Why Krispy Kreme failed in Australia
No doubt you’ve heard the news about Krispy Kreme going into administration in Australia. Many people seemed surprised at the news given it was a such a successful launch. But when we look a little closer it’s pretty clear why they failed. They broke a few simple retail rules which are worth considering.
Why Krispy Kreme failed:
Firstly, they failed to understand that in this country they needed to operate as a specialty retailer. Instead they opened 50 stores in a few short years. When Krispy Kreme first opened their doors in this country (Sydney) it was a real treat and the store became a destination outlet. People would travel many miles to the store to buy a dozen doughnuts. You’d even see people returning on airplanes at Melbourne airport with big bags of Krispy Kreme doughnuts. It suggested that Kripsy Kreme had a strong novelty value in Australia. But it can be very misleading when people from wide spread geographies come you as a retailer of non essential items. Contrary to what the ‘spreadsheet’ might intimate, it’s rarely a good idea to take your retail offer to where they live.
To give you some perspective of the expansion folly, let’s consider this:
USA has 224 store serving population of 311 million. (1 store per 1.4m people)
Australia had 50 stores serving a population of 21 million. (1 store per 420K people)
The numbers are mind blowing and it doesn’t even take into account our vastly different food cultures.
The expansion was far too wide far too quick, and KK didn’t allow enough time to understand what their sustained demand would be prior to expansion. No doubt the temptation to expand rapidly during growth would be tempting, but sometimes the best decision we can make is to limit distribution and keep the brand exclusive.
Great point. I also think that there are some real climate issues that make a difference in Australia. I have travelled extensively in North America and with the cold you want more sweet. I think in the heat of Australia (although currently not in Melbourne today) we crave more savoury and salty. I don’t believe that was taken into consideration either. I’m not suggesting though, that if Krispy Kreme became Salty Dimmies that they would have been successful either!
I certainly agree with your points – I remember stories of Melburnian’s flying exclusively to the KK at Sydney Airport to get their fix. However what I was surprised you didn’t take in to account was the growing health movement in Australia. When KK opened in Australia in the early noughties there was certainly a concern for obesity and good nutrition but not to the extent it is now. These days there is a plethora of low-fat/ fat-free, organic, gluten-free, nut-free, taste-free foods available along with takeaway chains exploiting this concern… Grill’d, Boost, Sumo Salad (who in fact hi-jacked a KK store opening) to name a few. Along with offering healthier alternatives the presence of these foods and brands serves as a constant reminder to the consumer that there are nutritious options available and choosing KK as a regular snack option is no longer justifiable. It certainly should have remained a specialty item.
[...] Sammartino posted a good analysis on Start-up Blog, making the point that Krispy Kreme were successful as a speciality retailer when then first opened [...]
Another point of interest came from one of my lecturers at uni. He said that in Australia we tend to buy donuts from a donut outlet one or two at a time, as opposed to a dozen or two dozen at a time that Krispy Kreme is known for. As a result, their sales are likely to not have been as high as they had anticipated.
Very interesting, especially within the franchising communities I am involved with.
I believe that there are multiple reasons why Krispy Kreme failed. They all seem to point to the brand not knowing their audience. They seem to have assumed that because a certain model works in the US, it will work in Australia as well. That is clearly not the case.
They were just too expensive. Simple.
That’s stats on store numbers would seem to indicate that the failure of the firm has less to do with the donut recipe and more to do with the franchising model.
For a land with reportedly the highest franchising rates in the world, we really do seem to have a lot underskilled participants in what are too often Ponzi schemes (repeat same story in Australia for Baskins and Robbins, Starbucks etc)…
For several years the revenue for the master franchiser here would have come principally from new franchise sign-ups, but this was clearlyan unsustainable source of income.
Great blog mate. Very useful info and topics.
I grew up 25km from the KK Head Office in the USA in the 60s.
On Sunday morning my dad would usually treat the family to a dozen KK doughnuts (2 each) They cost 5c each, so a dozen was well under a dollar–a great way to make the whole family happy and not blow the family budget. Back then, no one ate doughnuts during the week that I can recall. (Hence, hardly any obese people in America then either!)
When KK came to Oz, I dropped in. After the initial gasp at seeing the price of a single plain glazed doughnut of something like $3.50, I bought it anyway, purely for the nostalgia. Yep, it tasted just like the original ones, but I was offended at being asked to pay that obscene price for a small chunk of deep-fried bread dough with a coating of plain sugar syrup that would have cost a fraction of a cent to make. And there was nothing particularly special about it. It was a brief moment of nostalgic fun, but I never went back after that day.
Unlike something like coffee, for most people, doughnuts are a ‘reward’ product (“I’ve been good, so I’ll treat myself”), bought only infrequently. But again, unlike coffee, no one except an idiot eats doughnuts every day. For KK to have expected this to be otherwise is just poor business strategy at best, and at worst it’s a blatant case of corporate social irresponsibility.
KK tried to become a MacDonalds– making consumption of an undifferentiated chunk of deep-fried bread into a daily affair in a world trying to fight obesity and striving toward healthier foods. Unsustainable.
As you pointed out, the only thing KK had going for it was the aura of the exclusivity of the brand when there were few outlets and great distances between them. Once they became ubiquitous, the glamour and intrigue was destroyed and so was the willingness of customer to pay a premium price for it. People will always want most that which is not easy to obtain. If it’s hard to get they’ll pay more for it. When there’s one on every corner, they lose interest.
It still astounds me how many corporations the world over, with virtually unlimited resources at their disposal to formulate strategy and deploy their business models, still ignore the most basic marketing principles and make such fundamentally poor decisions.
And the worst part is, this same mistake has been made so many times before by others that KK probably won’t even warrant a mention in a Harvard Business School Case Study.
More analysis on KK’s demise:
http://www.smartcompany.com.au/retail/20101108-poor-site-selection-caused-kripsy-kreme-crash-sumo-salad-founder-luke-baylis-says.html
With two stores there was novelty value Amazing how greedy they got thinking they could open fifty stores rip people off at over 3.50 for one donut and blackmailing them into dozens. I loved the two stores driving for hours to get there and spread the word , the writing was on the wall when they started to advertise milk shakes. Core business is key you idiots
Krispy Kreme made the same kind of rapid expansion mistake here in Chicago and its outlying suburbs. I can remember 10 years ago, a Krispy Kreme store was hard to find. You would have to drive FAR out of your way and hope that when you got there the “Hot Now” sign was lit up. We were crazy about Krispy Kremes. Then, all of a sudden, Krispy Kremes were opening left and right in the Chicagoland area. We were ecstatic at first. I went at least once a week for my donut fix. But not too long after the stores opened, they weren’t busy anymore. They were like ghost towns. I suppose the novelty wore off (personally, I stopped going because I ate too many and lost my taste for them). As quickly as they all opened, many of them closed. Now in my area (where I could think of at least 5 locations) there is only one. The closest Krispy Kreme after that is 35 miles away.
My theory on why KK has failed is more grass roots. I can walk into any Westfield shopping centre right now, find a doughnut shop and get hot fresh made dougnuts there and then. With Krispy Kreme increasingly I was finding after driving for miles to their store, they were not making hot doughnuts so it was a waste of time. It got to the point that myself and all my friends just stop going. If they couldn’t give us the one thing that set them apart from any 2 cent doughnut shop with a small machine to make them, then they were a joke, and thats exactly what they became. You can fancy it up and give all the business/financial theories you like. If you don’t give your customers what they want your going down, no matter how much money you have,