Executive summary - Krispy Kreme Doughnuts, Inc.
EXECUTIVE SUMMARY Krispy Kreme Doughnuts, Inc. is a specialty retailer of doughnuts. The company's business owns and franchises Krispy Kreme doughnut stores, where it makes and sells over 20 varieties of doughnuts, including its signature Hot Original Glazed and nine other varieties. Each of its stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. The Company also sells in its stores drip coffee, other beverages, other bakery items and collectible memorabilia such as tee shirts, sweatshirts and hats. As of February 2, 2003, there were 276 Krispy Kreme stores, of which 270 were located in 37 states in the continental U.S., five were located in eastern Canada and one was located in Australia. The Company also accomplishes off-premises sales through its direct store delivery system. 1 Krispy Kreme's success has left many in awe. This case will talk about how Krispy Kreme has been so successful using internal and external analyses and will also take a look at its competitors. Financial reports will be used as a benchmark to measure success. The analysis will focus on product diversification as a measure of securing market position and sustaining a competitive advantage.TABLE OF CONTENTSKRISPY KREMEI. External AnalysisA. EconomicB. International C. SocioculturalD. TechnologicalII. Porter's Five Forces of CompetitionA. Bargaining Power of SuppliersB. Bargaining Power of BuyersC. Threat of New EntrantsD. Rivalry Among FirmsE. Threat of Substitute ProductsIII. SWOT AnalysisA. StrengthB. WeaknessC. OpportunityD. ThreatIV. Life CycleA. Stage IIB. Horizontal GrowthV. Competitor AnalysisA. Dunkin' DonutsB. LaMarsC. CinnabonD. Tim HortonsE. WinchellsVI. Internal AnalysisA. Tangible ResourcesB. ReputationC. CapabilitiesD. Intangible ResourcesE. Core CompetenciesF. How does Krispy Kreme Create value for the Customer?VII. StrategyVIII. FinancialA. Financial OutlookB. ChartsC. RatiosIX. ImplementationX. RecommendationA. ExpansionB. DiversificationC. Healthy FoodsD. AdvertisingE. Krispy Kreme Charge AccountExternal EnvironmentEconomic In a time of economic pain, corporate scandals and troubles overseas, Krispy Kreme's stock is up four times since its IPO three years ago. Net income per share has compounded at more than 45% since 1998. Significantly, Krispy Kreme's same-store sales are still growing by more than 11%. Krispy Kreme is relatively small. It has just 292 stores and last year did $492 million in sales and earned $33 million.2Dunkin Donuts has the largest market share in this industry. They have 5,000 stores in 31 countries. Tom Horton's owns shops in Canada and they are the second largest donut shop with 2200 stores in 2 countries. See Exhibit A.InternationalIn the United States, Krispy Kreme target market is all demographics. Not all markets overseas will be a target market for Krispy Kreme. For example, France has built a reputation on fresh baked goods; therefore, their key branding technique would not be as effective in such a culture. Krispy Kreme has opened up shops in the U.S., Canada and Australia. They have also stopped accepting franchise applications in Europe. 5Sociocultural The hot fresh doughnuts work effectively across the U.S. with two exceptions. First is the growing number of obese Americans. With growing media attention turned towards slimming up America quick service restaurants, Krispy Kreme has come into the crosshairs of mainstream media. The basic glazed has 200 calories and 12 grams of fat. The other hindrance is the all in one convenience attitude. Wal-Marts have opened up a McDonalds where people can stop to get breakfast, lunch or dinner. Aside from breakfast, there are not many that consider doughnuts as a full meal. Krispy Kreme is faced with the problem of offering a greater variety of meals to suite lunch and dinner, or changing the way America perceives doughnuts to increase sales in existing markets.Technological Krispy Kreme has introduced "MyKrispyKreme." This internet-based portal connects management franchisees and Krispy Kreme vendors to each other. Porter's 5 Forces of CompetitionBargaining Power of Suppliers The ingredients in doughnuts are simple and plentiful. Anyone who wants to enter the doughnut industry can simply stop by a grocery store and purchase necessary supplies. Krispy Kreme has a centralized mixing facility that enables them to purchase all of their supplies from closely maintained relationships keeping costs low. This is not a strong threat to Krispy Kreme. Bargaining Power of Buyers Consumers have a lot of choices when it comes to buying doughnuts. Krispy Kreme is forced to have a differentiation strategy of giving the customer an "experience" by using the Doughnut Theater and
serving hot doughnuts. This is a strong threat to Krispy Kreme. They have an opportunity to create the right atmosphere for the customer to want to come back over and over again.Threat of New Entrants The initial cost of a new retail facility, insurance and a deep fryer are required to enter the doughnut industry. There are few barriers to entry into the doughnut market. This is a strong threat to Krispy Kreme. They are forced to remain competitive and to expand their geographic locations to minimize the threat of new entrants.Rivalry among FirmsKrispy Kreme competes in an industry that ...
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serving hot doughnuts. This is a strong threat to Krispy Kreme. They have an opportunity to create the right atmosphere for the customer to want to come back over and over again.Threat of New Entrants The initial cost of a new retail facility, insurance and a deep fryer are required to enter the doughnut industry. There are few barriers to entry into the doughnut market. This is a strong threat to Krispy Kreme. They are forced to remain competitive and to expand their geographic locations to minimize the threat of new entrants.Rivalry among FirmsKrispy Kreme competes in an industry that has several large competitors and many "Mom and Pop" shops. The large competitors are Dunkin' Donuts, Winchell's Donut House, Tim Hortons, LaMars Donuts and Cinnabon. Interfirm rivalry in these companies is high because doughnuts have been a slow growth industry. This leaves the only room for growth in expansion opportunities either in geographic areas or in expanding product lines. Krispy Kreme has already had competitors compete head to head with them regarding their hot glazed doughnuts. Krispy Kreme need to advertise their product so that their name is on people's minds more than any other competitor. Horton's threatens Krispy Kreme in the Canadian market. Dunkin' Donuts holds the international market. This is a threat to Krispy Kreme's success. However, Krispy Kreme needs to look at where Dunkin' Donuts have expanded successfully and start to do business in those areas where doughnuts are successful.Threat of Substitute Products There is a lot of competition for America's fast food dollar. Therefore, it is no surprise that substitute products come out every day. In this industry, companies are not only competing against other doughnut and pastry shops, but also against every other quick service restaurant in their market. This is a strong threat to Krispy Kreme. They need to come up with new products that the consumers are interested in. SWOT ANALYSISStrengths Weaknesses Opportunities Threats Brand Name Brand Recognition Doughnut Theater High Quality Product HOT DONUT NOW sign Laboratory tests key ingredients Lack of Advertising Making Money Secret Formula Hot Donuts Cult-like following Cultural Diversity Target Market all age groups Stock Performance Affordable Excellent locations Streamlines doughnut making process Advertising Unhealthy - bad publicity 100% reliance on reputation Competition offering variety of products Opening additional locations but no focus on increasing current store performance International Growth Potential - still relatively small Advertise Training Franchise Local open kiosks and in store locations in airports, bookstores and other retail outlets. Co-branding opportunities with local sports teams and movie theaters Offer internet access, larger food menu Krispy Kreme Charge card, doughnut points Diet Low Fat Doughnuts Health Awareness Fattening Competitors Though there are many complaints when a Krispy Kreme opens, aggregate doughnut sales increaseLife Cycle Krispy Kreme is in the Stage II Growth Cycle. It is experiencing Horizontal Growth and Vertical Integration. Krispy Kreme has an automated system, designed to create high quality, consistent doughnuts. They manufacture their own custom doughnut making equipment for all of their restaurants. Krispy Kreme chooses not to segment its market, believing that their appeal extends across all major demographic groups, including age and income. Krispy Kreme uses a Functional Structure.Krispy Kreme is not a monopoly, it is an Oligopoly.Competitor Analysis Competing in similar markets with Krispy Kreme are Dunkin' Donuts, LaMars, Cinnabon, Tim Hortons and Winchells. With this focused group of competitors, the market commonality is very high and undifferentiated with the exception of the degree to which their baked goods variety differs. Each company carries with it an emotion in the eyes of consumers. Dunkin' Donuts is known for its coffee. LaMars has a small shop feel. Tim Hortons and Cinnabon are known for their baked goods, while Krispy Kreme is known for its doughnut theater. Small pastry companies that sell their product within discount stores are also competitors. Another competitor is the small local doughnut shop. Krispy Kreme is now selling doughnuts right out of service stations. By doing this, Krispy Kreme opens up to an enormous market and also really hurts the store brands such as Hostess and Little Debbie that are giving them strong competition. In an interview, Stan Parker, the Senior Vice President of Marketing, was asked whether or not the selling of doughnuts to convenience stores and grocery stores would hurt the hot and fresh Krispy Kreme reputation. His response was that they don not initiate sales through grocery and convenience stores until they have penetrated that market with an actual Krispy Kreme store. He stated that the company likes to establish the "hot and fresh" reputation first and then open themselves up to other opportunities. 3 Another extremely important advantage Krispy Kreme has is their brand name. This provides a huge source of competitive advantage over their competitors. They rarely need to advertise in a new market in which they are beginning to compete in. Before the Krispy Kreme franchise is even built in a town, word spreads and there are people lining up in the cold darkness in their pajamas waiting to cut the ribbon. Krispy Kreme send free donuts to local news stations and accepts free advertising. Movies such as "How to Lose a Guy in Ten Days" feature Krispy Kreme exposure. 2 Krispy Kreme is not just about going to the store, it's about the "experience." When people see the "Hot Donuts Now" sign lit up and can watch the doughnuts being made fresh right before their eyes, word of mouth is all they need. These are the types of intangible resources that Krispy Kreme's competitors do not have and cannot possibly begin to imitate. Another intangible resource Krispy Kreme possesses is their recipe. Even though the ingredients are basic, the recipe that makes the doughnuts is sacred. At this point in time, Krispy Kreme is the dominant competitor in the doughnut industry. Their name, process and their extremely fresh doughnuts are better than any other doughnut company. With a dynamic competitive strategy, Krispy Kreme can continue this dominance for many years to come. If their strategy becomes static and other companies begin to create competitive advantages of their own; Krispy Kreme will find themselves losing market share for the doughnuts that have made them so famous.Exhibit A Krispy Kreme Dunkin Donuts Lamar Winchell Tom HortonFounded: 1937 1950 1960 1948 1964# of stores: 296 5000+ 15+ 200+ 2200+# of countries: 3 31 1 1 2# of product lines: 4 5 2 3 4Non-food items: Yes Yes No No NoE-ordering: Non-food items only Coffee Only No No NoInternal Analysis An internal analysis of Krispy Kreme reveals its resources, capabilities and core competencies. Its resources are broken down into tangible and intangible resources. Capabilities are Krispy Kreme's implementation of purposely integrating these resources to attain specific goals. Core competencies are the competitive advantage derived from the capabilities and resources. Tangible Resources Krispy Kreme uses a consistent recipe for their Hot glazed doughnuts. Krispy Kreme's staff, training and recruiting for store employees as well as top management staff are all part of their superior doughnut making process.Reputation Krispy Kreme has had an enduring reputation for providing high quality and original product since 1937. No one has been able to duplicate Krispy Kreme's "top-secret" recipe of the strong appeal that keeps customers coming back for more.Capabilities Large asset base, good reputation and the "hype" following their name. Krispy Kreme keeps customers wanting more and is always a welcome addition to any area in which they choose to open a store. They have the capability to open stores anywhere they wish and have the ability to succeed.Intangible Resources When Krispy Kreme opens a store, it is usually greeted with anxious anticipation from the local community, many of whom had tried Krispy Kreme in other states and were excited that they now have one of their very own for the first time. Core Competencies Krispy Kreme has an excellent Marketing Department. They have kept a good reputation and established good rapport in the domestic market. Having excellent and swift customer service is a good business strategy that led to the development of their doughnut-making machine. The original glazed is the doughnut that most people are familiar with and is the most popular. At Krispy Kreme the glazed doughnuts are served hot off the doughnut-making machine. A main attraction for Krispy Kreme is the ability to create your doughnuts fresh to order. If you happen to be passing by the store and wondering whether or not the doughnuts are being served hot and fresh, just watch the sign on the outside of the store. If the "HOT" light is on, that means that the doughnuts are being made and they are at the peak of freshness. How Does Krispy Kreme Create Value for the Customer? Value is measured by a product's performance characteristics and by its attributes for which the customers are willing to pay. Krispy Kreme adds value to customers by providing a unique product in a unique environment. The moneymaker for Krispy Kreme is its original glazed doughnut. Customers are willing to pay for these hot doughnuts that they can see created right in front of their eyes. The misspelling of the words "crispy" and "cream" almost guarantees that the customers would not forget the name. The name uniquely identifies Krispy Kreme doughnuts so that customers will forever associate the name with the overall experience that is Krispy Kreme doughnuts.Strategy Krispy Kreme's ability to align strategy and execution with the brand's highest potential defines their capacity for vision and creativity. They place having both brand value and internal cultural values as a key priority. Using their brand as platform, Krispy Kreme has developed strategies such as linking everything they do by, understanding, protecting and promoting their brand, establishing the brand with the "Hot Donuts Now" experience, penetrating complementary, off-premises channels of sales. They are committed to building an organization based on common values of integrity, authenticity, passion, learning, sharing and positive expectations. Krispy Kreme implements a differentiation strategy, attempting to distinguish their doughnuts based on taste, quality and simplicity. Krispy Kreme's strong marketing focus is their charitable efforts through giveaways and wholesale charges to charities. By using this particular approach they continue to emphasize their small town, southern hospitality, commitment to community and brand value. Through a related diversification strategy, Krispy Kreme should choose to offer a variety of other products that doughnut eaters tend to enjoy. In 2001, Krispy Kreme acquired Digital Java, Inc. to broaden their beverage offering to customers. It also offers espresso beverages, frozen coffee beverages and frozen beverages prepared with a variety of proprietary flavors. 4 In addition to doughnuts, they sell snack foods, real fruit pies, cinnamon buns and mini-doughnuts. 5 Offering more morning sweets or health conscious breakfast items such as low fat bagels should be avenues they explore. Krispy Kreme could choose to diversify into fresh baked breads for the evenings or deli type sandwiches throughout the day. Although Krispy Kreme has done a successful job in securing their position and maintaining a competitive strategy, it is critical that they continually take strategic actions to stay ahead of the competition. Already, other companies in the doughnut industry have begun to respond to some of the successful actions by Krispy Kreme. One company has even begun to compete head to head with what Krispy Kreme prides itself on most, taste and quality. LaMar's Doughnuts has held taste tests directly competing with a variety of Krispy Kreme's products. In one such contest, held in Springfield, Missouri, police and sheriff's department officers judged LaMar's Doughnuts to be superior to Krispy Kreme's products in four of five categories; original glaze, glazed sour cream, chocolate iced and Bavarian Cr鋗e filled and cinnamon role. 6 Cinnabon represents themselves as a "modern version of the traditional neighborhood bakery where people are always welcome to stroll in, sample their unique product and delicious treats and linger a while to enjoy the entertaining baking process and warm, friendly atmosphere. 7 Possibly future threats will be some of the strategic actions of competitors like Dunkin' Donuts. They were the first-movers into the international market, allowing them the time to gain knowledge of the culture, tastes and preferences and tailoring their products by implementing a multi-domestic strategy. They have also been able to win the eye of the recent health conscious wave riders by offering low-fat muffins and bagels. Krispy Kreme offers its products in Canada and Australia and has plans for further expansion. 5FinancialsFinancial OutlookWhen reviewing the financial analysis of Krispy Kreme Doughnuts, Inc we have grown by leaps and bounds in the pass five years. Management has cut expenses considerably, by reinvesting in the business and opening the door to franchisees. In analyzing the financial strengths of the company and how the functional strategic technique management has chosen to generate profits from operations we would like to show how rewarding that has been. Systemwide sales for Krispy Kreme between 1998 and 2002 have increased on average 23.5%, which is a indication of the demand for the product. Company revenues for that time period increased on average 20%, and net income increased on average an outstanding 42% for the same time period (see chart 1, 2, 3). This only indicated how well the Companies strategy is working and the magnitude of the product. Krispy Kreme current quick ratio as of year ending February 2, 2003 was 1.96, which is the current assets minus inventory divided by current liabilities. This indicates the firms liquidity, the ability to pay it short-term debt from current assets, which gives us a competitive advantage in the industry. To show the profitability of the firm lets take a look at the net profit margin. This shows the after-tax profit generated from each sale. For the same time period Krispy Kreme has a profit margin of 4%. Also indicating the profitability of the company is the return on investment (ROI) and return on equity (ROE). We measure the quality of our management and how efficient the firm is run by ROI, the net profit after tax divided by total assets. This also shows that good sound investments are made to aid in the growth of the firm, we are holding our own at 4%. ROE gives our shareholders an ideal of how the company is growing. Our shareholders are the life of Krispy Kreme, they are what keep us going, and for the period ending 2/2003 the ROE was 2% this is computed by taking the net profit after taxes divided by the shareholders equity. Listed below is a liquidity and profitability chart indicating our progress over the past five years which is a sound bases for forecasting an average increase of 3% over the next two years. This would make way for new innovations in our product line. SUMMARY OF FINANCIALS Key ratios YEAR ENDED 1/31/99 1/30/00 1/28/01 2/3/02 2/2/03 Current Ratio 1.33 1.14 1.08 1.94 2.36 Quick Ratio 0.94 1.05 0.76 1.63 1.96 Cash Ratio 0.17 0.11 0.32 0.42 0.54 Net Profit Margin 2% 3% 5% 7% 4% ROI 3% 6% 9% 1% 4% ROE 6.80% 1.20% 1.20% 1.40% 2%Implementation Krispy Kreme should expand product lines to include cinnamon rolls, muffins or other pastry items. This would position Krispy Kreme as America's breakfast stop. People have different tastes. Dunkin' Donuts realized this and offered bagels, croissants, muffins and other pastry goods. Krispy Kreme could merge itself with a quick service restaurant. This will most likely be in the form of an alliance on a limited basis for a trial period. This company should provide breakfast, lunch and dinner. By doing this, Krispy Kreme will draw in customers during their traditionally slow lunchtime hours. It will also be able to share facility costs with its partner for the slow hours improving profitability. This relationship will also draw different types of customers if the partner chosen is correct. Another factor that Krispy Kreme needs to watch carefully is that its brand does not get tied into its partner companies name. Krispy Kreme wants to make sure to maintain its strong brand name. This can be accomplished through markets and monitoring brand recognition. Krispy Kreme is already growing and setting trends in the doughnut world. With these changes it can continue to stay ahead of competition and gain market share.Recommendation Krispy Kreme has a cult-like following even though it doesn't do any advertising. Our first recommendation would be to capitalize on their brand name and recognition and to start an advertising campaign. They could look into opening kiosks in airports, bookstores and retail locations. They also may look into co-branding opportunities with local sports teams and movie theaters. Krispy Kreme is still relatively small, so it has a lot of growth potential. It first needs to expand locally and then it should expand internationally. Dunkin' Donuts has been very successful in their international expansion. Krispy Kreme does not need to be number one in an area. It can capitalize on the successful locations that Dunkin' Donuts has chosen. Because of the heightened health awareness, Krispy Kreme should offer low fat doughnuts. They could offer Internet access and a larger food menu. 1. Multex Profile - Krispy Kreme Doughnuts (NYSE:KKD) July 18, 20032. How Krispy Kreme Became America's Hottest Brand. Fortune July 7, 20033. Krispy Kreme word-of-mouth tactics. October 21, 2002 Brandweek.4. Krispy Kreme Announces Store. October 31, 2002. PR News Wire.5. Krispy Kreme Homepage.6. LaMars Donuts News. October 25, 20027. The Cinnabon Story. Cinnabon Homepage.
