Krispy Kreme to add China: Goal is 35 stores in 3 cities by 2013

Oct 09, 2008 (Winston-Salem Journal - McClatchy-Tribune Information Services via COMTEX) -- KKD | Quote | Chart | News | PowerRating -- Krispy Kreme Doughnuts Inc. has decided that it's time to take on the world's largest customer base.

The company said yesterday that it will open 35 stores in China by the end of 2013 in the metropolitan areas of Beijing, Shanghai and Tianjin.

There are more than 47 million residents in those three cities alone, along with an overall Chinese population of more than 1.3 billion.

Krispy Kreme is entering China through a partnership with KKD Lotte Holdings Co. Ltd., who has been the company's franchisee in Japan and South Korea since 2004. Terms of the deal were not disclosed.

The franchise agreement could be the largest international deal yet for Krispy Kreme, which has at least 169 satellite and 91 factory stores overseas in 16 countries, according to a recent regulatory filing.

Company officials could not be reached for comment yesterday. The company announced in August that it was opening 25 stores in Turkey and 20 stores in Malaysia.

Jeff Welch, the president of Krispy Kreme International Store Operations, said in a statement that the company is confident in Lotte's ability "to successfully introduce Krispy Kreme to the China market."

The latest international expansion by Krispy Kreme comes at a time when overseas sales have become increasingly important to its bottom line. About 80 percent of total stores are operated by franchisees, with more than half outside the United States.

Jim Morgan, the company's chairman and chief executive, told shareholders on June 17 that 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.

"At this point, Krispy Kreme's China announcement is more symbol than substance," said Michael Lord, an associate professor of management at Wake Forest University. "But it could be a great start.

"China is a huge market for fast-food franchises. KFC and McDonald's, among others, have done extremely well in China."

Lord warned that most U.S. fast-food companies do not achieve overnight success in China.

"KFC and McDonald's have been building their businesses in China for more than 20 years," he said.

The growth represents a remarkable change from 2001, when analysts questioned whether Krispy Kreme's glazed doughnuts would translate well to international consumers, and whether it could add local taste preferences to its menu choices amid regulatory food restrictions.

"The positives obviously include opening up a target segment with attractive volume numbers," said Michelle Roehm, an associate professor of marketing at Wake Forest University. "Potential risks include quality control, which has been such an issue in multiple Chinese industries recently.

"The key will be to carefully structure the distribution agreement to ensure that quality is upheld."

Krispy Kreme has struggled to adapt to the changing tastes of U.S. consumers over the past four years. It is still being investigated by federal authorities about past accounting practices.

In January, the company replaced Daryl Brewster, its president and chief executive, with Morgan. And higher prices for raw materials and gas are having an influence on the company and its franchisees.

"While Krispy's overseas expansion continues to be a great positive boost for the company, in some ways, it also continues to underscore the company's lingering challenges at home," Lord said.

Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.

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