This analysis will also provide recommendations for Krispy Kreme to move forward and to increase their market share.

University Degree Business and Administrative studies

Krispy Kreme Doughnuts, a specialty retailer of doughnuts, has overcome some major obstacles and enjoyed a great amount of success in the past few years, but compared to other competitors in their industry, Krispy Kreme owns a very small market share. In order to determine why the company has been successful, but still owns a low market share, this case will analyze the internal and external factors that effect Krispy Kreme’s success as well as how Krispy Kreme’s strategies help the company create a competitive advantage. This analysis will also provide recommendations for Krispy Kreme to move forward and to increase their market share.

External Environment

In this section of the analysis, Porter’s Five Forces model will be used as a framework to determine the degree to which external forces play in Krispy Kreme’s success.

Suppliers

Since the ingredients in doughnuts are simple and plentiful, Krispy Kreme can purchase these materials from a large number of suppliers. Krispy Kreme has also centralized its mixing facility, which allows them to purchase materials from closely managed suppliers keeping their costs low. It is also not likely that a manufacturer of granulated sugar will integrate forward to open a doughnut shop. Overall, suppliers’ threat to Krispy Kreme is low and should not be considered as a large factor when analyzing Krispy Kreme’s market performance.

Buyers

Consumers these days have a large number of choices when it comes to purchasing doughnuts. It is easy for a consumer to switch to another brand of doughnut and since the product is not highly differentiated, Krispy Kreme must do many things to keep consumers loyal. Overall, consumers have a powerful role in the doughnut industry.

New Entrants

The threat of new entrants into the doughnut industry is very high. There are very few barriers to entry since the equipment needed to produce a doughnut is minimal and the knowledge needed to cook a doughnut is easily gained.

Competitors

The largest forces in the external environment are the competitors in the industry. Because the industry has shown slow growth in the past, companies in this industry must either steal market share from the competition or try to expand their business through geographic and product line expansions. Due to the high rivalry in this industry, competitors are a large threat to Krispy Kreme and play a major role in Krispy Kreme’s market share.

Substitutes

Potential substitutes for the doughnut are also highly threatening to Krispy Kreme. There are many choices for both fast breakfast foods and sweet snacks in today’s market, such as bagels, biscuits, cakes and cookies. Those in the doughnut industry must realize this threat is high and use their strengths to gain competitive advantage.

Overall, the external environment plays a large role in the success of Krispy Kreme (see Exhibit 1). In order to be successful, Krispy Kreme will have to keep a close watch on this environment to ensure they are adapting to changes.

Internal Environment

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Substitutes

Internal Environment

An analysis of Krispy Kreme’s internal environment is also necessary in order to fully understand where Krispy Kreme stands as a company today. This section of the case will include a SWOT analysis as well as an analysis of Krispy Kreme’s financial performance from 1995 to 2001.

The SWOT analysis of Krispy Kreme (see Exhibit 2) shows that compared to their major competitors, Krispy Kreme has some strengths and weaknesses. The biggest strengths Krispy Kreme has compared to their competitors are their emphasis on the doughnut experience and their high quality product. These strengths allow Krispy Kreme to enjoy high consumer loyalty in the markets they serve. The largest weaknesses they have in comparison to their competitors are the limited menu they offer and the small number of outlets they currently operate. Some of their biggest competitors offer a larger selection of products in more locations, which could prove to be a large threat in the future. These weaknesses must be turned around in order for Krispy Kreme to increase its market share.

When reviewing the financial performance of Krispy Kreme since 1995, one can see that the company has grown steadily (see Exhibit 3). Over the seven years from 1995 to 2001, Krispy Kreme’s revenues have increased 161.5%.

As a whole the company’s net profit margin is on the rise reaching 4.9% in 2001. Since 1997 Krispy Kreme has also begun to generate profits from their assets as opposed to debt as can be seen by the falling Debt-to-Equity Ratio with an increase in ROA. After analyzing the performance of each business unit it can be seen that the Franchise operations are the most profitable unit of Krispy Kreme followed by the KK manufacturing & distribution division and the least profitable being the company owned stores.

Strategy

Krispy Kreme has developed a unique strategy to try to set itself apart from its competitors. This section of the case will analyze the key elements of Krispy Kreme’s strategy.

First, Krispy Kreme has developed a focused differentiation strategy. They have differentiated themselves from their competitors by developing a “Doughnut theatre” and by using a “Hot Doughnuts Now” sign although they only offer one core product. Krispy Kreme is focusing on the doughnut experience, not just the food.

Krispy Kreme also offers a high quality product. In order to have control over the quality of their product they have centralized the mixing of the secret recipe doughnut batter. They have also developed manufacturing equipment that must be used in each franchise. These efforts not only keep the quality consistent, but they are also big money makers for Krispy Kreme.

In order to grow, Krispy Kreme is currently utilizing a market development strategy. They are expanding into new market segments by franchising their stores to entrepreneurs that know the food business in these new markets well. This strategy has allowed Krispy Kreme to expand with little capital outflow. This growth has increased revenues both by the sale of the franchises, but also through the sale of the batter and equipment. In another growth effort, Krispy Kreme has recently horizontally integrated by acquiring Digital Java, Inc.

Although these strategies seem to be allowing Krispy Kreme to be profitable, they have not given Krispy Kreme a large market share for several reasons. First, Krispy Kreme seems to be a follower when it comes to expansion and development. For example, the acquisition of Digital Java to increase their beverage choices came years after their competitors had already established a large demand for their coffees. Also, Krispy Kreme has expanded rapidly over the past few years, but the brand is still not prominent in every part of the country. They also have not taken convenience into account as much as they should have. In today’s rushed world people are just as concerned about how fast they get their food as they are about the experience they have while obtaining the food. The “doughnut theater,” although a novel idea, may not be as appealing as Krispy Kreme had hoped.

Recommendations

After the analysis of Krispy Kreme’s external and internal environments as well as their current strategies, there are some recommendations that can be made in order to increase Krispy Kreme’s market share.

First, I would recommend that Krispy Kreme diversify their product offerings. Through innovation, KK may be able to enhance the “doughnut theatre” experience by also creating a “bagel theatre” or another type of “hot now” treat. In order to satisfy the health conscious, KK could also offer low fat doughnuts or muffins and offer sides of fresh fruit. Diversifying their menu could help KK increase their market share.

Krispy Kreme should also look into partnering with a large coffee house such as Starbucks. Krispy Kreme’s acquisition of Digital Java, although on the right track, may not have been enough to gain some market share from Dunkin Donuts based on coffee offerings. If Krispy Kreme could establish a partnership with a coffee powerhouse such as Starbucks they could offer Starbucks coffees in Krispy Kreme outlets and offer Krispy Kreme doughnuts in Starbucks stores. This would attract customers who are loyal to both brand names and place KK doughnuts in more outlets.

I also believe that Krispy Kreme should continue to grow through franchises. Franchise operations are not only their most profitable division; they also allow KK to open new facilities with little cash outflow up front. Since franchises must also purchase their dough and equipment through KK Manufacturing & Distribution, KK is making money through two outlets when supporting franchises. These franchises should be placed on routes that are highly traveled in the morning and late afternoon hours. They should also look into expanding the number of locations they have by utilizing small “hot-dog-like” stands in large cities. People would not be able to enjoy the “doughnut theatre”, but the doughnuts would be more convenient.

Overall, Krispy Kreme is a company is sound financial shape. The company is expanding rapidly and is doing so by utilizing their most profitable divisions. By diversifying their menu and partnering with the right brand they may be able to increase their market share and continue on a profitable route into the future.