Concerns Over Krispy Kreme CEO’s Plans
By George Anderson
Daryl Brewster, the recently appointed chief executive of Krispy Kreme Doughnuts Inc., has extensive background in marketing packaged goods and that is what worries some investors and franchisees.
For those, Krispy Kreme’s future lies with its own doughnut shops and not by developing a ubiquitous presence supplying third parties such as convenience stores and supermarkets.
In an interview with The Business Journal of the Greater Triad Area, Mr. Brewster said that one of the things the company would need is to “do a better job of working with our supermarket and convenience store customers.”
Rich Reinis, a partner in Great Circle, Krispy Kreme’s biggest franchisee, said, “We’re invested in the retail business first and foremost, and it did concern me when looking at his (Mr. Brewster’s) credentials that he’ll be focusing on off-premises business. We have found that in its current format, it’s unworkable.”
According to Mr. Reinis, third party business only accounts for about $500 a week in extra sales for Great Circle and the accounts are difficult to service from an operational standpoint.
He would prefer to concentrate his efforts on developing a hub strategy where Krispy Kreme sets up smaller standalone shops that are supplied by a local factory store. Great Circle currently has two of these stores in operation and one has grown average weekly sales to between $12,000 and $14,000.
Analysts believe that Mr. Brewster’s transition to foodservice will be made easier by Krispy Kreme’s other recent hire, executive vice president of operations Jeff Jervik. He joined Krispy Kreme last October from Yum Brands’ Pizza Hut business.
Morningstar analyst John Owens wrote in a recent report, “We think this management duo has the experience and skills necessary to take on the considerable challenge of turning around Krispy Kreme’s business.”
Moderator’s Comment: What mistakes has Krispy Kreme made in the past and what will it need to do if the business is to get turned around?
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George Anderson – Moderator
There are many foodservice brands in the UK that are now widely available on supermarket shelves. I can’t think of any, offhand, that started and then finished. Most of them tend to go on and on and on. Although Krispy Kreme does seem to be abandoning its own USP, that isn’t to say there isn’t a market for their packaged version. And based on what I’ve seen, heard and read of American consumers, I would say that whoever suggested the microwave version isn’t too far off base either.
Agree with all comments and will add that Krispy Kreme should perhaps leave doughnuts in the shops but leverage the name for expansion products in groceries and c-stores through licensing. Consumers would get the message that if you want a warm Krispy Kreme, you’ll need to hit the nearest store, yet the name would still be very much “out there” (as a tickler for the core product). When you consider all of the seemingly illogical brand stretches that aren’t doing half bad, surely Krispy Kreme could get a piece of the action . . . KK jerky anyone?
The past success KK business model was based on the ability of the parent company to sell franchising agreements, mix and fixtures (still made in America!) to franchisees. Lots of problems can be traced to confusing brand expansion with franchising expansion.
Krispy Kreme is in the business of “throwing a party for your mouth.” Unfortunately, this umbrella did not work effectively when you asked customers to buy a “supermarket” doughnut and instructed consumers to “nuke” the doughnut.
Krispy Kreme will have difficulty duplicating the doughnut store experience in supermarkets and c-stores without further denigrating the Krispy Kreme positioning. They could probably position Krispy Kreme as a better supermarket or c-store offering but at the risk of totally obviating the experience that Krispy Kreme has developed in the doughnut store. It’s a “see-saw” dilemma.
I think Krispy Kreme’s expansion and the ubiquitous locations where the products can be purchased reduced the “mystery” around it a bit when it was so readily available. Furthermore, when it is not served fresh…it does decrease the quality and their big “pitch” was that you should come eat them when they are fresh (with the lights on outside the stores to indicate when they are fresh).
However, now that the cat is out of the bag…how long before we see “Frozen Krispy Kremes” that you microwave at home or bake in your own oven with a mix? May not be the same quality as when you get them fresh at the store…but it seems like it may just be something that people would try at home (and not risk being seen with the box in the office where the “low carb” police would cast contemptuous scowls).
I agree with David, there is a mystique that used to surround the Krispy Kreme experience… it was not too long ago that people would ask their friends to bring back that famous rectangle box on the plane so that they could have the items they missed or stood in line for hours as they waited for the newest location to open within 50 miles of their home. Panera Bread and Starbucks have created an atmosphere in which their products add and become part of an experience. I am not sure I am going to get that standing around in a Circle K.
Dunkin’ Donuts’ and Starbucks’ profit key is coffee, not food. Krispy Kreme will maximize its profits the same way. Selling donuts in convenience stores and supermarkets is unlikely to create meaningful profits for the Krispy Kreme franchisees. And the product is best when it’s fresh. Every hour reduces the donuts’ quality. Supplying supermarkets and convenience stores isn’t the way to reinforce the quality experience.
Not being very familiar with their business model, it’s hard to say, but I would think they have a great opportunity to expand outside their shops. Once they have strategically located stores to supply the core customer anything they can sell outside that is incremental business. Both sides of the business should help increase future demand for the other. Based on this, I think the credentials of Mr. Brewster are ideally suited to their needs.
Krispy Kreme Donuts-just the name says it all. My opinion is, stick to what you do best. Sell the donut “factory” experience, which includes the trip to franchise/store, entrance into an aromatic heaven, the excitement of watching baby dough rings ride the assembly line and transform into glazed, golden treasures, friendly humans that offer samples (which obligates customers to buy more) AKA face-to-face sales and, of course, sinking your teeth into the fresh-crispy and creamy product. You can’t box and shelve the experience and sell this effectively. Nobody wants to buy day-old donuts in a box ’cause by then they aren’t crispy or creamy!
It seems we all agree that KK blew the brand mystique with overzealous expansion — franchises and otherwise. But now what? You can’t put the genie back in the bottle; you can’t go home again and you can only wear the white dress once, right?
Maybe not. While he may have been brought in for his operating experience, Jeff Jervik will no doubt remember when YUM brands’ Taco Bell unit took a retail foray in the late 90’s. They managed to regroup nicely. Maybe KK can do the same.
I remember when Krispy Kreme opened in Milwaukee a few years ago. It made the 10 pm News and there were cars lined up for about a half mile to buy them. Now I go by Krispy Kreme and the parking lot is always empty. It always looks closed with their lights on. Why? Because it’s just a plain simple donut. You can go to the supermarket and get one for 33 cents, just like Krispy Kreme. There is no unique atmosphere at Krispy Kreme. If I want a donut and coffee with no atmosphere, I will just stop by the nearest Holiday Inn Express or Hampton Inn and pick one up for free. Starbucks sells coffee for $1.60 a cup while the gas station or hotel across the street gives away free coffee. Starbucks offers a coffee drinking atmosphere so they can get away with charging for coffee. Krispy Kreme is trying to sell products that many places just give away for free.
Marketing and positioning may not be the top-level factors here. I am a big fan of first focusing on core business weakness and strengths: Just what is KK selling and how do those products mesh with market needs and wants?
Our research indicates that until 2001, KK was perceived by the market as offering donut quality of 4.75 (on one-to-five scale), service of 4.2, value of 4.0, and overall expectation fulfillment of 4.0. In 2001, we noticed several changes: a significant change in recipes, a significant change in focus (much faster franchise expansion and third-party business), and a change in pricing.
Our data as of autumn 2005: donut quality 3.9, service 4.0, value 3.5, overall expectation fulfillment 3.5. It is interesting to note, too, that regarding positioning, consumer perception has shifted dramatically: in 2000, consumers said the KK “brand” was a 4.2 out of five. Quite high. Last autumn, consumers rated the brand as 3.0 out of five, not much higher than Dunkin’ Donuts. It appears that consumers don’t think KK is what it used to be, and this is likely to have had a strong impact on its business. Let’s see if the new management at KK looks at these issues.
A Krispy Creme bought at Target is just another donut. They need to focus on the freshness of donuts purchased at their stores and work on developing some type of brand for coffee or whatever else they sell out of their retail locations.
When the brand was hot, it was because of the mystique surrounding going to the retail store, waiting in line and getting the fresh hot donut. They need to find a way to create some buzz around their retail business and generate some positive media attention again. When was the last time you read a positive story about Krispy Creme?
Krispy Kreme’s major mistake was the master franchise agreement. At the time when they were growing, their market penetration was hampered by marketing agreements that prohibited growth through small investors. This kept Krispy Kreme stores out of many mid sized communities which made their safety net one that was full of holes. If Krispy Kreme had chosen to franchise more stores, increase the number of locations and build a business at store level, their problems would have been much more manageable. They, instead, looked for the short cut and got burned badly when their under funded franchise partners could not manage a very good business.
It is still possible for Krispy Kreme to move their market to the consumer instead of the convenience store.
Krispy Kreme’s ailments are many and for many reasons. One area I’m familiar with is their marketing. Now this definitely coincides with the massive growth (too quickly), which forced the company to lock into a certain pattern and stay there for stability. That’s a big part of the problem; they didn’t modify plans even though the image and brand would obviously alter with a faster growth.
Their marketing department, or what you would call a marketing department, would not adjust or modify a very limited approach – using only local cause marketing as the main advertising and marketing method. This might have worked with the old model but with fast growth you needed to affect loyalty and a reason to come back, and this was not done.
I agree they need to quit diluting their product through outside sales, as the freshly made in-store donut is key to an effective resurgence. Krispy Kreme needs to either go back to their original tried and true version or they will have to pursue a campaign of advertising and marketing (such as sports marketing) to incur the old brand loyalty they use to enjoy.
The good news is that the new CEO understands the value of the Brand; what has been done and not done with the franchisees; the equity of the Brand; and its shopping experience.
The future is in Kripsy Kreme’s own outlets and franchisees mirroring the corporate direction, AND, importantly, SOP.
A lot of ‘mending the fences’ has to take place with franchisees. The focus will be on the retail stores and their marketing efforts first. No Brand has done well selling to third parties………not even Godiva candies in department stores. Hmmmmmmm