Recurring Discontinued Operations Extraordinary tem Effect of Accounting Changes Other tems Net ncome Preferred Stock NAC
ncome Statement - Vertical Analysis fiscal 2007 fiscal 2006 461,195.00 543,361.00 389,379.00 84.43% 474,591.00 87.34% 71,816.00 15.57% 68,770.00 12.66%
fiscal 2005 707,766.00 597,110.00 110,656.00
84.37% 15.63%
48,860.00 28,491.00 21,046.00 98,397.00 (26,581.00)
10.59% 6.18% 4.56% 21.34% -5.76%
67,727.00 90,895.00 28,920.00 187,542.00 (118,772.00)
12.46% 16.73% 5.32% 34.52% -21.86%
56,472.00 161,847.00 31,934.00 250,253.00 (139,597.00)
7.98% 22.87% 4.51% 35.36% -19.72%
6,732.00
1.46%
2,603.00
0.48%
(7,157.00)
(19,849.00) 20,334.00 (40,183.00) 1,211.00 -
4.41% 0.26% 0.00%
(41,394.00)
(116,169.00) 20,211.00 (136,380.00) (776.00) 4,181.00
3.72% -0.14% 0.77%
(131,423.00)
(146,754.00) 6,875.00 (153,629.00) 9,674.00 6,249.00
-1.01% 0.97% 1.37% 0.88%
(157,054.00)
-
0.00% 0.00%
-
0.00% 0.00%
(40,054.00) -
-
0.00%
-
0.00%
(1,231.00)
(41,394.00) (41,394.00)
0.00%
(131,423.00) (131,423.00)
0.00%
(198,339.00) (198,339.00)
-8.98%
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-24.19%
-5.66% 0.00% -0.17% 0.00%
-28.02%
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cc c Appendix 2: Horizontal Analysis of ncome Statements
Total Revenues Cost of Revenue Gross Profit Operating Expenses Research & Development Selling & Administration Non-recurring Others Total Operating Expenses Operating ncome ncome from Continuing Operations Total Other ncome/Expenses Net EBT nterest Expense EBT Tax Expense Minority nterest Net ncome from Continuing Op. Non-Recurring Discontinued Operations Extraordinary tem Effect of Accounting Changes Other tems Net ncome Preferred Stock NAC
ncome Statement - Horizontal Analysis fiscal 2007 fiscal 2006 461,195.00 -34.84% 543,361.00 389,379.00 -34.79% 474,591.00 71,816.00 -35.10% 68,770.00 48,860.00 28,491.00 21,046.00 98,397.00 (26,581.00) 6,732.00 (19,849.00) 20,334.00 (40,183.00) 1,211.00 (41,394.00) (41,394.00) (41,394.00)
-13.48% -82.40% -34.10% -60.68% -80.96% -194.06% -86.47% 195.77% -73.84% -87.48% -73.64%
-79.13% -79.13%
-23.23% -20.52% -37.85%
fiscal 2005 707,766.00 597,110.00 110,656.00
67,727.00 90,895.00 28,920.00 187,542.00 (118,772.00)
19.93% -43.84% -9.44% -25.06% -14.92%
56,472.00 161,847.00 31,934.00 250,253.00 (139,597.00)
2,603.00 (116,169.00) 20,211.00 (136,380.00) (776.00) 4,181.00 (131,423.00)
-136.37% -20.84% 193.98% -11.23% -108.02% -33.09% -11.00%
(7,157.00) (146,754.00) 6,875.00 (153,629.00) 9,674.00 6,249.00 (157,054.00)
(131,423.00) (131,423.00)
-100.00% 0.00% -100.00% 0.00% -29.52%
(40,054.00) (1,231.00) (198,339.00) (198,339.00)
-29.52%
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cc c Appendix 3: Horizontal Analysis of Balance Sheets Balance Sheet ± Horizontal Analysis fiscal 2007 fiscal 2006 ASSETS Current Assets Cash Short-term nvestments Net Accounts Receivable nventory Others Total Current Assets Long-term nvestments Plant, Property, Equipment Goodwill ntangible Asset Accumulated Amortization Other Assets Deferred Long-term Asset Charges TOTAL ASSETS LABLTES Current Liabilities Accounts Payable Current Debt Others Total Current Liabilities Long-term Debt Other Liabilities Deferred Long-term Liabilities Charges Minority nterest Negative Goodwill TOTAL LAB SHAREHOLDERS¶ EQUTY Misc Stocks Redeemable Preferred Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Shareholders¶ Equity TOTAL SHAREHOLDERS¶ EQUTY TOTAL LABLTES & SHAREHOLDERS¶ EQUTY
36,242 64,227 26,162 5,187 131,818 4,261 168,654 28,094 1,900 9,226 5,539 349,492
133,140 1,730 134,870 105,966 25,656 4,038 270,530 310,942 (233,246) 1,266 78,962 349,492
30.90% 29.44% -8.50% -61.48% 10.43% -55.70% -45.46% -14.06% -54.88% 128.71% 383.33% -27.23%
118.05% -96.40% -100.00% 14.65% -9.74% 3.19% -100.00% 13.03%
5.19% 322.16%
117.53% -67.23% -27.23%
16,980 83,546 41,985 4,514 147,025 14,734 205,579 29,181 2,925 3,584 7,827 410,855
149,373 4,486 60 153,919 147,417 848 302,184 298,255 (191,010) 1,426 108,671 410,855
fiscal 2005
-38.67% 68.37% 46.85% -66.48% 23.17% 53.19% -33.52% -10.74% -30.54% -11.16% 582.98% -14.45%
144.64% -90.67% -99.29% 30.84% 25.57% -78.33% -100.00% 26.26%
0.89% 245.72%
145.02% -54.90% -14.45%
P cc c
27,686 49,621 28,591 13,465 119,363 9,618 309,214 32,692 4,211 4,034 1,146 480,278
61,058 48,097 8,480 117,635 117,397 3,913 390 239,335 295,611 (55,250) 582 240,943 480,278
c
c c
c
cc c Appendix 4: Key Financial Ratios and Their Trends Ratios LQUDTY Current Ratio Quick Ratio
2007
2006
2005
97.74% 78.34%
95.52% 68.24%
101.47% 77.16%
DEBT MANAGEMENT Debt-to-Asset Ratio Debt-to-Equity Ratio Long-term Debt- to-Equity Ratio Times nterest Earned
77.41% 342.61% 134.20% -0.98x
73.55% 278.07% 135.65% -5.75x
49.83% 99.33% 48.72% -21.35x
ASSET MANAGEMENT nventory Turnover Fixed Asset Turnover Total Asset Turnover
11.43x 2.46x 1.21x
13.45x 2.11x 1.22x
PROFTABLTY Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Asset Return on Equity
15.57% -4.30% -8.98% -10.89% -44.12%
12.66% -21.38% -24.19% -29.50% -75.18%
P cc c
15.63% -20.73% -28.02%
c
c c
c
cc c Appendix 5: HA/VA of Store Count Horizontal Analysis 2007
2006
2005
By Owner: Company Store
113
-13.7%
118
-9.9%
131
Consolidated Franchisees
0
-100.0%
15
-72.2%
54
Associates - Franchisees
52
-11.9%
57
-3.4%
59
Area Developers - Franchisees
230
21.7%
212
12.2%
189
Systemwide Total
395
-8.8%
402
-7.2%
433
108
-12.9%
113
-8.9%
124
Factory Stores - Consolidated
0
-100.0%
15
-70.6%
51
Factory Stores - Associates
43
-20.4%
47
-13.0%
54
Factory Stores - Area Developers
145
-13.2%
148
-11.4%
167
Satellites - Company
5
-28.6%
5
-28.6%
7
Satellites - Consolidated
0
-100.0%
0
-100.0%
3
Satellites - Associates
9
80.0%
10
100.0%
5
Satellites - Area Developers
85
286.4%
64
190.9%
22
Systemwide Total
395
-8.8%
402
-7.2%
433
107
-18.3%
112
-14.5%
131
Domestic - Consolidated
0
-100.0%
15
-63.4%
41
Domestic - Associates
52
-11.9%
57
-3.4%
59
Domestic - Area Developers
113
-31.5%
150
-9.1%
165
P cc c
By Type: Factory Stores - Company
By Location: Domestic - Company
nternational - Company
6
nternational - Consolidated
0
nternational - Associates
0
6 -100.0%
0
0 -100.0%
0
13 0
nternational - Area Developers
117
387.5%
62
158.3%
24
Systemwide Total
395
-8.8%
402
-7.2%
433
c c
c c
c
c
cc c Vertical Analysis 2007
2006
2005
By Owner: Company Store
113
28.6%
118
29.4%
131
30.3%
Consolidated Franchisees
0
0.0%
15
3.7%
54
12.5%
Associates - Franchisees
52
13.2%
57
14.2%
59
13.6%
Area Developers - Franchisees
230
58.2%
212
52.7%
189
43.6%
Systemwide Total
395
402
P cc #c
433
By Type: Factory Stores - Company
108
27.3%
113
28.1%
124
28.6%
0
0.0%
15
3.7%
51
11.8%
Factory Stores - Associates
43
10.9%
47
11.7%
54
12.5%
Factory Stores - Area Developers
145
36.7%
148
36.8%
167
38.6%
Satellites - Company
5
1.3%
5
1.2%
7
1.6%
Satellites - Consolidated
0
0.0%
0
0.0%
3
0.7%
Satellites - Associates
9
2.3%
10
2.5%
5
1.2%
Satellites - Area Developers
85
21.5%
64
15.9%
22
5.1%
Systemwide Total
395
Factory Stores - Consolidated
402
433
By Location: Domestic - Company
107
27.1%
112
27.9%
131
30.3%
0
0.0%
15
3.7%
41
9.5%
Domestic - Associates
52
13.2%
57
14.2%
59
13.6%
Domestic - Area Developers
113
28.6%
150
37.3%
165
38.1%
nternational - Company
6
1.5%
6
1.5%
0
0.0%
nternational - Consolidated
0
0.0%
0
0.0%
13
3.0%
nternational - Associates
0
0.0%
0
0.0%
0
0.0%
nternational - Area Developers
117
29.6%
62
15.4%
24
5.5%
Systemwide Total
395
Domestic - Consolidated
402
433
c
c c
c
cc c Appendix 6: FE Matrix STRENGTHS 1.c KKD products can be found at thousands of retail outlets 2.c Stock price rebounded to over $8 a share 3.c ncreasing number of franchises in the international scene brought more revenues to KKD, and a 26% increase in sales in equipment, furniture, fixtures, and similar items to the KKD Supply Chain 4.c KKD is vertically integrated in three segments, giving them the control over quality 5.c Strong marketing and CSR efforts for community fundraising projects and for opening off-premise channels to gain more exposure and sales 6.c KKD has a distinctive product that invited generations of loyal customers for its ³one-of-a-kind taste´ and its special flavor offerings 7.c Exposure in 10 foreign countries with an on-going development of 200 additional stores in the Middle East, Hong Kong, Macau, Tokyo, the Philippines and ndonesia 8.c Effective cost-cutting practices including closing of poor performing stores, improving Net ncome 9.c Automatic doughnut-making equipment that gives them the capacity of 4,000 dozens to 10,000 dozens per factory store daily lEAKNESSES 1.c Despite their turnaround strategy, KKD still incurred a net loss for the second quarter of fiscal 2008 2.c Company brand image greatly suffered from legal issues back in 2005 3.c Failure to update registered Uniform Franchise Offering Circular in the U.S. 4.c Revenues for company stores and supply chain decreased 5.c Reduction of labor force of 31.83% in two years which further lowered their employer brand image 6.c KKD doughnuts have higher calorie content compared to its major competitors 7.c nventory turnover decreased to 11.43 times. Total
leight
Rating
leighted Score
0.05 0.03
4 3
0.20 0.09
0.08
4
0.32
0.03
3
0.09
0.03
3
0.09
0.12
4
0.48
0.07
4
0.28
0.1
4
0.40
0.05
4
0.20
0.15
1
0.15
0.02
2
0.04
0.04
1
0.04
0.06
2
0.12
0.07
1
0.07
0.04 0.06 1
2 2
0.08 0.12 2.77
P cc &c
c
c c
c
cc c Appendix 7: Tabulation of Key Trends/Changes in the Macroenvironment Classification
Nature of Trend/Change in the Macroenvironment
lestern brands in Asia and in the Middle East are popular.
Socio-Cultural
Europeans are loyal to their own doughnut brands and have different eating habits than the American market.
The Asian population is known for their fondness of sweets.
There is a trend for healthier food choices in the U.S.
Demographics
More Americans are now working and with it is an increasing number of people eating out. 33.3% of American adults are overweight. The ³older, wealthier population´ in the U.S. market prefers casual dining
Economic
Global
Stock prices in the QSR industry are improving.
mpact on the Firm¶s Ability to Generate Better-than-Average Returns (ROE) ncreased Net Profit from lower P cc )c marketing costs because of high acceptability. ncrease in revenues from a larger customer base. ncreased Net Profit and revenues will lead to increased ROE. Lower revenues since Europeans are accustomed to their own taste of doughnuts. t also lowers Net Profit as there will be a need to develop new doughnut lines and strong marketing efforts to cater to this region. Thus, it lowers the ROE. Higher revenues that will contribute to higher ROE. Decreased revenues because customers are now going into the healthy substitutes, which will lower ROE. t will also lower Net Profit as there is a possibility of developing a healthier product menu, which also lowers ROE. ncreased revenues that will increase ROE. Lower revenues as customers tend to shift to healthier foods thus, lower ROE. Decreased revenues will lower ROE. Attractiveness of the industry stocks is improving which can attract more stockholders, increasing ROE.
Food product price inflation is still increasing thus pushing companies to decrease their development costs.
ncrease in RO will lead to an increase in ROE.
A number of fast-food companies are considering international expansion as a growth opportunity.
Decreases revenues and Net Profit as KKD has to compete in an intensified global market. Thus, it lowers their ROE.
c
c c
c
cc c Appendix 8A: ndustry Analysis (Current) Competitive Force
Nature of Competitive Force
ntensity of Rivalry among Competing Firms
High
Threat of New Entrants
Low
Threat of Substitutes
High
Bargaining Power of Buyers Bargaining Power of Suppliers Overall Assessment
High Low
Supporting Case Details ôcFew dominating players with a significant number of stores in the domestic and international scene ôcSlow industry growth as determined by stable samestore sales growth in the domestic market ôcHigh strategic stakes in the U.S. market ôcHigh storage costs due to the industry¶s perishable offerings ôcAll major Europeans and American doughnut chains are slowly entering the Asian market thus, this segment is becoming crowded ôcHigh entry barrier because of strong retaliation from domestic players ôcncreasing trend of Americans being overweight which leads to consumers seeking for healthier or low-calorie food products ôcBritish market have biscuits as substitutes for other snack products ôcLow switching cost for end consumers ôcRaw materials are commodities so companies face low switching cost
General mpact in Attractiveness
P cc ,c
Highly Unattractive
Highly Attractive
Highly Unattractive
Highly Unattractive Highly Attractive Highly Unattractive
c
c c
c
cc c Appendix 8B: ndustry Analysis (Next 3-5 Years) Competitive Force ntensity of Rivalry among Competing Firms Threat of New Entrants Threat of Substitutes
Nature of Competitive Force High Low High
Bargaining Power of Buyers High
Bargaining Power of Suppliers Overall Assessment
Low
Supporting Case Details ôcDomestic market will reach its saturation point ôcncreased number of players in the international market ôcHigh entry barrier ôcncreasing number of healthy, low-calorie, and low-sugar substitutes ôcBargaining power of buyers in the domestic market does not change significantly ôcBuyers can choose from a variety of brands so switching cost is low ôcNo change
General mpact in Attractiveness
P cc 2c
Highly Unattractive Highly Attractive Highly Unattractive
Highly Unattractive
Highly Attractive Highly Unattractive
c
c c
c
cc c Appendix 9: Competitor Analysis Tim Hortons Critical leighted Success leight Rating Score Factors US 0.25 2 0.50 Stores Product Offers 0.35 4 1.40 (Variety) Global 0.40 1 0.40 Presence Total 1.00 2.3
Dunkin¶ Donuts Rating
Starbucks
leighted Rating Score
Krispy Kreme
leighted Rating Score
leighted Score
4
1.00
4
1.00
2
0.50
4
1.40
3
1.05
2
0.70
4
1.60
4
1.60
2
0.80
4.0
3.65
P ccc
2.0
c
c c
c
cc c Appendix 10: EFE Matrix OPPORTUNTES 1.c Asia and the ME are favorable markets for KKD offerings, along with UK, Germany, and Spain. 2.c ndustry stock prices are improving 3.c Growth in two-income households that will lead to an increase in snack-food consumption and doughnut sales growth 4.c Since 2004, development costs has been decreasing in the U.S. THREATS 1.c Casual-dining sector is gaining share from fastfood chains and it is expected to grow 2.c Healthy food choice is the growing trend 3.c Fast expansion of competitors (e.g. Dunkin¶ Donuts) in the domestic and international market 4.c Cultural differences among countries make operations and doughnut consumption varied, which makes things difficult to control 5.c Europeans and American doughnut chains are expanding in the international market, especially Asia Total
leight
Rating
leighted Score
0.15 0.05
3 4
0.45 0.20
0.15
2
0.30
0.08
4
0.32
0.12 0.15
1 1
0.12 0.15
0.15
3
0.45
0.06
2
0.12
0.09 1
3
0.27 2.38
P cc c
c
c c
c
cc c Appendix 11: Strategy Formulation Matrix (SlOT Matrix) STRENGTHS 1.c KKD products can be found at thousands of retail outlets 2.c Stock price rebounded to over $8 a share 3.c ncreasing number of franchises in the international scene brought more revenues to KKD, and a 26% increase in sales in equipment, furniture, fixtures, and similar items to the KKD Supply Chain 4.c KKD is vertically integrated in three segments, giving them the control over quality 5.c Strong marketing and CSR efforts for community fundraising projects and for opening offpremise channels to gain more exposure and sales 6.c KKD has a distinctive product that invited generations of loyal customers for its ³one-of-a-kind taste´ and its special flavor offerings 7.c Exposure in 10 foreign countries with an on-going development of 200 additional stores in the Middle East, Hong Kong, Macau, Tokyo, the Philippines and ndonesia 8.c Effective cost-cutting practices including closing of poor performing stores
c c
lEAKNESSES 1.c Despite their turnaround strategy, KKD still incurred a net loss for the second quarter of fiscal 2008 2.c Company brand image greatly suffered from legal issues back in 2005 3.c Failure to update registered Uniform Franchise Offering Circular in the U.S. 4.c Revenues for supply chain decreased because of local merchants serving their international stores 5.c Reduction of labor force of 31.83% in two years which further lowered their employer brand image 6.c KKD doughnuts have higher calorie content compared to its major competitors
P ccc
c
cc c
OPPORTUNTES 1.c Asia and the ME are favorable markets for KKD offerings, along with UK, Germany, and Spain. 2.c ndustry stock prices are improving 3.c Growth in two-income households that will lead to an increase in snack-food consumption and doughnut sales growth 4.c Decreasing development costs in the U.S. THREATS 1.c Casual-dining sector is gaining share from fast-food chains and it is expected to grow 2.c Since 2004, there has been an increasing trend of food product price inflation 3.c Healthy food choice is the growing trend 4.c Fast expansion of competitors (e.g. Dunkin¶ Donuts) in the domestic and international market 5.c Cultural differences among countries make operations and doughnut consumption varied, which makes things difficult to control 6.c Europeans and American doughnut chains are expanding in the international market, especially
c c
9.c Automatic doughnutmaking equipment that gives them the capacity of 4,000 dozens to 10,000 dozens per factory store daily S-O STRATEGES Market penetration in the U.S. market focusing on advertising efforts and increasing the number of franchised satellites (S1-2, S8-9, O2-4) ncrease stores in the international market, especially Asia (S3, S6-7, S9, O1)
P ccc l-O STRATEGES Update UFOC to increase the number of franchised satellites in the U.S. (l3-4,l7, O3) Market penetration in the Asian market focusing on store openings (l6, O1)
S-T STRATEGES Check the feasibility of product development in the U.S. market focusing on creating a healthier doughnut line (S1, S4-5, T3)
l-T STRATEGES Market penetration in the U.S. market focusing on aggressive advertising and close poorperforming stores (l1-2, T1, T4)
ncrease number of stores current in the foreign countries being served (S1, S6, T4, T6)
Conduct feasibility study on other foreign countries that are not currently being served to identify the most favorable to serve (l1, l3, T4, T6)
Related diversification offering sandwiches, bagels, etc. (S1, T1)
c
cc c Asia
c
P cc c
c c
c
G c c c c cM c c cM c
cccc
c
c
c
P ccc c
c
c
c c
c
c
c c
c
c
c c
c c c c c c
c c c c c!c"#c ccccccccc$$c c % c!c&#cc
c c c c c c c c c c c c c c c c c c c c c c c c c c c
c
c '%c!c#c
c
cc c Appendix 13: Strategy Evaluation Matrix
Criteria
% leight
Alternative 1 Raw ltd Sc. Sc.
. Feasibility a. Financial 0.1 4.0 condition b. Human 0.1 4.0 resources c. Technology 0.1 5.0 . Long-term Profitability 0.2 3.0 . Advantage 0.2 5.0 V. Consonance 0.2 2.0 V. Consistency 0.1 3.0 Totals 1.0 Alternative 1 Market Penetration Alternative 2 Product Development Alternative 3 Related Diversification Alternative 4 Market Development
Alternative 2 Raw ltd Sc. Sc.
Alternative 3 Raw ltd Sc. Sc.
Alternative 4 Raw ltd. Sc. Sc.
0.4
3.0
0.3
2.0
0.2
1.0
0.1
0.4 0.5
2.0 1.0
0.2 0.1
1.0 1.0
0.1 0.1
3.0 4.0
0.3 0.4
0.6 1.0 0.4 0.3 3.6
3.0 1.0 3.0 4.0
0.6 0.2 0.6 0.4 2.4
4.0 1.0 2.0 2.0
0.8 0.2 0.4 0.2 2.0
4.0 4.0 3.0 5.0
0.8 0.8 0.6 0.5 3.5
P cc&c
c
c c
c
cc c Appendix 14: Balanced Scorecard
P cc)c
c
c c
c
G
c c" c( c % c)c c c
£ ! $ % & ! ( ' ) ( ! * ( ! $ $ # ! ! ( $! * ( & #!& ( $ ( ! $
c
"# $ ' ' ' ' ' ' ' # ! # ! ' ' ' ' '
M M M M M M M M M M M M M M M M M
M M M M
P ccc
r r r r r r
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