Krispy Kreme experiences sizeable traffic lift

Nov. 20, 2012 | by Alicia Kelso

Krispy Kreme's third quarter promotions included Talk Like a Pirate Day, National Coffee Day and Halloween, all of which contributed to consistent traffic growth. According to CEO James Morgan, higher traffic — not pricing assistance — is the main reason the company experienced a 6.8 percent jump in same-store sales during Q3, its 16th consecutive quarterly increase.

During the company's earnings call Nov. 19, Morgan said that although these promotions produce higher traffic, they're only part of the equation.

"What we are learning is that the tremendous work that's done through PR and social media and our marketing group is that this (success) is about much more than one day. The energy that gets created in our stores with our guests has a halo effect," he said. "That's something we're having fun with. Our promotions' after-effect lasts longer than we would have thought."

Krispy Kreme anticipates even more untapped opportunities in Q4 and into 2013. For example, in the coming weeks the brand will launch its annual holiday program featuring original new doughnut creations and special beverages in conjunction with its traditional holiday offerings.

Other opportunities lie in the brand's fledgling coffee line, launched during Q3 2011.

"Consumers view our beverage program as complementary to our doughnuts and we continue to focus on building top-of-mind awareness for our entire beverage lineup, and for drip coffees, iced coffees and specialty coffees in particular," Morgan said. "Consumer response has been positive and we remain excited about our program."

Additionally, the company is testing lattes and espresso-based drinks; however, it's too early to gauge their performance.


On the development front, Krispy Kreme added 20 net new stores during Q3, including one new company store and 19 new franchise locations. The quarter ended with 731 stores systemwide, more than 85 percent of which are franchised.

A major driver in domestic market development is the company's smaller factory shop and two satellite formats.

"We will have the suite of shop concepts we need to bring the Krispy Kreme experience to millions more consumers and we expect to do so at lower investment costs and with superior operating performance compared to our traditional production line," Morgan said.

The new 110M production line, for example, features a revamped production system that has the capacity to meet consumer demand with less square footage — about 2,200 square feet versus up to 4,000 square feet. The newest 110M prototype opened in Charlotte, N.C., earlier this month. About seven 110M stores are expected in 2013.

"We haven't seen anything about (the protoype) that we don't like so far. We think it's going to work so we are going to build it," Morgan said.

Markets eyed for 2013 growth include Knoxville, Tenn., Jacksonsville, Fla., Atlanta, Tidewater, Va., and potentially Richmond, Va.

Also during Q3, the company announced a new international franchise development agreement for Singapore. This is in addition to its agreements announced earlier this year for Moscow and India. More new markets are expected to be announced in the coming months.

2013 and Obamacare plans

As is the post-election earnings call theme, executives were asked about their plan of action for the implementation of Obamacare.

Douglas Muir, chief financial officer, said: "We have currently about 1,500 employees to whom we do not currently provide subsidized healthcare benefits. As near as we can tell, we would be required to provide them with some benefits if the law is implemented as it is currently structured. That represents about 35 percent of our entire workforce. We are shooting in the dark to some extent because we don't know the scope of the benefits that we are going to have to provide, but our current prognostication is that we do not think our incremental healthcare cost in calendar '14 will increase over calendar '13 ... At the outside, we would call the number $5 million. We think it is probably less than that."

Also, looking ahead to 2013, one of Krispy Kreme's major initiatives will be to accelerate technology spend. The company is currently in the process of selecting a new Enterprise Resource Planning (ERP) package to replace the current system that is nearly 20 years old.

"Fiscal 2013 is shaping up to be a banner year for Krispy Kreme. We have many years of growth ahead of us," Morgan said.

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Alicia Kelso / Alicia Kelso has been a professional journalist for 15 years. Her work with and has been featured in publications around the world, including Good Morning America, Voice of Russia radio, and Franchise Asia magazine.
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