Krispy Kreme to Serve India

Krispy Kreme Doughnut Inc. ( KKD - Snapshot Report ) is close to entering India with the signing of a development deal with franchisee Bedrock Food Company Pvt. Ltd. As per the deal, Bedrock Food Company will unveil 35 locations in the country over the next five years. The outlets will be in six states in Northern India and will be located in cities like Delhi, Jaipur and Lucknow.

Bedrock Food Company Pvt Ltd, a leading corporation specializing in restaurant operations, boasts of considerable local market knowledge. The company also has the development right for Subway and is spreading the brand in parts of North, West and South India. Bedrock operates approximately 185 Subway restaurants, indicating the managerial efficiency of the company in that region.

The latest alliance replicates Krispy Kreme management’s intent to make India one of the prime markets for international expansion, considering stepped up economic growth and under-penetration of quick-service restaurants in that country as against the saturated North American countries. Additionally, Bedrock Food Company sees coffee and doughnuts as flourishing category in India over the next couple of years. It also believes that Indians have a preference for sweet food.

However, the Indian market is not free from competition. Following the rising demand for coffee products, another U.S. coffee behemoth Starbucks Corporation ( SBUX - Analyst Report ) is about to storm the market. Starbucks is slated to launch in India by the end of August. Also, apart from local confectioneries and brewers, many other U.S. restaurateurs are currently serving the market.

Presently, Krispy Kreme’s coffee and doughnuts are available in over 690 stores in 21 countries around the globe. According to management, the company’s overseas expansion is expected to be more in 2013 than in 2012. Encouraged by immense growth in international exposure in the last six years, the company seeks to almost double its current overseas store base within 2017.

At the end of fourth quarter 2011, the company had 460 international stores. It is also under agreements to open 270 locations in nine different countries. Comparatively, Krispy Kreme has fewer domestic properties. In order to fulfill the target of opening 900 international outlets by 2017, the company remains in the constant process of identifying further possibilities outside the U.S. It is concentrating specifically on Europe, Russia, India, China, Central and South America apart from spreading in existing markets.

We believe the company’s extended global reach bodes well for its financials. On the flip side, there is some fear of deterioration in international comparable store sales from cannibalization by the new stores. Krispy Kreme currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.