In order to ramp up its overseas presence, Krispy Kreme Doughnut Inc. (KKD - Snapshot Report) recently forged a deal with Star360 Group to set up 15 Krispy Kreme franchise locations in Singapore over the next five years. The financial terms of the deal were not disclosed.
Star360 group boasts superior local market knowledge and has a proven track record of venturing into the premium retail industry within the Southeast Asian market. The group operates retail outlets in Singapore, Malaysia, Indonesia, Hong Kong, Philippines, Thailand, Taiwan and Japan.
Possessing strong know-how of local food habits, the franchisee is hopeful that its collaboration with a global brand like Krispy Kreme would help spread its Glazed doughnuts and freshly brewed coffee successfully across Singapore. According to Star360 group, coffee and doughnuts is a flourishing category in Singapore and the population has a sweet tooth.
The latest deal affirms Winston-Salem, North Carolina based Krispy Kreme’s plan to make Singapore one the prime markets for international expansion, considering its emergent economy. According to a global market research company, Euromonitor, Singapore recorded gross domestic product (GDP) growth of 5% in 2011 on the top of a robust GDP growth of 14% in 2010, leading to higher consumer confidence.
Increasing disposable income has enabled Singaporeans to spend big on branded food items. It is being witnessed that the young population as well as the emigrant population in Singapore are more inclined towards western fast-food chains. We believe that Krispy Kreme seeks to fully capitalize on this trend.
According to Krispy management, the company’s overseas expansion is expected to be more in 2013 than in 2012. Encouraged by international growth over the last six years, the company anticipates having 900 overseas stores within 2017.
Furthermore, a sluggish macroeconomic environment acts as another short-term deterrent. According to the Monetary Authority of Singapore, GDP growth is expected to be slow to 1–3% in 2012.
However, the market is not free from competition. Apart from some western players currently serving the market, steep competition will likely come from some of the domestic brands — The Donut Factory and Mad Over Donuts.
Krispy Kreme which competes with the likes of Papa John International Inc. (PZZA - Analyst Report) currently carries a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating. We maintain our long-term “Outperform” recommendation on the stock.