Benefits, Costs, Risks Analysis of opening a Krispy Kreme Franchise in Sweden

Mia T. Barton
Norma Chapman
Carissa Godsalve
Tina Ricketts
BMGMT 102
Professor MacKaben
November 12, 2013

Table of Contents

Introduction Barton, MT
Summary of Findings Barton, Chapman, Godsalve, Ricketts
Benefits
Costs
Risks
Final Analysis

Benefits, Costs, Risks Analysis of opening a Krispy Kreme Franchise in Sweden

Introduction July 13, 1937 marked the day that Vernon Rudolph opened his doors in Winston Salem, North Carolina and started selling Krispy Kreme doughnuts. Initially his business plan was to sell to grocery stores but there was a customer demand for his hot doughnuts so he started selling directly to people on the streets. From that one store, Krispy Kreme has now expanded to 789 stores, here in the Continental United State and 22 foreign countries. The company has seen some highs and some lows. Since its original IPO on the NASDAQ the price of shares has fluctuated to as much as $50 and as low as $1.15. They are now traded on the New York Stock Exchange at approximately $25.74 a share. This summary details the benefits, costs and risks of an American and a Swede doing a joint venture to open a Krispy Kreme franchise in Stockholm, Sweden.

Summary Findings
Benefits
For the business partners, Sweden is a very attractive prospect. In short, the benefits are great. Their economy, like most others, took a hit during the recession. The country however was sitting on a 3.6% budget surplus which the government was able to use to provide aid for its constituents. Interest rates were also lowered and eventually when it was financially sound the stimulus to their economy was weaned off. This has put more money into the system but at the same time has kept the country’s inflation number relatively low. Krispy Kreme Corp has goals to expand to 1,300 stores by 2017 and the Swedish market is one of interest for them. The currency of choice is their krona and not the euro. They are therefore one of the countries within European Union not subject to the decrees of the European Central Bank.

Within Sweden there are no major concerns about protection of property rights and the enforcement of contracts. Intellectual property rights protection is up to par with world standards and expropriation is also not a cause for concern. Swedish courts are independent and impartial so should arbitration be necessary, investors can anticipate justice without corruption. The country ranked high in the World Justice Project Rule of Law Index. It ranks countries on areas such as government accountability, access to justice, protection of rights and crime and corruption prevention.

The Stockholm location was an important factor endowment. It is the capital of the country, the most populous and urban therefore potentially bringing in better revenue. There are currently no foreign investors in the doughnut business in Sweden. This gives the partners first-mover advantages. Competitively, there are numerous small pastry shops throughout Sweden. The largest pastry company located in Sweden does not appear to have anything similar to doughnuts on their menu. For the coffee market, Starbucks is got the jump on the first-movers advantage and will be good competition. The Krispy Kreme doughnut is therefore entering a new market at the introductory stage and can be thought of as a deliciously amazing novelty item. In the United States the Krispy Kreme doughnut is fluctuating between the growth and maturity stages within different markets. The franchise will also be entering a prime, new market of customers who have a demand for their product. The typical Scandinavian diet is usually high in fat and salt and the Swedes are known for their butter cookies. The average family in Sweden, 2 adults and 2 children consumes about 2.7 pounds of sweets weekly. Krispy Kreme doughnuts will fit in perfectly with their sweets routines.

Costs
Currently there are no major issues, politically, legally, economically or culturally, that send up red flags. The Swedish government is a constitutional monarchy with and elected Prime Minister and they are ranked high for lack of corruption. The country’s next elections will be September 2014 and there are no notes for cause of alarm due to political unrest. The legal system is impartial and has safeguards in place for property rights. There is an intricate process for non EU investors to import goods that might add up to time and money. Culturally, the people of Sweden are factor endowments that considered for this venture. They are a demographic that enjoys high fat foods. They are descendants of Vikings and still enjoy their whale steaks and desserts.

Economically their system is sound and fairly healthy. Sweden has a population of 9.517 million. Their GDP is $525.7 billion USD with a small difference between their GNI which is at $420.1 and their inflation rate at 0.9%. The country’s budget deficit currently rest -0.3% of the GDP, comparative to the United States with a GDP of $15.94 trillion and a deficit of -6.9%. The unemployment rate in the country is at 8% and the country is very open to foreign investments which would aid in reducing this statistic. Currently, the United States is not a part of any preferential trade agreements with the European Union and as such investors are not entitled to any special privileges on tariffs, duties or taxes on any items originating from the States and imported into the country. The average tariff rate is 1.6% and the corporate tax rate is currently 26.3% with a proposal for it to be lowered to 22%to attract more investors. Krispy Kreme Corp does require their franchisees to purchase equipment and supplies from them so that will affect their budget negatively. This may also be disadvantageous in supporting related industries.

Risks The risks to doing business in Sweden are not apparent. In all aspects the country appears to be the ideal country to open the Krispy Kreme franchise. There is no political risk to trigger social unrest that would in any way endanger the business’ future. With the recovery of their economy after the global downturn, their government has proved that they know how to handle their finances. The legal risks are also managed by their efficient judicial system.

Final Analysis Though they were previously closed off, Sweden has been open to foreign direct investments since they joined the European Union in 1995. It is surprising that franchises entered other foreign markets before going to Sweden. Looking at the benefits, costs and risks from a political, legal, economic and cultural viewpoint we wholly endorse the joint venture opening the Krispy Kreme franchise in Stockholm Sweden.

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