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Krispy Kreme's International Business Segment And What That Could Mean For KKD In India?

|Includes:Krispy Kreme Doughnuts, Inc. (KKD)

Alright, so as most of you probably know already but for those of you under rocks, Krispy Kreme (KKD) announced on Jan. 19th the unveiling of its first Indian location which opened in Bangalore. This is the first of 80 stores to be opened over the next five-years as a part of a franchise agreement between Krispy Kreme and the Dubai-based Landmark Group. More specifically, the franchise agreement was made with Citymax Hotels India a subsidiary of the Landmark Group. Citymax Hotels India is the hospitality division of the Landmark Group for the Indian subcontinent, providing a small assortment of retail stores and entertainment centers. The franchise catalog run by Citymax Hotels India is comprised of: Gloria Jean's Coffees (A "gourmet" coffee retailer), Polynation ("mid-scale" ethnic dining), Fun City (Entertainment/Fun Center), and most recently Krispy Kreme.

Now, despite the overwhelming sentiment to the contrary I am not completely sold on the future success of Krispy Kreme in India. Given the business expansion plan announced in the Q3 2012 earnings report and financial statements and the economic situation within Bangalore I believe the move to India the first in a line of planned missteps which would threaten the long-run growth of Krispy Kreme negatively.

In the most recent quarterly report transcript of Krispy Kreme, the CFO announced the expectation to open as many as 15 new domestic stores (5-7 company) and 75 new foreign stores in the next fiscal year.

I cannot understand this focus. At the time of the financial report, International Franchises reported a segment revenue of 5.6% yet accounted for just over 65% of the total number of stores. Total sales for International franchises was $103.536 Million but was rivaled by both company owned stores and domestic stores reporting $71.884 Million and $68.950 Million respectively. This equated to a per store average sales rate, over the quarter, of: $210,000 per International Franchise, $748,792 per Company Store and $485,563 per Domestic Franchise. Lastly, International Franchise stores were the only segment to report a sales drop (7.7%, in constant dollars).

While this was attributed, by the CEO, to a possible "honeymoon" effect or market shifts, it still seems indicative of the business segment performance. Leading me to question why a foreign market growth policy is prevailing over the potentially more profit maximizing policy of company ownership expansion. A growth in foreign markets does not seem like the best use of resources considering the brand or equity dilution.

I believe the reason this is occurring, to a large degree, is because of the lack of "quality" markets being developed. I believe India is one such market that doesn't have the growth or expansion potential to support long-term profitability on a large scale.

Bangalore, is boasted as one of the largest multicultural hubs in India, supporting a large foreign cuisine market due to the variability in tastes. The store set up on the 19th also is in a good location, by several hotels, a school, main thoroughfare, and upscale housing complex. All in the center of the city which, is an economically successful part of the city. The main problem I can figure is pricing. I can't possibly figure a price point, yielding corporate profitability, being implemented due to city possessing a mean income of about 850 USD and when the average meal is around 1 USD, I would be hard pressed if a coffee and a donut were any more than that.

Also, potential expansion even within Bangalore seems to be questionable and certainly does not facilitate the creation of 80 stores in five years. My uncertainty about Bangalore lies within the housing market which is depreciating significantly in value and will cause any expansion to yield less than optimal results due to market thinning.

There were a couple other things but those were the main ones. To bring it all together, I am worried about the way the company is pursuing foreign expansion, and whether the expansion is truly worth the dilution of the brand given the less than low sales figures and revenues coming from the International business segment.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: KKD