Professor Mike Lord Weighs in on the Risks and Rewards for Krispy Kreme UK Expansion

10.17.2011 Article, Faculty News, Retail

Krispy Kreme announces expansion plans for the United Kingdom
Reposted from Winston-Salem Journal | by Richard Craver

Krispy Kreme Doughnuts Inc. confirmed Monday its expansion plans for the United Kingdom, with its franchisee there committing to 35 new stores over six years.

Krispy Kreme UK Ltd. already has 45 stores in the country.

"There is a lot of excitement and energy around the Krispy Kreme brand and our products in the UK," said Jeff Welch, president of the company's international division.

"Our franchise partners in the UK are seasoned operators, and we look forward to continued success in that market."

The Sunday Times of London has reported Krispy Kreme's U.K. franchisee has been bought out by management with backing from Alcuin Capital Partners LLP. Alcuin Capital bought a majority stake in the business for $39.6 million.

Krispy Kreme has more than 660 stores in 21 countries, including 231 domestic shops.

In February, Krispy Kreme said its goal is having close to 1,000 international shops by 2016, up from 421 on Oct. 31, 2010. Welch said at that time that there also were plans for "significant growth" in the United States.

The strategy could be pivotal because the jobs of its 3,900 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 regular choice rather than an occasional treat in international markets.

In the second quarter, the company's international franchise revenues jumped 33.5 percent to $5.4 million from $4 million, primarily because of higher royalty revenues.

In August, the company said Krispy Kreme Doughnut Japan Co. Ltd. agreed to build 73 new shops in the Kanto, Kansai and Chubu regions of Japan over the next five years, which would give it 94 in the country.

It also announced in August that its franchisee in Mexico plans to expand its presence by 70 over the next five years to 128.

Jim Morgan, the company's chairman and chief executive, has said he is convinced 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 emerged in 2010.

"It would be difficult to imagine that both corporate headquarters and their franchisees aren't aware of these lessons," said Michael Lord, an associate professor of strategy and entrepreneurship at Wake Forest University.

"In general, this sort of move would be perceived more as a vote of strength in the U.K. market by its partner there. This commitment would almost double the company's presence in the U.K., which is a pretty big expansion.

"But the six-year time horizon reduces the risks. That's only about six new stores per year, which is much more manageable since they already have some significant brand recognition in the market," Lord said.