Article

Krispy Kreme's sales jump via 'inspired marketing'

The company is growing its domestic and international footprint through a smaller, cheaper prototype.

August 30, 2013 by Alicia Kelso — Editor, QSRWeb.com

Krispy Kreme's second quarter results, released Thursday, included a 10-percent jump in same store sales. This comes despite the fact that July is historically the lowest quarter for the brand, and the QSR segment has been sluggish as of late.

CEO James H. Morgan said it's been 10 years since Krispy Kreme earned this much during Q2.

"This track record is even more impressive when considering that many of our QSR peers have experienced a noticeable slowdown in comp sales and traffic over the past several months," he said.

Krispy Kreme's results were driven mostly by high customer counts, attributable to what Morgan calls "inspired marketing" and improved in-store execution. The brand also got a lift from its fledgling coffee line, with total beverage sales up 6 percent compared to a year ago.

"We are seeing a shift in our beverage mix towards coffee, which accounted for 45 percent of our beverage sales mix. Further, total coffee category sales were up 19 percent driven by a 156 percent increase in higher price espresso-based beverage sales," Morgan said.

Execution of strategies

On Thursday, executives outlined how the company executed its strategies during Q2. Some highlights include:

• Promoting new doughnut occasions to grow same-store sales."If we give our customers an excuse to visit our stores, they'll respond," Morgan said. For example, Krispy Kreme marked National Doughnut Day June 7, and its 76th birthday on July 13 with promotions.
• New news.Krispy Kreme is also driving sales with new products and LTOs.
• Social media.Morgan said social media channels play a "critical role" in how the brand interacts with customers and builds relationships. With the Hot Light smartphone app and the Krispy Kreme website, there have been more than 97 million searches for locations in two years.

Small shop footprint

Also, Krispy Kreme continues to focus on the development of its smaller factory shops that include the full doughnut-making capability of a traditional store, but with a smaller footprint and less costs.

During Q2, three of these opened for a total of five now in operation, with plans to open four to five more by the end of the year. Morgan said these smaller stores are a big part of Krispy Kreme's growth going forward, and results from the models have been positive.

"We are committed to this new model. We think we are now poised, globally, to take this new and more efficient and better economics on this model forward," he said.

Although he stopped short of identifying specific target markets, CFO Doug Muir said the expansion will include "a number" of cities that currently do not have a Krispy Kreme presence.

Refranchising efforts are also a focus for the brand. During Q2, Krispy Kreme relaunched its domestic franchise expansion through a 15-store development agreement in Dallas. The goal is to build on this initiative to have 400 domestic shops in place by the beginning of 2017.

The company is also building its international presence, opening 19 such stores in Q2 and signing an agreement with a South Korean franchisee for 60 new shops throughout the next 5 years. The total franchise commitment for international is about 350 shops, and the goal is to have 900 shops open by January 2017.

POS upgrade and loyalty

Additionally, Krispy Kreme continues to upgrade its POS system and all company stores should have the new platform in place this year. Franchised locations are also upgrading. The system, Muir said, includes features that can "really drive the business," including mobile payment capabilities and loyalty programs.

"But we really wouldn't get any uptick from them probably until (2015), until we begin to get this new data and make use of it. But I can tell you, the marketing people are really excited about the potential," he added.

Obamacare

Finally, executives touched upon their plans to navigate any extra costs that will be incurred through the implementation of Obamacare early next year.

Muir said the law has already cost some money; for example in having to provide employees' dependents up to age 26.

"There's some new things that have cost some money. It hasn't been onerous. I still don't know what the cost of the big Obamacare increase is going to be, in which we are going to be required to provide health care to full-time employees," he said.

Until the company knows how many people actually sign up, the budget will remain murky.

"My sense is, it's going to be well within our ability to mitigate it through other cost reductions. Some of them may not be pleasant, but I think, my sense of it right now is we're going to be able to deal with it," Muir said.

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