Krispy Kreme Case Analysis
Amanda Szott, Peter Duryea, Phil Martin, Olga Pogorelsky
Currently, Krispy Kreme’s strategic situation is a forward & backward
vertical integration approach, focusing on manufacturing the mixes for its
product, doughnuts, at the company plants and also manufacturing proprietary
doughnut-making equipment for company-owned and franchised stores. Their
strategy is still implementing the “hot doughnut experience,” fresh off the line,
which customers value so much about the company as a means of its
differentiation from other competitors, as well as the “theater” experience. Krispy
Kreme is currently a domesticated and international business, operating in 10
other countries. In new markets, the company’s strategy is to focus on initial
efforts on on-premises sales and then control the interest made in their products
to secure off-premise packaged sales in supermarkets and convenience stores.
Krispy Kreme initially started off focusing on wholesale bakery strategy and
shifted the focus now to a specialty retail strategy that promotes sales at the
company’s own retail outlets.
In evaluation of Krispy Kreme’s firm analysis, some of their major
strengths are a vertically integrated approach, strong brand name, fundraising for
various civic organizations and charities, good employee training program and
high volume production capability. Some of their weaknesses consist of new
stores cannibalizing sales from existing stores, disappointing sales at new stores,
problems with the Securities & Exchange Commission, the $34 million Montana
Mills write-off and lastly, financial difficulty. Their current position in the industry is
low, not possessing much of the market share with a need to reduce costs and
administrative expenses as well as increase profit margin.
Krispy Kreme’s key opportunities are that they appeal across all major
demographics including age and income, customer excitement, lack of major
competitive presence in the South, affordable indulgence, and that their products
are easy to eat on the run. Some key threats are the proliferation of bakery
departments in supermarkets and constrained growth, loyal customers of
neighborhood doughnut shops, diet crazes, and a strong competitor presence in
New England, Midwest, West and Colorado. Right now, the market
attractiveness is moderate. Based on the Generic Strategy Matrix, Krispy Kreme
is plotted medium for industry attractiveness and medium for competitive
strength. With this, the key strategic question is whether Krispy Kreme wants to
enhance their competitive position by attempting to offer more coffee and food
varieties in order to better compete with competitors or exit in poor performing
markets with intense competitor rivalry, such as Canada, the Northeast and the
West. Krispy Kreme should continue to focus on the South, because there is less
rivalry and a strong customer base.
Taking a look into one of the company’s competitors, Tim Horton’s, gives
a reasonable argument as to why Krispy Kreme should move out of Canada,
mainly. Tim Horton’s has 2,400 restaurants across Canada offering soups,
sandwiches, bagels and coffee. Half of their sales were coffee without a
doughnut, which is also why if Krispy Kreme decided to still stay in this particular
market segment, they would have to offer more variety in their products to
enhance their competitive edge and be able to compete with Tim Horton’s. The
most doughnut shops per capita are located in Canada, therefore having intense
competitor rivalry in the industry and making it less attractive.
As for Dunkin Donuts, which has 1,200 stores in New England and
planning to double the amount of outlets within the next 5 years, they are a
strong threat to Krispy Kreme in the Northeast for reasons being the largest
coffee and baked goods chain in the world and offering a wide variety of hot and
cold coffee beverages as well as quick and consistent service. Lastly, in
Colorado is LaMar’s Donuts, which offers 75 varieties of doughnuts that are
hand-made daily with all natural ingredients and no preservatives. Being best
rated in the country by John Walsh Show and named top in the market area by
several local newspapers, they are a major competitive force to be reckoned
with.
With all these factors taken into consideration, Krispy Kreme should either
attempt to increase their competitive strength in these markets or exit and focus
on more attractive markets elsewhere.
The alternative to increase competitive advantage would have the
following advantages and disadvantages:
Advantages
1. be able to penetrate certain
2. no write-off costs
3. keeps investor confidence high
Disadvantages
1. costs of adding more products
2. employee training for additional
products
3. still risk of not increasing market
share
4. changing the whole company
strategy
The second alternative to exit markets in Canada, Northeast and
Colorado have
numerous advantages and disadvantages as well, which are:
Advantages
1. Gain cash from assets sold
2. be able to focus more efforts in the
region
3. avoid competing with major
competitors
4. get rid of deadweight franchises
Disadvantages
1. potentially decrease investor
confidence
2. loss of potential sales in other areas
3. loss of employee jobs
Refer to IFAS/EFAS attachment for alternatives #1 and #2.
Upon completion of the IFAS and EFAS reports and scores done for each
alternative, we’ve concluded that the second alternative to exit in poor performing
markets with intense competitor rivalry is the best option for Krispy Kreme to
implement for their company.
In the short run, Krispy Kreme should sell off poor performing franchises
and attempt to gain quick cash from the liquidation to pay off debts accumulated
from these poor performing franchises. An analysis should be conducted to
determine where the best performing stores are located and consolidate strategic
focus to those locations. Secondly, they should implement a strategic advertising
campaign in those areas to secure a larger market share.
In the long run, Krispy Kreme should look into increasing hot and cold
coffee beverage choices to accommodate customer demand, while offering a
combination of coffee and doughnut at a discounted price. This offers Krispy
Kreme to work into a rising market for coffee while using their already popular
product as a companion. During off peak hours, discounted doughnuts should
be offered to attempt to gain increased market share. Cash gained from the
liquidation should be used to revamp old outdated décor to keep up with
changing market conditions, as well as replace old equipment that is not
performing to optimal production capacity.
There are several assumptions and critical success factors to making this
alternative work. We are hoping that major competitors to no attempt to follow
our strategy and that no new competitors enter the market in those specific
regions. Most likely people will still continue to demand doughnuts and coffee.
Overall major risks would be that markets in which we decide to focus will
also become greatly saturated with competitors. It is also possible for consumers
to decrease wants for in the doughnut market.