Krispy Kreme

Abstract

After Krispy Kreme’s initial public offerings, the company announced an aggressive strategy to expand its total store number from 144 to 500 over the next five years. Krispy Kreme generated revenues through its on-premises retail sales (27% of revenue), off-premises sales to grocery and convenience stores (40%), manufacturing and distribution of product mix and machinery (29%) and franchisee royalties and fees (4%). The main problem highlighted in this case was that, Krispy Kreme practiced wrong reacquisition of franchisees, by recording reacquired franchisees in its balance sheet as intangible assets, recorded it as interest income on its income statement and failing to amortize the transaction. As a result, revenues stock price, price per share, profit margins,were expected to reduce the bottom-line figures on its income statement and balance sheet. Recommendations were made for Krispy Kreme to practice a more conservative expansion strategy, reduce its store format and reduce prices on equipments and ingredients for purchase by franchisees.

Introduction

Krispy Kreme began as a single doughnut shop in Winston-Salem, North Carolina, in 1937, when Vernon Rudolph who had acquired the company’s special doughnut recipe from a French chef in New Orleans, started making and selling doughnuts wholesale to supermarkets. In the 1950’s Krispy Kreme had 29 shops in 12 states, many of which were operated by franchisees. After the death of Rudolph in 1973, Beatrice Foods bought the company, expanded to more than 100 locations and introduced products like soups, sandwiches and cut cost by changing the appearance of stores and substituting cheaper ingredients. In 1982, the company and original doughnut formula was sold over to a group of franchisees led by Joseph McAleer for $24 million. In 2000, CEO Scott Livengood took the company public in April 2000, in what was the largest initial public offering of $40.63 price per share.

Problem

At the end of 2004, Kispy...