Business Analysis Report on Krispy Kreme Essay Example

faces competition from other current rivals such as Pizza Hut, who have been successful in catering to consumer preferences by introducing new and slightly different pizzas. Additionally, local fast food chains like Cafe de Coral, Fairwood, and Maxim's Express also rival Krispy Kreme. However, the biggest competition comes from local "street food" vendors, which are small stores that offer a variety of local Chinese dishes at much lower prices.

( Lan, 1995 )

Company analysis: industry and investing

Krispy Kreme
Krispy Kreme Doughnut Inc opened in Hong Kong, marking its introduction on Chinese soil, and its second only venture in East Asia - with nine stores already in South Korea. There are signs of the chain's aggressive expansion in this region; however, China's potential 1.3 billion consumers seem most attractive. Krispy Kreme's expansion into Hong Kong proved unsuccessful after only two years of its launch.
Entering New Markets
There are several reasons for Krispy Kreme's launch in Hong Kong, but overall, the chain faced no other choice but entering new markets due to indigestion in America: as Americans slowly became aware of the health impacts linked with donuts, donut sales went down; alleged trans-fats contained in donuts, which were said to exceed health and safety regulations, became a subject of contention for Krispy Kreme.

The company aimed to rebuild and repair its brand reputation by exploring new markets after being accused of accounting impropriety, facing corporate problems, and undergoing financial record investigations. As a result, the company suffered substantial losses (refer to the graph below). The stated strategy of "expanding globally through the establishment of fresh Krispy Kreme stores" suggests that the company was unable to sell franchises domestically until resolving its

accounting concerns (annual report 200?). The graph provided illustrates Krispy Kreme's profit (loss) between 2006 and 2010.

The company's overall performance has been unsatisfactory during this period, experiencing a notable decline in profits. The financial crisis in the United States in 2008 had a particularly adverse impact. However, there is a positive trend as losses are progressively decreasing. The graph below depicts Krispy Kreme's comprehensive performance.

Hong Kong as an attractive destination

The Hong Kong market presents both growth and appeal, housing potential consumers who are willing to spend extra on luxurious treats. Additionally, Hong Kong serves as an international culinary hub and embraces Western cuisine. Consequently, Krispy Kreme strategically decided to expand into Asia by establishing franchises in Hong Kong with the ultimate objective of entering the Chinese market.

The reasons behind companies choosing to franchise In early 2006, Krispy Kreme partnered with the Parfitt brothers, Brian and Wayne, to open a franchise in Hong Kong. The Australian Parfitt brothers were introduced to Krispy Kreme by American investors who aimed to expand the restaurant franchise in Asia. (The Standard) It is important to note that Krispy Kreme mainly operates through franchises, especially outside of the US market, as part of their expansion strategy. However, one might wonder why companies opt for franchising in the first place. By selling brand rights to franchisees for a fee and a percentage of monthly sales, companies can generate continuous revenue without making significant investments. Franchisees are responsible for financing equipment, rent, and other expenses from their own funds.

Krispy Kreme's subsidiary, KKD lotte, collaborates with them in terms of franchising. They have obtained the rights for mainland China in the upcoming years. However,

Krispy Kreme actually sold all its rights to manage the shop in this particular case, resulting in limited control over future operations. Some argue that this is why they failed in Hong Kong since it was just a test market for them. Nonetheless, I believe that the owners still have an interest in profitability as their success and failure are at stake. This expansion can be viewed as Foreign Direct Investment (FDI) aiming to enter a market close to China - a market with almost 1.3 billion people and immense potential. From Krispy Kreme's perspective, this serves as a trial market to assess the possibility of expanding further into mainland China.

Despite facing aggressive regulations on franchise agreements, which require a minimum gap of 10 shops within a limited timeframe, along with difficulties such as management issues, accounting mistakes, legal charges, and declining national trade, the brothers remained convinced that the product was the key to success. Surprisingly, the number of franchise shops nearly doubled between 2006 and 2009, increasing from 269 to 430. The main reason for this growth was the focus on international expansion, which was mainly done through franchises. (Annual Report 2006/09) Despite being advised by third parties that this move could be risky, knowing that Chinese people prefer savory over sweet, they still had confidence that people would indulge in this delicacy occasionally.

The first Krispy Kreme shop opened in Causeway Bay, Hong Kong on August 8th, 2006. This location was renowned for its expensive rent costs, second only to New York's 5th Avenue. To enter the Hong Kong market, Krispy Kreme utilized franchise agreements that required interested franchisees to meet specific criteria

and make a significant investment.

These criteria included paying a $25,000 fee per store, purchasing baking equipment and ring mix worth thousands of dollars, paying a development fee for the franchise, and giving 6% of sales as royalties. Franchisees were also expected to have a minimum net worth of $1,000,000 for each shop and commit to upholding Krispy Kreme's reputation.

This investment carried risks such as potential harm to Krispy Kreme's reputation if the stores failed in Hong Kong and limited demand for doughnuts in this market. Nevertheless, new stores are still being opened in the Asian region.

The Parfitts dismissed concerns about the Chinese preference for savory food and negative perceptions of donuts as exaggerated. They believed Krispy Kreme would thrive in Asia due to its alignment with the Asian style of sharing and preparing food in front of customers through "Hot Doughnuts Now". The graph below illustrates a comparison between Krispy Kreme's total revenues and those from its franchises, revealing that franchise revenue is relatively small in relation to the company's overall revenue. Additionally, it emphasizes the decline in company-wide performance as a reflection of franchise performance.

The graph compares the gross generated by franchises between Krispy Kreme and Franchises from 2005 to 2009. It shows the total sum of gross for franchises during the years 2006 to 2009. The fourth column indicates the average gross per shop, calculated by dividing the total annual gross for franchises by the total number of shops. Although the calculated average cannot show the net gross of franchises in Hong Kong, it can be used as an estimate of shop grosses. Krispy Kreme went public with its Initial Public Offering

(IPO) in 2000, following seven years of rapid expansion primarily in the USA and Canada. The initial share price started at $8.50 and the excitement surrounding its glazed doughnuts quickly reflected in the share price, which reached its peak in 2003 at just under $50.

People were obsessed with doughnuts, causing shops to run out and long queues to form. The success of Krispy Kreme came to an end when the Stock Exchange Commission investigated their financial health and accused them of dishonest accounting. This led to investors withdrawing and losing confidence, resulting in a negative impact on Krispy Kreme's stock market. Additionally, their expansion plans were chaotic and driven solely by short-term profit goals. As a result, their unique brand quickly became dull and the market became oversaturated.

(morebusiness.com) To make matters worse, people became aware of their diets and what they were eating, and doughnuts were unquestionably a product that should not be included in a healthy regimen. Scandals have also contributed to Krispy Kreme's deteriorating reputation in recent years. The most shocking and alarming controversy was the so-called "trans fats," which are essentially hydrogenated fats that help reduce the process of making doughnuts and extend their shelf life. This is a scandal because Krispy Kreme explicitly emphasizes the freshness of their doughnuts, making multiple batches every day. (Top News) Although they announced a "zero trans fat policy" in 2008, it was only implemented in the US, while international stores still employed it.

Not only does this demonstrate a double standard for US and other stores, but the most alarming aspect is that these fats can cause coronary heart diseases and other side effects. The Hong

Kong Consumer Council conducted further investigation and discovered that the doughnuts in the Hong Kong franchises still contained 2.2 grams of trans fats, which is twice the average standard recommended by the World Health Organisation. (Top news)

New shop openings in China

Krispy Kreme, despite failing in Hong Kong, has agreed with KKD Holding Company to open new stores in China. Street food is highly popular and Krispy Kreme plans to offer hot doughnuts directly from the oven to their Chinese customers, having learned that adapting to the market is crucial for survival, let alone thriving. 35 stores are planned within the next five years, with the first one opening in Shanghai.

Krispy Kreme; Government Intervention in Hong Kong
Hong Kong, the 11th largest merchandising economic system in the world (HKTDC, 2011), is renowned for its individualistic approach. In Hong Kong, businesses are allowed to operate freely while the government focuses on maintaining law and order, providing infrastructure, and protecting property rights. There are no restrictions on imports and exports of consumer goods except for certain products like tobacco and alcohol which are subject to indirect taxes.

Was it welcomed?
In Terms of the Government:
As previously mentioned, Hong Kong's individualistic economy does not actively encourage or offer incentives for foreign companies to establish their operations there.

In terms of customers: Krispy Kreme was the pioneer doughnut shop in Hong Kong, which exposed them to various risks. Since there were no established strategies in Hong Kong, they couldn't simply follow a proven path. Nevertheless, other doughnut chains in Asia had already experienced either success or failure by the time Krispy Kreme ventured into Hong Kong. Consequently, analyzing these competitors could have provided valuable

insights for Krispy Kreme to learn from their triumphs or mistakes (see...).

Additionally, it should be noted that the "doughnut culture" never influenced the eating habits in Hong Kong, as stated by The East West Hospitality Scribe. Moreover, Krispy Kreme's products are considered excessively sweet for the Hong Kong consumer. When they do consume sweet items, they prefer them to be less sweet compared to American or Korean products.

Another key factor in Hong Kong is the thriving local bakeshop scene that sells a popular item known as "Gaimeibao" or Cocktail Bun. These soft rolls come with a variety of fillings or toppings such as sausage, dried porc, read bean, custard, and coconut in carnal fat (The E west cordial reception Scribe). You can find these cocktail buns being sold everywhere in Hong Kong, including stations and street corners. People typically enjoy them as breakfast or lunch, while doughnuts are mostly seen as a snack. Additionally, the cocktail bun is much more affordable at 4-6 HKD (32 - 48 pence) compared to Krispy Kreme's doughnuts which cost 15HKD (119 pence). As a result, overall the customers in Hong Kong did not warmly embrace Krispy Kreme.

Rivals

In the domestic market, the main competition for Krispy Kreme comes from the locally sold cocktail buns.

These cheaper alternatives posed a major challenge to KK, who failed to react appropriately. This was especially the case in HK, where doughnuts were not widely popular and only offered as supplementary items in bakeries. Nevertheless, Krispy Kreme could have learned from the experiences of other competing firms in Asia.

For instance,

Dunkin' Donuts in Japan

Despite having been established for three decades, Dunkin' Donuts eventually faltered and ceased operations in 1998. The explanation for this can be outlined as follows.

The Nipponese consumer is always in pursuit of novelty and open to experimentation. To maintain success, companies must consistently innovate their product offerings. Moreover, it is crucial for competition to be limited, making it challenging for consumers to switch suppliers. During the 1990s, Japan witnessed a surge in European-inspired bakeries and cafes that expanded beyond traditional donuts and coffee, offering various breakfast options and more. Additionally, these establishments' sophisticated dining areas greatly appealed to consumers. Consequently, by the late 1990s, consumers had numerous dessert choices; however, only one donut chain - Mister Donut - managed to survive. It's worth mentioning that Mister Donut had merged with Dunkin' Donuts in the US in 1990 and thrived in Japan as a result.

Their ability to do so can be attributed to the original Nipponese franchisee who purchased regional rights in 1983, claiming certain countries for themselves. Additionally, they also adjusted to consumer preferences by offering flavors like green tea, seaweed, or mochi. Since then, they have expanded to Thailand, the Philippines, Shanghai, and Taiwan.

Reasons for failure:

Krispy Kreme's failure can be linked to low sales. While the company attributed its lack of success in Hong Kong to the global financial crisis, this idea can be disproven - because in reality, Hong Kong was not as severely impacted by the crisis as other places.

Therefore, other reasons for Krispy Kreme's failure must be considered. Lack of market research led to the company's inability to effectively position

its flavors in competition with local bakeries, which sold similar products for a much lower price. Additionally, the sweetness of the donuts did not appeal to the main bakery consumers in Hong Kong, who were concerned about trans-fats. Moreover, the franchises were opened too closely together and had minimal advertising, resulting in a lack of attention compared to other Krispy Kreme stores. Ultimately, the failure can be attributed to the fact that the donut culture never truly integrated into Hong Kong's eating habits.

Decision

After analyzing the instance of Krispy Kreme running in Hong Kong, the following conclusions were reached:

1. The failure of Krispy Kreme in Hong Kong was directly linked to a lack of market research, particularly in terms of specific taste preferences of Asian customers, e.g. savory versus sweet.
2. High lease costs in Hong Kong and high prices on equipment provided by Krispy Kreme HQ in the USA contributed to the difficulties.
3. Health and safety issues that originated in the USA and were then transferred to other countries where Krispy Kreme franchises were operating, such as the trans-fats scandal, were a factor.
4. American investors have largely avoided the company over the past two years due to management turmoil, accounting irregularities, securities investigations, numerous lawsuits, and declining domestic sales.
5. Krispy Kreme was overly focused on short-term profitability and aggressive growth plans, such as opening 10 stores within Hong Kong where the population is only approximately 8 million people.
6. Although all franchises were closed in Hong Kong except those in the airport, many have been opened in other Asian countries.
7. HOWEVER, one of the most enticing opportunities
   

for any multinational business is China's 1.3 billion potential customers, and Hong Kong, where East meets West and is already a hub for both Chinese and Western gourmet cuisine, may be an ideal testing ground.

Thus, it is hoped that KK will not repeat its mistakes in the future and achieve success in the Asian market.