Krispy Kreme’s Competition and the Competitive Forces
Competition
Krispy Kreme has many core competencies, such as its excellent marketing department, product strategy, advertisement strategy, and experience. The advertisement strategy that the company follows by aiding local groups and charities, and giving away free donuts to TV, newspapers and radio stations before entering a market shows that its marketing department plays its role cleverly. By aiding local groups and charities, Krispy Kreme has a good reputation and rapport in the domestic market. In addition to its reputation, its fresh donuts are also one of the company’s competitive advantages. Krispy Kreme’s “Hot Doughnuts Now” sign serves as its biggest signal to the freshest donuts being offered. Due to its charity tie in and the fresh donuts that it produces, the company has an effective word-of-mouth advertisement. Since Krispy Kreme is the oldest firm in the donut industry, its 71 years experience is another competitive advantage. Finally, Krispy Kreme’s “Doughnut Theater” and fifties-style store design is another competitive advantage that attracts consumers’ interest.
The donut industry carries the characteristics of oligopolistic competition; small numbers of large firms produce donuts that range from highly differentiated to standardized [Kotler, Keller]. There are both major players as well as small retailers that have a reasonable share in this market. The companies that are competing in the same market with Krispy Kreme are Dunkin’ Donuts, Starbucks, Winchell’s Donut House, and Tim Hortons. “Industries differ greatly in ease of entry. It is easy to open a new restaurant…” [Kotler, Keller]. In the entry, mobility and exit barriers basis, the donut industry has very few entry barriers. Because of the major players such as Krispy Kreme and Dunkin’ Donuts, it is required to have a flexible capacity large enough to produce the number of donuts needed to meet the customers’ needs, which bear a requirement to make large investments on the donut machines, hence fixed costs at the beginning. In addition to that barrier, the presence of established strong brands within the donut market can be a barrier to entry. On the other hand, since making donuts is a fairly simple process, and knowledge is disseminated throughout the world, there are few barriers to enter. In addition to barriers to entry, because the donut manufacturing does not require much investment in non-transferable fixed assets, there are almost no barriers to exit. In the degree of vertical integration basis, almost all of the firms are not vertically integrated, except Krispy Kreme. In addition to its donut production, the company also manufactures its own donut-making machines. Krispy Kreme also sells flour mix, donut-making machines, and donut supplies to its franchised stores. The degree of globalization in the donut industry is not much high. Dunkin’ Donuts and Starbucks are the only highly globalized companies in the industry. Krispy Kreme is not globalized as much as its competitors.
According to Rayport and Javorski’s model of profiling a company’s direct and indirect competitors, we can list the consumer activities: purchasing donuts and purchasing coffee. In the light of consumers’ activity of purchasing donuts, Krispy Kreme is in direct competition with other donut producers such as Dunkin’ Donuts, Winchell’s Donut House, and Tim Horton. In addition to these direct competitors, Starbucks is also a direct competitor for Krispy Kreme on the basis of purchasing coffee activity of consumers. In addition to its direct competitors, Krispy Kreme has also several competitors. In terms of consumers’ coffee purchasing activity, I can say that most of the coffee bean producers, such as Nestle’s Nescafe, Jacobs Coffee, etc. are Krispy Kreme’s indirect competitors. Moreover, because the chocolate producers are satisfying the consumers’ sugar need, most of the chocolate producers, such as Hershey’s, Mars, Amano Artisan, etc. Some bakeries also offering various types of coffee and pastries, such as Panera Bread, Au Bon Pain, so they are also indirect competitor for Krispy Kreme. Since McDonald’s is offering coffee and sugar kind of thing, it is another competitor for Krispy Kreme.
Competitive Forces Krispy Kreme Faces
Threat of intense segment rivalry:
Large and small companies compete fiercely for market share in the industry. Therefore, the prices and perceived value of products are crucial to company performance. There are no significant exit barriers for firms in the industry.
Threat of new entrants:
There are several barriers to entry including supplier relationships, significant capital investment, and brand development, all of which protect incumbent companies. Larger-scale entrants must invest large amounts of capital in order to compete with larger companies like Krispy Kreme. Although new companies can get into the industry by offering new products and lower prices, they take a significant risk since companies that are already in the industry are more powerful and established.
Threat of substitute products:
The threat of substitute products is high in industry because many convenient choices are invented and marketable. In this industry, companies are not only competing against other donut and pastry shops, but also against every other quick service restaurant in their market. The biggest threat Krispy Kreme faces nowadays is from healthier alternatives, such as bagels and muffins.
Threat of buyers’ growing bargaining power:
Buyers have huge power in the donut industry. There are many options available to the buyer. Consumers can make their own donuts or pick and choose from a wide range of donut stores.
Threat of suppliers’ growing bargaining power:
Making a donut is a relatively straightforward process, and it does not require too many complicated ingredients. Donut producers can find and buy ingredients from a variety of stores, such as grocery stores. Therefore, the suppliers don’t have much bargaining power in the donut industry. In addition to that, since Krispy Kreme is a vertically integrated firm, by producing flour mix and donut-making machines, it provides its own supplies internally, so Krispy Kreme’s suppliers have limited power.
The strategy Krispy Kreme need to employ in order to increase sales
The donut industry consists of four major companies: Dunkin’ Donuts, Krispy Kreme, Tim Hortons, and Winchell’s Donut House. Although the industry displays an oligopolistic competition, the market share of the companies in the industry is not scattered equally. Dunkin’ Donuts keeps its high market share for years, which fluctuates between 40% and 50%; just after Dunkin’ Donuts, Krispy Kreme follows with a market share fluctuating between 20% and 30%; the other companies share the rest of the market share [www.suu.edu]. The text book (Kotler and Keller) classifies firms by the roles they play in the target market and defines them with their market share: “40% of the market is in the hands of a market leader; another 30% is in the hands of a market challenger; another 20% is in the hands of a market follower; a firm that is willing to maintain its market share and not rock the boat. The remaining 10% is in the hands of market nichers ...” According to this definition, the market leader of the donut market is Dunkin’ Donuts, and the market challenger is Krispy Kreme which needs to increase its sales. In light of this information, Krispy Kreme should employ the “Market Challenger Strategy” in order to achieve its target sales. Market challengers are seen as those firms in an industry/market which are next in terms of market share to the leaders and are actively challenging the leaders for their dominant position. Market challengers aggressively try to capture market share from their rivals.
Companies can increase their sales and market share by achieving more customers. Achieving more customer means attracting rival firms’ customers. The target firm that the challenger needs to attack should be the one that the challenger is more able to gain the most market share from. In this case, according to the market share data in the preceding paragraph, Krispy Kreme must attack Dunkin’ Donuts because the other firms are just holding 10% of the market, which is not sufficient to gain enough market share. In order to attack to Dunkin’ Donuts, Krispy Kreme can employ two strategies: frontal and flank. Since Krispy Kreme’s donuts are of high quality and are appreciated by the consumers, the company can employ frontal attack strategy in which the attacker (Krispy Kreme) matches its opponent’s (Dunkin’ Donuts’) product, advertising, price, and distribution. Since it is known publicly that Krispy Kreme has the highest quality and the freshest donuts, it already has a product advantage, but it lacks on advertising. By performing intensive advertising, the company can have the opportunity to inform more consumers about its superior “hot and fresh” donuts and gain customers, consequently increasing its sales. Also Krispy Kreme can combine its high quality donuts with low prices to snag market share from Dunkin’ Donuts. The company’s deficiency is also its distribution channels. Although its biggest competitor, Dunkin’ Donuts, operates over 5000 retail stores all over the world, Krispy Kreme has just 357 locations, which is a big obstacle to achieve sales increase. In order to achieve an efficient product distribution, Krispy Kreme must develop a new channel of distribution. For example, since it is hard to open thousands of stores in the short-run, as Wal-Mart and McDonald’s did, Krispy Kreme can enter to an agreement for a partnership with a nationwide and global company, such as Toy’s “R” Us, and consequently widen its distribution channel, hence improving market share and sales. In addition to frontal attack, Krispy Kreme can also employ the flank attack strategy to serve uncovered market needs. Since there are already gaps in donut industry to satisfy consumer needs, Krispy Kreme can invest in R&D and product innovation to capture additional consumers, therefore increasing market share. For example, since healthier food products are becoming a growing trend nowadays, most people (especially elderly people) do not prefer to eat donuts, so Krispy Kreme can produce low-carb donuts to attract health concerned consumers.
Krispy Kreme’s Pricing Strategy
Price has operated as the major determinant of buyer choice, but nowadays with the changing needs and expectations of the consumers, their priority is now other factors, such as quality, healthiness, usability, durability, etc. Although nonprice factors have become more important in recent decades, price still remains one of the most important elements determining market share and profitability. According to the market challenger strategy, in order to gain market share from the market leader, one of the options for market challenger is to focus on low price, high quality. As soon as the challenger’s product quality is equal to or greater than the market leader’s product quality, by applying price discrimination as a price strategy, the challenger will be more able to strip market share away from the market leader. Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect proportional differences in costs. One way for price discrimination to occur is customer-segment pricing, which refers to different customer groups being charged different prices for the same product. Suppose that, if the market challenger charges lower prices for specific segments, such as students who have high price elasticity, they will start to purchase from the market challenger, so the market challenger’s market share will increase. For example, if Krispy Kreme charges students lower prices for donuts, the ones that usually purchase donuts from Dunkin’ Donuts will switch to Krispy Kreme. Another way for price discrimination is time pricing, which refers to varying prices due to season, day, or hour. Suppose that a market challenger is charging low price for the product at a specific time period of the day, during which time the market leader sells the highest quantity of its product. The customers of the market leader will start to switch to the market challenger; therefore the challenger will increase its sales. Dunkin’ Donuts makes 50% of its sales during the breakfast time, so if Krispy Kreme offers lower price during this time period (7:00 am-10 am), it will attract Dunkin’ Donuts’ customers and encourage them to buy from Krispy Kreme.
References:
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Kotler K., Keller K.L., Marketing Management 12e, 1956
