The Doughnuts and Coffee Business

Last month, Krispy Kreme(NYSE: KKD) CEO Scott Livengood joined David and Tom Gardner on The Motley Fool Radio Show. In this last installment of their interview, Livengood discusses the company's franchising model, international and domestic expansion, and more coffee.

TMF: Explain how your franchising model is different from other franchises. As I understand it, you sell fewer franchises. There are individual owners of very large regions. Is that still the case?

Livengood: Yes, there are two things that are really significant about the way that we have run [the company], and it is all calculated. We made a decision from the beginning that we wouldn't franchise single stores or street address locations.

Krispy Kreme has half of its sales in mature stores: our off-premises sales. So, we created an area developer-licensing program where we get a very strong, well-capitalized, experienced operator in a market that can build out the store base and not be in conflict or in competition with another franchisee when it comes to serving off-premises customers.

The other thing that we did was look at the experience of other folks that are franchised and said, "Where have they gone wrong, or what would they do if they could do it differently?" The one thing that I think is more important than anything is the relationship between the company and its franchisees. So, rather than charging a higher royalty -- which I think we could have easily done and still gotten the great group of franchisees that we have -- we made the decision to have more of a market type of franchise fee. 

And we have taken a partnership position with our franchisees, typically in excess of 30%, which in my opinion gives us income opportunities, but it is based on the success of that business. It just further aligns our interests with the interest of the franchisee. 

TMF: Scott, I would love for you to just tell us, over the next 10 years, your sense of how much you think Krispy Kreme can grow.

Livengood: Well, we have 282 stores... 282 stores in the world. The opportunity is exponential.  There are markets that... For example, Boston. We haven't opened our first store. That will open later this year, or in the next two or three months in Medford. Northeast New Hampshire, Vermont, no stores. Maine, no stores. The markets that we have stores in are the largest population centers because that is where we felt like we could really get them leveraged in terms of getting stores built in a concentrated area. But that is just stores in the U.S. and Canada. 

TMF: How many stores do you have outside the U.S. and Canada today out of your 282?

Livengood: We have no stores outside of the U.S. and Canada. We have just one store in Montreal, and I think we have three stores now in Toronto. 

TMF: So, you consider there to be significant international opportunities for this brand over the next 10 and 20 years?

Livengood: International and domestic.

TMF: Now, another successful company with an addictive product and passionate customer base is Starbucks(Nasdaq: SBUX). It seems to me that a closer partnership between Starbucks and Krispy Kreme makes a lot of sense, whether we are talking about a merger or just distribution of your doughnuts in Starbucks stores. Do you want to make some news on this program, sir?

Livengood: I think Starbucks is a great company, and it would have made a lot more sense a couple of years ago before we acquired our roasting facility. We now, based on what I can determine, are the largest micro-roasting formatted coffee business in the United States, at least. Probably the world. Our coffee, from the time it is roasted until the time that it is brewed, is never more than 28 days old. That is the freshest on the market, and freshness makes a difference. So, you combine fresh coffee with the best quality beans that you can buy in the world and it is a real great taste experience.

TMF: What percentage of your total sales comes from coffee today?

Livengood: That amount has doubled since October when we rolled out the new coffee, and is now approaching 10% of our sales. 

TMF: Wow. Now, Scott, do you ever walk into the office and say,  "Just this one day, just this morning, I can't see another doughnut right now"? 

Livengood: No. I think I would tell you the truth. It has never happened. Now there are some days when I come in, I can't resist the temptation as well. There might be a couple that disappear instead of one.

TMF: You have trouble seeing them because you want to be eating them?

Livengood: They are disappearing pretty quickly. 

TMF: From Krispy Kreme headquarters in Winston-Salem, N.C., Scott Livengood. Thanks for joining us again on The Motley Fool Radio Show.

Livengood: Tom and Dave, it has been a pleasure. 

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