Krispy Kreme Franchise Cost Worth It in 2023?
This article is based on the video featured above, originally recorded for Vetted Biz Youtube Channel.
Doughnuts are one of the most liked desserts/ snacks in the United States. They are so loved that you can pretty much get one wherever you go. One of the best places to eat Doughnuts is Krispy Kreme, considered by most, the best doughnut shop around the country. Krispy Kreme offers doughnuts in addition to beverages and other related products.
Contents
Listen to this article
Krispy Kreme franchise was founded in 1937 by Vernon Rudolph and has been offering doughnuts and coffee ever since. In 1947 Krispy Kreme was incorporated in North Carolina and re-incorporated in 1982. Krispy Kreme started offering franchises in 1950.
There are currently 363 Krispy Kremes around the country, a small number for how long the brand has been around.
Michael Tattersfield has been the CEO of Krispy Kreme since 2017. Michael has been the CEO of multiple companies in the food and beverage industry, so we know he has a lot of experience.
Competitors of Krispy Kreme include Dunkin Donuts, Starbucks, Caribou Coffee House, and other coffee stores and bakeries.
We will analyze the potential returns and if they are worth the initial cost of the franchise.
How Is Krispy Kreme Franchise Positioned in the Food and Beverage Industry?
The Food and Beverage industry in the USA accounts for 13% of all manufacturing employment in the country. Around 1.46 million people are employed in this industry. Food franchises make up to 36% of the total franchise establishments in the USA, and it is expected to create 1.6 million more jobs by 2027. The annual growth rate in the industry is around 2% and the EBITDA multiplier is around 3x for a single restaurant. Multiples can go up to 7x for 5+ restaurants.
Krispy Kreme competes in the coffee market against big brand companies such as Starbucks and Dunkin’. Krispy Kreme franchisees also compete against other nearby Krispy Kreme locations.
One of the benefits of buying a coffee shop is that very little industry-specific knowledge is required. Many first-time business owners buy coffee shops, and this industry is very popular among first-time franchise owners. There is a lot of information about general business practices as well as coffee shop specifics, so the learning curve is less steep. Any owner in the industry is expected to be knowledgeable in the specifics of coffee, trends, and coffee-related drinks.
The coffee shop industry is characterized by high turnover and discretionary spending. This industry has experienced a period of rapid expansion over the last decade. The existing competition in the industry is expected to intensify. Industry profitability is expected to increase, recovering from the decline early in the period. International expansion is anticipated to be the largest source of revenue and profit growth.
How Much Is a Krispy Kreme Franchise?
The initial Krispy Kreme Franchise Fee is between $25,000 and $50,000. This is split evenly between a Development Fee and an Initial Franchise Fee. You have to pay this upfront fee when opening a Krispy Kreme franchise.
Krispy Kreme Franchise Cost:
The estimated total investment necessary to begin the operation of a Krispy Kreme Franchise ranges from $440,500 to $3,410,000 depending on the type of location. The following costs are part of the upfront costs included in the initial investment for a Krispy Kreme. Many of these are one-time fees that are needed to launch the franchise. Review the chart below to see how much it costs to buy a Krispy Kreme franchise in 2022.
Hot Light Theatre Shop:
| Type of Expenditure | Amount | To Whom Payment Is to Be Made |
|---|---|---|
| Development Fee | $25,000 | Us |
| Initial Franchise Fee | $25,000 | Us |
| Real Estate and Improvements – 3 Months | $20,000 to $75,000 | Third Parties |
| Construction Costs | $800,000 to $2,200,000 | Outside Suppliers |
| Equipment/ Signane/ Furniture/ Fixtures | $230,000 to $370,000 | Us, Our Affiliates, Outside Suppliers |
| Truck | $25,000 to $50,000 per truck | Outside Suppliers |
| Initial Inventory | $40,000 to $50,000 | Us, Our Affiliates, Outside Suppliers |
| Production Equipment | $270,000 to $400,000 | Us, Our Affiliates |
| Grand Opening Marketing Program | $25,000 to $45,000 | Advertising Sources |
| Training Expenses | $45,000 to $50,000 | Outside Vendors, Your Employees |
| Security Deposits and Other Pre-Paids | $7,500 to $20,000 | Outside Suppliers |
| Additional Funds 3 Months | $75,000 to $100,000 | Outside Suppliers |
| TOTAL ESTIMATED INITIAL INVESTMENT | $1,587,500 to $3,410,000 |
Fresh Shop:
| Type of Expenditure | Amount | To Whom Payment Is to Be Made |
|---|---|---|
| Development Fee | $12,500 | Us |
| Initial Franchise Fee | $12,500 | Us |
| Real Estate and Improvements – 3 Months | $8,000 to $37,500 | Third Parties |
| Construction Costs | $250,000 to $837,000 | Outside Suppliers |
| Equipment/ Signane/ Furniture/ Fixtures | $90,000 to $175,000 | Us, Our Affiliates, Outside Suppliers |
| Initial Inventory | $5,000 to $8,000 | Us, Our Affiliates, Outside Suppliers |
| Grand Opening Marketing Program | $20,000 to $45,000 | Advertising Sources |
| Training Expenses | $15,000 to $20,000 | Outside Vendors, Your Employees |
| Security Deposits and Other Pre-Paids | $2,500 to $10,000 | Outside Suppliers |
| Additional Funds 3 Months | $25,000 to $50,000 | Outside Suppliers |
| TOTAL ESTIMATED INITIAL INVESTMENT | $440,500 to $1,207,500 |
Krispy Kreme Franchise Requirements
Krispy Kreme is continuously looking for passionate and experienced individuals to expand their business
Krispy Kreme requires you to have a net worth of at least 2 million dollars and a liquid capital of at least $300,000.
The process of starting a franchise is fairly similar to most franchises. Just fill up an application, they will be in contact with you for next steps.
Owning a Krispy Kreme Franchise Requires Ongoing Fees
Royalty: 4.5% of Net Sales of the Shop, including Fundraising Sales.
Brand Fund: Up to a maximum of 2% of Net Sales
Advertising Placement Fund: Up to a maximum of 1% of Net Sales
Local Advertising Requirement: At least 2.5% of Net Sales
Local and/or Regional and/or National Advertising Cooperatives: Up to 3% of Net Sales
How Much Krispy Kreme Franchise Owners Make?
Krispy Kreme does not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets. However, if you are purchasing an existing Krispy Kreme, the company may provide you with the actual records of that Krispy Kreme.
However, according to the company’s own investors’ website, the average Krispy Kreme franchise made $3.6 million in sales in 2021. This represents a growth of 42.6% compared to sales in 2020.
2021 Krispy Kreme Median Franchise Sales: $2,200,000
| Initial investment (midpoint) | %Profit margin of median franchise sales | Estimated Profits | Time to recoup investments |
|---|---|---|---|
| $2,498,750 | 10% | $350,000 | 9 years |
| 15% | $525,000 | 7 years | |
| 20% | $700,000 | 5 years |
Based on the median sales provided by Krispy Kreme’s franchise locations, at an average of a 15% profit margin it will take around 7 years to recoup your investment. This is longer than other franchise opportunities. You may not get a 15% profit margin which would elongate getting a return on your investment.Many factors affect the sales, costs, and expenses of your Franchised Store. Such as the Franchised Store’s size, geographic location, menu mix, and competition in the marketplace. The presence of other Food and Beverage stores; the extent of market penetration and brand awareness that Krispy Kreme stores have attained in your market. Also, the quality of management and service at your Franchised Store are major factors.
Is the Krispy Kreme Franchise Profit Worth the Franchise Cost?
To assign a valuation multiple for Krispy Kreme franchises, we leverage estimates from DealStats, a database of acquired private company transactions sourced from U.S. business brokers and SEC filings. We reviewed the larger franchise industry as well as selling price multiples for larger systems where more transaction data is available.
Under $5 Million Net Sales
- Estimated Selling Price = Net Sales * 0.34
Over $5 Million Net Sales
- Estimated Selling Price = Net Sales * 0.86
After a few years in the business, when you go to sell your Krispy Kreme franchise based on the median multiple of 0.34 and net sales of 2021 of $3,500,000 it would sell for about $1,190,000. This is just 47% of your initial investment.
However, as an owner of multiple Krispy Kreme franchises, you do have the ability to make a profit. Owners in the Food and Beverage Industry with over $5 million in sales have a median multiple of .86. So, if you had 10 Krispy Kreme franchises this would be ~$35,000,000 in sales. That, at the multiple of 0.86 would sell for $30,100,000. This is higher than the estimated investment of $24,987,500 and makes around $5 million profit.
The more franchises you own, the more earning potential you have as private equity firms become interested in your business instead of individual owner-operators.
Krispy Kreme Income Statement:
| $ in thousands, except per share data | January 2, 2022 (52 weeks) | January 3, 2021 (53 weeks) | December 29, 2019 (52 weeks) |
|---|---|---|---|
| Net Revenue | |||
| Product Sales | $1,533,466 | $1,085,110 | $912,805 |
| Royalties and other revenues | $30,925 | $36,926 | $46,603 |
| Total net revenues | $1,384,391 | $1,122,036 | $959,408 |
| Product and distribution costs | $354,093 | $310,909 | $262,013 |
| Operating expenses | $630,239 | $488,061 | $390,849 |
| Selling, general, and administrative expense | $222,394 | $182,317 | $161,452 |
| Marketing expenses | $39,489 | $34,000 | $28,785 |
| Pre-opening costs | $5,568 | $11,583 | $7,078 |
| Other (income)/expenses, net | (10,102) | $10,488 | $7,465 |
| Depreciation and amortization expense | $101,608 | $80,398 | $63,767 |
| Operating income | $41,102 | $4,280 | $37,999 |
| Interest expense, net | $32,622 | $34,741 | $38,085 |
| Interest expense – related party | $10,387 | $22,468 | $21,947 |
| Other non-operating expense/(income), net | $2,191 | (1,101) | (609) |
| Loss before income taxes | (4,098) | (51,828) | (21,424) |
| Income tax expense | $10,745 | $9,112 | $12,577 |
| Net loss | (14,843) | (60,940) | (34,001) |
| Net income attributable to noncontrolling interest | $9,663 | $3,361 | $3,408 |
| Net loss attributable to Krispy Kreme, Inc. | $ (24,506) | $(64,301) | $ (37,409) |
Krispy Kreme is a loss-making business for the franchisors and has been making losses for a while. In the last three years that we have data for, Krispy Kreme incurred losses of $24 million, $64 million, and $37 million in 2021, 2020, and 2019. The loss in 2019 is a worrying sign because it indicated that the company was not doing well even before the pandemic hit.
That said, there are signs of improvement in Krispy Kreme’s financials. The table below compares Q1 of 2022 to Q1 of 2021 and the company made a profit of $4 million in 2022 compared to a loss of $3 million in 2021.
Krispy Kreme, Inc. Condensed Consolidated Statements of Operations (Unaudited)
| $ in thousands, except per share data | April 3, 2022 (13 weeks) | April 4, 2021 (13 weeks) |
|---|---|---|
| Net Revenue | ||
| Product Sales | $364,052 | $313,585 |
| Royalties and other revenues | $8,480 | $8,224 |
| Total net revenues | $372,532 | $321,809 |
| Product and distribution costs | $96,111 | $79,997 |
| Operating expenses | $168,726 | $147,541 |
| Selling, general, and administrative expense | $53,711 | $49,537 |
| Marketing expenses | $10,159 | $9,507 |
| Pre-opening costs | $1,329 | $1,391 |
| Other (income)/expenses, net | (2,633) | (3,245) |
| Depreciation and amortization expense | $27,841 | $23,401 |
| Operating income | $17,288 | $13,680 |
| Interest expense, net | $7,351 | $8,249 |
| Interest expense – related party | – | $5,566 |
| Other non-operating expense/(income), net | (321) | (442) |
| Income before income taxes | $10,258 | $307 |
| Income tax expense | $3,800 | $685 |
| Net income/(loss) | $6,458 | (378) |
| Net income/(loss) attributable to noncontrolling interest | $4,002 | $(3,061) |
| Net loss attributable to Krispy Kreme, Inc. | $ (24,506) | $(64,301) |
The pie chart below shows where Krispy Kreme’s revenues for 2021 came from:
The number of franchised owned units has been decreasing at an accelerated rate in the last three years. To compensate for this, it seems that Krispy Kreme is opening more company-owned units. There are currently more company-owned units than franchised-owned. This could be an indicator that franchisees are not doing too well or that the business is not beneficial for them.
Systemwide Outlet Summary
| Outlet type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
|---|---|---|---|---|
| Franchised | 2018 | 218 | 205 | -13 |
| 2019 | 205 | 187 | -18 | |
| 2020 | 187 | 136 | -51 | |
| Company-Owned | 2018 | 120 | 145 | +25 |
| 2019 | 145 | 173 | +28 | |
| 2020 | 173 | 227 | +54 | |
| Total Outlets | 2018 | 338 | 350 | +12 |
| 2019 | 350 | 360 | +10 | |
| 2020 | 360 | 363 | +3 |
Over the last three years, the company has expanded slightly. However, most of this growth has come from company-owned units, while franchising units have constantly been going down. Over the last three years, franchises have closed at a rate of 27 units a year. This is an indicator that these stores may not be performing well. Or their franchise term is up, and they are not renewing it. That is a bad sign for that company.
Alternatives to a Krispy Kreme Franchise
Considering the declining number of Krispy Kreme Franchises, you might consider some alternatives to a Krispy Kreme Franchise. Here are some options:
- Scooter’s Coffee is an American chain of coffee stores specializing in quick service of espresso drinks, smoothies, and baked goods founded in 1998 and has grown to about 250 stores in the United States. Boundless Enterprises, a Nebraska-based LLC, serves as the parent company for Scooter’s. The parent company also owns two affiliate companies – Harvest Roasting and Boundless Operations.
A 15% profit margin would yield estimated annual profits of $88,158. This means it would take nearly 9-10 years to recoup your investment, depending on whether your store is a kiosk or coffeehouse. While Scooter’s is a growing company and has seen increasing gross sales over the past six years, the 7-14 year timeframe that you could reasonably expect to recoup your initial investment may be a long time for one to wait.
- Biggby is a community coffee shop chain with offerings of espresso beverages, sandwiches, baked goods, etc. Their franchise is generally operated from either a freestanding, storefront or strip center location or a prefabricated modular structure. Biggby has a very high focus on community integration, which they credit for their economic recovery after COVID. Robert P. Fish is a Co-Founder and Co-CEO of Biggby since April 2016 along with Michael J. McFall. Both of them are managing members of Global Orange, Biggby’s associates.
A 15% profit margin would mean it would take nearly 4.5 years to recoup your investment. Based solely on the Franchise Disclosure Document, Biggby may be an exciting investment opportunity for potential franchisees. The company presents itself as an up-and-coming player in the industry focused heavily on community values and engagement. It is offering a chance to be a part of an industry that has been long present. While still in its early stages, Biggby Coffee’s growth seems to be accelerating.
- Dunkin’ Donuts, also known as Dunkin’ and DD, is an American multinational coffee and doughnut chain. It was founded by Bill Rosenberg in Quincy, MA in 1950. It began rebranding as a “beverage-led company”, and was renamed Dunkin’, in 2019 with stores in the U.S. beginning to use the new name. The rebranding is to eventually be rolled out to all international locations. With approximately 12,900 locations in 42 countries, Dunkin’ is one of the largest coffee shop chains in the world. At the close of 2021, there were 8,000+ Dunkin’ franchised locations in the US. It is led in the US by David Hoffmann as CEO & President, and former CEO Nigel Travis in the role of Executive Chairman.
Based on the median sales provided by Dunkin’s Drive-Thru franchise locations, at an average of a 15% profit margin, it will take around 5.5 years to recoup your investment. This is in the same range as other franchise opportunities. You may not get a 15% profit margin, which would elongate getting a return on your investment. Dunkin’ Donuts offers people the opportunity to be a part of a business that has high net sales and is rapidly expanding. It is impossible to understate the brand recognition that Dunkin’ has in the US market.
Conclusion
Krispy Kreme offers people the opportunity to be a part of a business that has strong annual returns. However, Krispy Kreme is not a strong franchisor anymore. Its loss of franchised stores seems to be accelerating, and the company is in murky financial waters – where it has been for a while. We recommend looking into alternatives for Krispy Kreme, or waiting a while to see if its financial condition improves or shows more signs of improvement.
While this may be the business for you, make sure also to check out other companies offered on Vetted Biz and in the Food and Beverage Industry.
