Krispy Kreme Doughnuts Inc. (KKD) recently announced that it has entered into a development agreement with its Japanese franchisee, Krispy Kreme Doughnut Japan Co. Ltd., for expanding in Japan. Per the deal, franchisee will develop and operate 73 new restaurants in the Kanto, Kansai and Chubu regions of Japan in the coming five years. The terms of the deal were not yet disclosed.
The latest deal will strengthen the company’s longstanding relationship with its franchisee partner, started long back in 2006. The deal affirms management’s intent to make Japan one of the prime markets for international expansion, considering its stepped-up economy and status of being the second largest quick-service restaurant market in the world. The company seeks to capitalize the country’s potential in full.
Krispy Kreme plans to open 30 international franchise stores, 5 to 10 company stores, and 5 to 15 domestic franchise stores in 2012. It continues to expand through franchises, as this strategy reduces capital requirement and ensures a stable growth profile.
In an attempt to strengthen its international presence, North Carolina-based Krispy Kreme through its subsidiary also inked a deal with the franchisee KDN Company Limited for 20 new stores in Thailand to be opened by 2015. Krispy Kreme also plans to open 14 stores through its franchisee in Dominican Republic and 70 incremental stores in Mexico in the next five years.
Fulfillment of the company’s current expansion plans would widen its global presence considerably. Currently, Krispy Kreme’s premium-quality sweet treats including its signature Original Glazed doughnut are found in over 650 stores in 21 countries.
However, the company faces intense competition in Japan from its peers, such as The Wendy’s Co. (WEN), McDonald’s Inc. (MCD). McDonald’s is a prominent name in Japan with a much wider scale of operation. In recent times, a new value-based lunch was the primary sales driver of McDonald’s in that country. Sharp rise in commodity costs also remain another cause of concern.
Krispy Kreme Doughnut currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also maintain our long-term “Neutral” recommendation on the stock.
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