Krispy Kreme is a well-known company that was founded in 1933 in Paducah, Kentucky. Krispy Kreme became a regional chain in the 1940s and in 1973 there were already 94 company owned stores and 25 franchises. However after the death of Vernon Rudolf, who was one of the Krispy Kreme’s founders, the company went through several troublesome periods some of which resulted in the failures that could not be easily resolved and required demonstration of the strong leadership from the top managers.
When analyzing the case study it seems that Krispy Kreme’s top managers failed to build a reliable relationship with the franchisees and were driven by the quick profit generation instead of the gradual build-up of a sustainable business model. Such crises occurred twice in the Krispy Kreme’s history, in particular in 1973-1982 after the founder Vernon Rudolph died and in 2004-2010 after the Krispy Kreme applied a rapid expansion business strategy that harmed both franchisees and company owned stores.
What do these two crises have to do with the failure in leadership? In the first case there was a very uneasy transition to the new owners that were not interested in the strong performance of the stores and instead they were focused on the sales to the supermarkets. The crisis ended when a group of 22 franchisees rescued the Krispy Kreme brand by buying out the company. Soon many of the previously used successful business strategies were restored.
In the second case the top managers wanted to increase the number of the Krispy Kreme stores and improve performance in the other business segments. At first there was the problem with the corporate governance system, because decision making at the top level became too complicated due to the ineffective veto system. When the company was incorporated, the top managers decided to expand business operations in the USA and abroad, but their strategy was not well-planned and in just 5 years it led to the very negative financial results. The company had to be restructured in order to escape bankruptcy.
There were several strategic actions that were not taken by the top management. Firstly, the buying habits changed in the USA and the people started to pay much more attention to the quality of the food and beverages that they bought. Following a healthy lifestyle became popular, but the former CEO Scott Livengood thought that it was a short term trend and did nothing to change the menu so that the quantities of sugar, carbohydrates and fat could be reduced. Secondly, Krispy Kreme does not sell much coffee and other beverages contrary to the Dunkin’ Donuts and other competitors. Coffee accounts for just 4% of sales at Krispy Kreme, and only now the current CEO James Morgan decided to focus on the improvement of the coffee sales in the Krispy Kreme stores. This decision is strategically right, because for example by means of the coffee sales Dunkin’ Donuts was able to revitalize its brand in the 1990s. So Krispy Kreme should follow the market leader.
A second strategic action that will improve Krispy Kreme’s performance is building up the stakeholder trust in the top management team. Overexpansion and too many accounting inaccuracies could not attract investors in the past and cannot do it now. CFOs resigned too often and this was likely one of the reasons why the SEC had a lot of questions about the financial documentation that had been formed with mistakes. When Douglas Muir became a CAO and later a CFO, his rich experience of working with well-known companies contributed to stabilization of the situation and further compliance with the strict requirements that the SEC set up. One more issue that led to the ineffective leadership in the past was the lack of transparency that allowed a lot of manipulations related to the franchises that belonged to the board members. Nevertheless duality continues to represent a lot of risks for the company nowadays. The current CEO James Morgan is also the Chairman of the Board and the President of the company.
Finally, overexpansion led to the oversaturation of the market and caused the damage of the Krispy Kreme’s reputation. A lot of franchisee stores started to struggle, because they could not earn enough in order to keep up with the high royalty payments. The franchisor/franchisee relations are the key factor of the Krispy Kreme’s success. More than half of the Krispy Kreme’s stores were opened by the franchisees, but the parent company has not figured out how to improve the relations with the franchisees.
The company should show that it is motivated to correct the existing deficiencies and satisfy the key stakeholders by applying an updated business strategy that will be targeted at setting up the fair franchisee fees and enhancing the company’s transparency. What is more, the company will show effective leadership if it continues to extend the product range. Offering high-quality coffee and healthy food may become the new competitive advantages in the future. In the meantime, the innovative hub-and-spoke distribution system will keep the operation costs low. Krispy Kreme should apply more aggressive marketing in order to increase sales in the existing stores. At the moment Krispy Kreme relies on the word-of-mouth and the social media, but the company competes against the very strong rivals. In order to have enough customers in the future, sales should be proactively stimulated by means of online marketing and traditional advertising.
As a final point, the company has been showing some positive financial results since 2010. It means that Krispy Kreme overcame a lot of structural problems within its organizational structure. However, in order to attract more investment the company should upgrade the corporate governance structure once again so that investors could effectively make their strategic decisions. If the company does that, it will comply with the current compliance standards and attract additional resources that are needed for the further market expansion and product differentiation. So Krispy Kreme’s improvements have to be strategic and mainly focused on the long-term growth. Having a strong brand may help the company introduce the necessary changes in a timely manner and with little pressure on the company’s finance.
References
Chandran, A., Maloreux, M., Seunsom, J. Case 19. Krispy Kreme Doughnuts: Refilling the
Hole in a Sweet Strategy. Texas A&M University. n.d. Web. 04 April 2016
