As part of the expansion plan, the company aims to promote sales at Walmart, Target, Kroger and convenience stores.
News Analysis
Krispy Kreme had a tough week on Wall Street. The stock lost almost a third of its value due to the disappointing revenue and revenue, and the news that it has suspended its partnership with McDonald’s.
A $64.3 million reduction primarily related to the sale of a majority stake in cookies with insomnia led to a 20.1% decline in US sales.
International sales did not fall by about 4.1%, primarily due to the impact of foreign currency translations being $8.4 million.
Management has sought to make these disappointing numbers more appealing by highlighting the improvements and efforts of the company’s balance sheet to allocate capital more effectively in a challenging macroeconomic environment.
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“Our ability to become a bigger Krispy Kreme requires us to be better, and we take prompt and decisive action, pay off our debts, fire our balance sheets and drive sustainable and profitable growth,” CEO Josh Charlesworth said in a statement.
“We expect the macro environment to remain challenging, but we focus on positive cash flows, higher returns on capital and two biggest opportunities: profitable US expansion and growth in capital lighting international franchises.”
During the revenue call, Charlesworth provided further insight into the company’s plans to expand, including its long-term goal of 100,000 points of access in the US and growth of the international capital lighting franchise.
As part of the plan, the company will increase sales at Walmart, Target, Kroger and convenience stores, eliminate unprofitable sales channels, and suspend its six-month partnership with McDonald’s.
“Six months after the national expansion began, we are currently in over 2,400 restaurants,” Charlesworth said.
“The two companies have been working closely together over the course of this to help them execute, marketing, train and deliver excellent consumer experiences. We are pleased with many aspects of the program. However, after the start of initial marketing, we know that demand falls below expectations and intervention is needed.”
Management is looking to expand its sales channels, but prioritizes pursuing debt repayments and profitable growth based on sustainable revenue streams.
“We will take immediate action to improve financial flexibility and strengthen our balance sheets, enabling us to create positive cash flow, profitable growth and shareholder value,” said Chief Financial Officer Jeremiah Ischian. “We already have a clear plan with ongoing actions.”
This means that unlike its close competitor, Dunkin Donuts, it has yet to develop a proper business model.
The Dunkin brand and Krispy Kreme are in the same business, at least in the early days when the latter had a donut factory store and sold coffee alongside donuts.
However, there was a big difference in how the value propositions were organized and promoted for the two brands. The Dunkin brand sold coffee and donuts, while Krispy Kreme sold donuts and coffee.
The Dunkin brand used coffee to attract customers and eventually sold coffee and donuts. Krispy Kreme used donuts (mainly sold by 12 people) to attract customers and eventually sold both.
Dunkin’s strategy is more effective than a donut first strategy, as coffee drinkers in the mornings usually think about breakfast first and then something that goes with it.
Plus, for most people who are worried about obesity and cholesterol, donuts are not the best food to seek. They are less likely to stop at a donut location because the reason wins the emotions. However, when the same person stops at a coffee place, the emotions may buy a donut to drink coffee to take over the reason.
The Dunkin brand had not acquired a business model from the start.
When the first donut shop opened in the 1950s, the focus was on donuts sold by dozens rather than coffee. As a result, the company lost its business to local coffee shops, and ultimately to McDonald’s and Starbucks.
Only in the 1990s the company moved from donut first to coffee first models, and business began.
Krispy Kreme has also changed its business model, moving away from the direct model that manufactures and sells donuts and coffee, to an indirect model that sells donuts via supermarket sales points, including stores and partnerships such as those formed with McDonald’s six months ago.
