Krispy Kreme AnalysisEssay Preview: Krispy Kreme AnalysisReport this essayKrispy Kreme Doughnuts Inc.The Doughnut IndustryThe U.S. doughnut industry was a $5 to $6 billion market in 2003 – 2004 with a robust growth rate of 13%. Doughnut specialty stores were the fastest growing dining category in 2002 – 2003 with sales increases of 9% to approximately $3.6 billion. Opportunity for expansion in North America and globally is desirable. Doughnuts appeal to many people across all ages and demographics. The increasing rate of obesity and the concern about healthy living triggers a change in buyer demand toward a more health conscious diet.
The doughnut industry consists of few major competitors which are Dunkin Donuts ($2.7 billion ), Tim Hortons ($651 million ), Krispy Kreme Doughnuts Inc. (KKD) ($665 million ), Winchells Donut House and a large number of smaller, independent doughnut shops, including neighborhood bakeries/doughnut shops and bakery departments in supermarkets. (See Figure 1)
Major players in this industry rely heavily on franchising and royalties fees paid to the parent companies. Most companies are retailers selling directly to end-users. Some i.e. KKD also use other channels for distribution of their product.
Price competition among rivals is close to nil, industry participants are very competitive when it comes to product differentiation. Product offerings to satisfy consumer demands include a variety of coffee, juices, muffins, bagels, cookies, cream cheese sandwiches, soups and other miscellaneous items.
The Competitive Environment – Competitive SuccessRivalry among competing sellers can be classified as strong. Competing sellers are constantly offering a broader product selection to dissuade competition for example Dunkin Donuts introduction of bagels and cream cheese sandwiches to protect against the pressure of Starbucks, Tim Hortons expansion of the lunch menu, and KKDs acquisition of Digital Java to be able to compete in the coffee segment.
The threat of new entrants is moderately strong. Incumbents do not strongly contest entry of newcomers, but existing industry members are consistently looking to expand their geographic reach and offer a broad product assortment. Brand awareness and customer loyalty are high and greatly important i this industry.
Substitute products for doughnuts are readily available including other baked items i.e. bagels, muffins, healthier food alternatives such as sandwiches, yoghurt, fruit and other comfort food for example ice cream and chocolates. The cost for consumers to switch is low.
The bargaining power of suppliers is very low. Major players are vertically integrated for example KKD is producing their own equipment while others are partnering up with suppliers. Its an industry where volume purchases implicated success and supplies are commodities which are readily available.
The bargaining power of buyers is moderately strong. Buyers purchase doughnuts infrequently and in comparatively small quantities. Consumers have low switching costs to competing brands or substitute products.
In consideration of all the factors within the competitive environment the overall industry attractiveness is moderately high.With an increasingly health conscious population, it is an absolute must to adapt to consumer demand through diversification. This required offering a broad variety of quick-to-eat healthy alternatives to doughnuts such as a sandwich, salad, or bagel. To analyze the aspect of the retail business, selecting excellent retail locations is the utmost importance. Typical doughnut patrons will not travel more than one or two miles to get doughnuts. The high loyalty rates in this industry make it very important to have a well-respected brand name which is established and supported by consistent quality product offerings, customer service and clever advertising. As in any other industry with relatively low margins, operational efficiency and efficient distribution capabilities are imperative. (See Figure 2)
Broad Differentiation StrategyCapitalizing on its strong brand name, beginning in 1996, KKD began to reposition itself by focusing less on the wholesale bakery strategy and putting more emphasis on implementing a specialty retail strategy for the purpose of boosting stagnant sales of $110 to $120 million. This decision was partially financed by taking the company public in April 2001. Retail stores were designed as a “doughnut theater”, where customers could watch the doughnut-making process, and be a part of the “hot doughnut experience”. The anticipation for the “Hot Doughnuts Now” sign would turn on consumers. The “buzz” around the brand, created by both the media and word-of-mouth advertising, resulted in numerous new store openings and tremendous sales increases. (See Figures 3 & 4) KKD created a multimedia training curriculum in 1999 to ensure a well trained management team and consistent customer service. These are clearly a few of the differentiating factors of the company.
KKD has three revenue generating business segments: 1) sales at company-owned stores, 2) franchise and royalty fees from franchise stores, and (3) Krispy Kreme Manufacturing and Distribution (KKM&D) unit producing and selling proprietary doughnut-making equipment and doughnut mixes to franchisees. (See Figure 5)
In early 2001 Digital Java Inc. was acquired as another vertical integration step that improved the caliber and appeal of the companys on-premise coffee and beverage products allowing KKD to be more competitive in the coffee segment.
In early 2004 it became clear that KKD was spiraling out of control. The increasing health consciousness of consumers definitely played a part in the predicament of KKD, but it certainly isnt the major cause of the issues. It is very difficult to grow a business that is solely based upon one single product, doughnuts. Even though coffee and other beverages are offered this limited product mix puts KKD at a competitive disadvantage. An attempt was made to broaden KK product offerings by acquiring The Montana Mills Bread Company which failed. The growth strategy around the single product was clearly unsustainable. As the number of stores grew, revenues per store decreased, partially because of existing stores were cannibalized, operational inefficiencies (See Exhibit 1) and poor choice of locations. Krispy Kreme relies heavily on wholesale channel sales, the packaged doughnuts to grocery stores account for 50% to 60% of sales. The proliferation of bakeries in supermarkets and
baking
malls has helped KKD to grow. The number of KKD stores grew with each additional store acquisition. The growth in KKD revenues in a single year was not linear and the store growth was limited mostly to small markets. As a result of the limited number of stores that the franchisees purchased and the limited number of stores that KKD purchased, consumer demand from specialty store openings declined. As a result of the limited number of KKD stores, both customer and the average consumer grew. Some of this is due to small store openings as well as the increasing complexity of the food industry, but this is only the most common result. At the same time, the increased consumer demand, greater choice of locations in retail stores and the availability of high quality food products have all contributed to a growing food industry. At KKD the growth in KKD was not limited to the smaller market where the majority of KKD food products are sold. The expansion of KKD opened the door to a growing food business that is unique in the marketplace as a whole. By investing in KKD there are two things that can be accomplished. One, it is very easy to enter into the KKD food business successfully, and the second is much harder to come by in the short term. The ability to gain first recognition and an audience in food is essential. This has contributed to the overall decline of KKD food products in the market, particularly in the Midwest, which has been particularly impacted since the recession. In response to this decline in KKD, KPD has expanded the KKD campaign through additional marketing and distribution of KKD products to our customers. KPD has spent millions of dollars to promote and enhance the KKD campaign and have partnered with our community to further promote KKD. KPD is responsible for leading with a small and effective outreach program designed to achieve the best possible results and support of our customer. By promoting and promoting KKD as a leading non profit company KPD was able to further diversify its customer base in order to reach new customers. With this increased support in new markets, KPD now also has the ability to make its offerings more widely available across the US, as many retailers have increased their selection through KPD. In conjunction with KPD a new KKD promotional campaign is now being produced which focuses on KKD products and has also gained national attention. KPD will continue to increase awareness that KKD is unique nationally and internationally. When we expanded KKD in the US in 2005 and 2012, KPD’s advertising sales in the US were $743 million at the same time. While it has grown, the number of retail store openings decreased from 43 in December 2010 to 27 in November 2012. Since then, our advertising strategy has increased through new KPD events and has achieved new audiences. KPD continues to grow and continue to build a strong presence in KPD’s markets and continue to engage our customers. During this time we have expanded and expanded KPD’s global reach to reach more customers in Asia and Africa.
3
*See note above in Table 3
In December of 2014 we launched our fifth KKD campaign (KPD K1-12) in the United States, with an aim of reaching over 2 million KKD customers globally, and our third KKD campaign in the U.K (K2-13). It was led by John R. Dominguez “R.D.M.E.” Monsey, who had been the first and then only KPD campaign manager in the U.S. He had brought with him a range of resources including a number of different commercial partnerships and advertising agencies. By expanding the campaign to include K2-13 we have also had a greater impact on KPD in North America.