Krispy Kreme has fought to strengthen its operations after years in the red due to its growth binge in the 1990s. Analysts have had plenty of advice, including calling for smaller stores, controlling costs and adding a Dunkin' Donuts-inspired menu with sandwiches.
The company took part of their advice, developing the small retail concept store with its smaller footprint. That model also features various operations options, from cooking donuts on site or to having them delivered from a nearby factory store.
Krispy Kreme also implemented cost cutting measures to strengthen its bottom line. But instead of moving into sandwiches, the company is testing soft serve ice cream and baked goods.
At least one analyst wondered if it was enough, predicting the company would be one of 15 who might not last the year. Krispy Kreme took issue with the outlook, responding, "Our future is bright."
And the company has had a few bright spots, including a successful limited-time-only Valentine's Day heart-shaped donut promotion. In the Share the Love promotion, more than 100 U.S. stores sold 400,000 of the donuts.
Then last month, fourth quarter earnings finally showed positive same-store sales and an operating profit, as well as making progress in the company's strategy.
QSRweb addressed Krispy Kreme CEO James H. Morgan in the following Q&A about the company's strategic plan:
Part of the company's strategy is to develop small retail concept stores. How does the size and build cost compare to previous models?
The economics of our small retail shops are attractive because they are less expensive to open, run and staff. When locations are supplied by a large Krispy Kreme factory store, it improves the utilization of the factory store and significantly enhances the return on those stores as well. The average size of a small Krispy Kreme Doughnut shop can range from 900 to 2,500 square feet.
These smaller shops can be put in more locations because of their size, which in turn, will make us more convenient to more customers. For years, our consumers have told us we need to be more convenient. The additional convenience these small stores offer will allow us to provide the Krispy Kreme value and experience to more new guests. The small shop concept will be the foundation of our domestic growth along with new products, such as Kool Kreme (soft serve ice cream), and future products, such as baked goods.
What does Krispy Kreme hope to achieve in terms of franchisee/operator savings and profits with the small retail concept store?
We have recently opened two new company-owned small retail shops, one in Smyrna, Tenn., and one in our hometown of Winston-Salem, N.C. And we continue to secure additional real estate for suitable sites to open additional small retail shops in our company heartland. Domestic franchisees have opened small retail locations in their markets as well.
We believe we will see good economics from these small retail shops because of their smaller size and inherent simplicity. We also believe we can leverage the fixed cost base of existing traditional factory shops by using their existing production capacity to supply the new small shops. Also, having greater store density in our markets frees us up to do more advertising and to make increased use of broadcast media, which we view as important to our long-term growth.
How specifically is Krispy Kreme corporate helping franchise operators to improve comps?
Krispy Kreme has an increasingly collaborative relationship with our franchisees, and we know that there is much we can learn from each other. We are committed to providing an enhanced level of marketing and operational support to our franchisees around the world. We are also providing increased supply chain support to our global business and working to improve franchisee service levels domestically and abroad.
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What percentage of international sales contributed to the slightly positive comps this quarter, and how are domestic comps?
Our measured international growth continues, as we take the steps required to absorb and build on our previous successes in international markets. International franchisees' enthusiasm for the brand motivated them to accelerate their store development calendars, and they opened 114 new shops last year.
We don't expect international franchisees to open that many stores this year, though we continue to believe that international growth opportunities will keep us busy for years to come. One thing that we expect will adversely affect us in fiscal 2010 is a stronger U.S. dollar compared to fiscal 2009. We are committed to providing the necessary infrastructure support that our new and existing franchisees need as we assist them in being successful.
Our company-owned same-store sales comps improved in Q4 over Q3 and improved sequentially each month during the fourth quarter.
Analysts recommended in 2006 that Krispy Kreme needs to follow Dunkin' Donuts' lead and introduce new menu offerings, including sandwiches. Why is the company testing ice cream instead of sandwiches?
Based on consumer research, ice cream has great brand fit with Krispy Kreme. This research — and the size of the category — led us to test ice cream first. Also, we can pair our Kool Kreme soft serve menu with our signature doughnuts to create a one-of-a-kind offering like our doughnut sundaes. Kool Kreme is a great complimentary day part and seasonal part product, and we anticipate the offering will be a positive contributor to both sales and profits. Although our brand is highly extendable, we have no plans at this time to offer a lunch menu. However, we are considering a baked goods platform.
With ever increasing emphasis on better-for-you menu items and on the obesity crisis, other brands have introduced healthier menu items. What specific plans does the company have for addressing healthy menu concerns?
Krispy Kreme products are sweet-treats, an affordable indulgence that our consumers understand can be enjoyed in moderation as part of balanced diet. Our focus today continues to be to provide the highest quality sweet-treats and complimentary products that our consumers have come to enjoy and expect from the Krispy Kreme brand. It should be noted that all our products are zero grams trans fat, and we now offer our most popular doughnut varieties in smaller portions with our new Krispy Kreme minis.