How Krispy Kreme achieved its success with minimum advertising budget and relying solely on word of mouth promotions is still quite a mystery for some people. Lately however, this formula of success began to display a downturn pattern as the company displayed yet another loss in its income statement. In this paper I am analyzing Krispy Kreme’s strengths and weaknesses in relation to changes in its industry and I am displaying krispy Kreme’s latest financial performance.
In relation to the changes in its industry, Krispy Kreme is facing quite a challenge from its competitors and from the changes of trends within the industry. As people are turning to healthier food, Krispy Kreme is finding its sales declining. Opportunities however, come from the creation of new products like low-fat doughnuts, etc. Unfortunately, until today, no such efforts have able to increase the financial performance of krispy Kreme. During three of the latest years, its horizontal financial analysis displayed a constantly decreasing performance and its vertical analysis also displayed a high burden on production costs without matching returns from sales and other revenues.
I.1. SWOT Analysis
What is good about the food industry is that it always has a huge and deep market possibilities dependent upon trends and product offerings. Krispy Kreme on the other hand, has been engaging in the food industry, particularly in the doughnut business for over than 68 years. Since its inception in 1937, the company has been a specialty retailer for doughnuts. Despite the highly competitive nature of the food industry, this long time presence has awarded the company its current large presence and established national brand. The company chose excellent locations and it is know for its streamlined doughnut making process. Due to this established presence in its markets, most of its targeted customers are generally already aware of its product offerings. In addition, conditions of the industry also allowed buying power for doughnut ingredients and operating equipment.
The weakness of the food industry is its trend volatility. Consumption patterns could change easily and rearrange food company’s earnings, when a new trend emerges in the society. Currently, the top factors that affected the industry’s trends are health issues (organics, etc), age (consumers are getting older), globalization and individual beliefs (vegetarians, kosher, etc). Krispy Kreme on the other is on the other side of this trend development. Being a doughnut manufacturing company, Krispy Kreme is often said as distributors of unhealthy foods. In addition, because of the competitive nature of the food industry, advertising often becomes one of the most powerful weapons of success. Krispy Kreme on the other hand, rely lightly on promotional activities, the company has never had any major advertisements.
As mentioned previously, one of the advantageous traits of the food industry is its huge and deep possibilities of market development. Krispy Kreme could always look for new markets and redesign its product offerings to address specific consumers. For instance, low-fat doughnuts, premium drinks, to please the health-concern consumers.
Competition and shifting trends remain the heaviest challenge of the food industry. Krispy Kreme has been receiving complaints regarding the nature of its business, while its competitors are expanding their product lines to sweep of market shares.
I.2. Strategic Comparison
Krispy Kreme’s main competitors are Dunkin Doughnuts, LeMars, Cinnabon, Daylight Doughnuts and Tim Hortons. Each of these brands however, have their own images and specialties. For example, despite being a doughnut specialty company, Dunkin Doughnuts is actually famous for its coffee. Daylight Doughnuts is famous for its wide variety of doughnut products. Cinnabon and Tim Hortons are known for their baked good. Krispy Kreme on the other hand, is famous for its doughnut theatre.
I.3. Risk Assessments
In its latest 10-K fillings, the company stated that it has several risks to deal with, which are:
Governmental investigations Some of the corporate officers and directors are under investigations by the SEC. The results of the investigations could have adverse effects on corporate development and growth.
Dependence on franchisers Notable portion of corporate revenues are contributed by its independent franchises and future conflicts with these partners or their failure to perform profitably will have a considerable adverse affect on overall corporate profitability.
Currency, economic and political risks Krispy Kreme has 204 stores operating overseas. This means the company is significantly affected by currency changes, local economic and political policy changes.
II. Important Financial Ratios
There are several categories of important financial ratios, which are: liquidity ratios, activity ratios, profitability ratios and coverage ratios. In this analysis, each of these categories will be represented by one or two ratios.
Important Financial Ratios for Krispy Kreme
IMPORTANT RATIOS 2008 2007 2006 Liquidity current ratio 1.76 0.98 0.96 quick ratio 1.30 0.82 0.80 Activity receivable turnover 18.67 15.55 20.37 asset turnover 2.12 1.19 1.32 Profitability profit margin -0.16 -0.10 -0.25 EPS -1.05 -0.68 -2.20 Coverage Debt to Total Asset 0.72 0.77 0.74 Book Value per Share 0.87 1.26 1.76
III. Vertical Analysis
Income Statement Vertical Analysis for Krispy Kreme
Income Statement Accounts 2008 2007 2006 2008 2007 2006 revenues 429,319.00 461,195.00 543,361.00 100.00% 100.00% 100.00% direct operating expense -380,014.00 -389,379.00 -474,591.00 -88.52% -84.43% -87.34% general and administrative expense -26,303.00 -48,860.00 -67,727.00 -6.13% -10.59% -12.46% depreciation and amortization expense -18,433.00 -21,046.00 -28,920.00 -4.29% -4.56% -5.32% impairment changes and lease termination cost -62,073.00 -12,519.00 -55,062.00 -14.46% -2.71% -10.13% settlement of litigation 14,930.00 -15,972.00 -35,833.00 3.48% -3.46% -6.59% other operating income and expense -13.00 -1,916.00 1,741.00 0.00% -0.42% 0.32% operating income (loss) -42,587.00 -28,497.00 -117,031.00 -9.92% -6.18% -21.54% interest income 1,422.00 1,627.00 1,110.00 0.33% 0.35% 0.20% interest expense -9,796.00 -20,334.00 -20,211.00 -2.28% -4.41% -3.72% loss on extinguishment of debt -9,622.00 -2.24% franchise equity -933.00 -842.00 -4,337.00 -0.22% -0.18% -0.80% minority interest 4,181.00 0.00% 0.77% other income -3,211.00 7,021.00 -248.00 -0.75% 1.52% -0.05% profit (loss) before income taxes -64,727.00 -41,025.00 -136,536.00 -15.08% -8.90% -25.13% Sources; 10K report 2008 & 2007 of Krispy Kreme
IV. Horizontal Analysis
Income Statement Horizontal Analysis for Krispy Kreme
Income Statement Accounts 2008 Changes 2007 Changes 2006 revenues 429,319.00 -6.91% 461,195.00 -15.12% 543,361.00 direct operating expense -380,014.00 -2.41% -389,379.00 -17.95% -474,591.00 general and administrative expense -26,303.00 -46.17% -48,860.00 -27.86% -67,727.00 depreciation and amotization expense -18,433.00 -12.42% -21,046.00 -27.23% -28,920.00 impairmen changes and elase termination cost -62,073.00 395.83% -12,519.00 -77.26% -55,062.00 settlement of litigation 14,930.00 -193.48% -15,972.00 -55.43% -35,833.00 other operating income and expense -13.00 -99.32% -1,916.00 -210.05% 1,741.00 operating income (loss) -42,587.00 49.44% -28,497.00 -75.65% -117,031.00 interest income 1,422.00 -12.60% 1,627.00 46.58% 1,110.00 interest expense -9,796.00 -51.82% -20,334.00 0.61% -20,211.00 loss on extinguishment of debt -9,622.00 franchise equity -933.00 10.81% -842.00 -80.59% -4,337.00 minority interest 4,181.00 other income -3,211.00 -145.73% 7,021.00 -2931.05% -248.00 profit (loss) before income taxes -64,727.00 57.77% -41,025.00 -69.95% -136,536.00 Sources; 10K report 2008 & 2007 of Krispy Kreme
2008 form 10_K Krispy Kreme. 2008. Krispy Kreme.
2007 form 10_K Krispy Kreme. 2007. Krispy Kreme.
‘Krispy Kreme History’. 2008. Krispy Kreme. Retrieved October 19 2008 from www.krispykreme.com/