Krispy Kreme’s International Expansion is Most Likely a Good Move, Says Professor Mike Lord

2.28.2011 Article, Business Analytics, Faculty News

Krispy Kreme to launch international expansion
Reposted from Winston-Salem Journal | by Richard Craver

Krispy Kreme Doughnuts Inc. is setting sail with another ambitious growth strategy, this time trying to more than double its international store count within five years.

Jeff Welch, the president of the company's international-store operations, said the goal is to have close to 1,000 international shops, up from 421 on Oct. 31. He said there also are plans for "significant growth" in the U.S.

The strategy could be pivotal because the jobs of its 3,702 employees, including 408 in Winston-Salem and an additional 102 elsewhere in the Triad, are riding on Krispy Kreme's ability to make its doughnuts a lifestyle choice rather than an occasional treat in markets as diverse as China, Kuwait and Turkey.

Jim Morgan, the company's chairman and chief executive, has said he is convinced that the company will post consistent growth through increased international sales, including at sites with lots of pedestrians, such as train stations and airports.

However, some analysts are taking a skeptical look at the initiative.

They question whether Krispy Kreme has learned a hard lesson from an aggressive, ill-fated domestic expansion outside the Southeast from 2001 to 2004 led by former top executive Scott Livengood.

The expansion led to oversaturation in some key markets, which led to reduced sales and put pressure on the company's bottom line during a six-year downturn from which it began to emerge in 2010.

"Krispy Kreme ought to know the dangers of chasing growth following its magnificent flop in the United States," said Seth Jayson, a contributing analyst to The Motley Fool.

"However, history does repeat itself, especially in corporate America."

Boosting overseas sales has been a top priority the past three years even though they accounted for just 5 percent, or $4.4 million, of its revenue in the third quarter.

Company officials believe they have only skimmed the surface of the company's international potential given that the 421 franchise shops in about 20 countries represent 65 percent of its stores.

Eighty international franchise shops were added from Nov. 1, 2009, to Oct. 31, 2010. By comparison, it added one company and five U.S. franchise stores in the same time.

"About 50 new (international) franchised stores will open this year," Welch said in an interview with The Nation. He could not be reached for further comment.

Jayson said translating flavors is always the trick with international expansion.

"If what you're selling is America, then it may be an easier sale to make in the short term," Jayson said. "But you're hoping the product you're selling doesn't go out of favor.

"As an investor, the underlying problem I have with Krispy Kreme is it's a one-trick pony."

He said that once the initial buzz wears off, as it did in the United States after Krispy Kreme expanded, "Where do you go if all you're selling is donuts bathed in the neon and fluorescent glow of faux roadside Americana?"

Brian Little, a Krispy Kreme spokesman, said the company will pursue international growth through existing and new franchisees.

"We are looking to expand our presence in the Middle East and in Asia, as well as establish brand presence in Europe and South America," he said.

Little said the company and its domestic franchisees expect to open between 10 and 25 shops combined in the United States. "If we continue our current growth, it could translate into jobs in Winston-Salem," he said.

Michael Lord, an associate professor of management at Wake Forest University, said he considers Krispy Kreme's expansion plans as "mostly good news with even greater promise" even though there are potential currency risks.

"The more countries in which Krispy Kreme operates, the more potential growth and the more diversified its revenues and profits," Lord said.

"Will all of the countries and all of the stores overseas be successful? Certainly not. But some good portion of them probably will be."

Lord said Krispy Kreme has learned some lessons from its franchisee experience, which taps into the capital of overseas entrepreneurs and limits its downside risk.

"But maybe even more significant is that this model also taps into local entrepreneurs' deep knowledge of the specific country markets, including key issues such as store sites and local customers' tastes," Lord said.

"These overseas entrepreneurs have a strong motivation to make their stores succeed. The more successful the stores are, the more money they make, and so does Krispy Kreme."