Krispy Kreme Appendix

CASE STUDY

Instructor Dr. Mary Flannery

ECON 136 - Business Strategy

January 30, 2006

INDUSTRY ANALYSIS

In 2003, the U.S. doughnut industry was a $5 - $6 billion market. American households consumed an estimated 10 -12 billion doughnuts annually; this translates into over three dozen doughnuts per capita. In 2002, doughnut industry sales rose by about 13%. Sales from doughnut outlets rose by about 9%, to approximately $3.6 billion, whereas packaged doughnut sales at supermarkets, convenience stores and other retail outlets staggered in the past five years. A study by Technomic confirmed the growth of doughnut shops and identified this segment as the fastest-growing dining category in the country. Further analysis provided by the following figure shows attractiveness and profitability characteristics of the doughnut industry.

Five Forces Model of Competition

Players in the doughnut industry are: Dunkin' Donuts, Krispy Kreme, Tim Hortons, Winchell's Donut House and LaMar's Donuts. As shown on the pie chart, there is a significant difference in the market share of these competing sellers, with Dunkin' Donuts dominating with a 2002 worldwide sales of $2.7 billion, followed by Krispy Kreme and Tim Hortons, each with over $620 million in total sales. (2002 Sales for Winchell's Donut House and LaMar's not provided.)

KRISPY KREME'S BROAD DIFFERENTIATION STRATEGY

Krispy Kreme Doughnuts (KKD) projects an image as "the Stradivarius of doughnuts," creating a unique enriching experience that increasingly gains customer enthusiasm and loyalty. Krispy Kreme's melt-in-your-mouth, hot, sugar-glazed doughnuts, the "doughnut theater," and the "HOT DOUGHNUTS NOW" feature are clearly a few of the differentiating factors it attempts to make itself identified with. Fortunately, this appeals to a broad base of buyers; demographically, buyers come from all walks of life: all genders and ages, from skilled to blue-collar, high-income to low-income workers.

KKD's business model provides the company three sources of revenue: (1) Sales at company-owned stores; (2) Royalties from franchised stores and franchise fees from new stores; and (3) Sales of doughnut mixes, customized doughnut-making equipment, and coffees to franchised stores.

Strategies in other functions that support the company's business model include:

♦ Shift in focus from a wholesale bakery to a specialty retail bakery to promote and increase sales at the company's own retail outlets. The company emphasized the "HOT DOUGHNUTS NOW" feature as a response to customer feedback as well as a form of local advertising.

♦ Boosting of store sales-volume by combining on-premise sales at its stores to capture customer base and then securing off-premise sales at supermarket and convenience stores for packaged sales.

♦ Reliance on franchising "associate" stores and opening a few new company-owned stores as a means of expanding nationally and internationally. However, franchise licenses were granted only to candidates who have experience in multi-unit food establishments and who possess adequate capital to finance the opening of new stores in their assigned territory.

♦ Building a vertically-integrated value chain that supplies both company-owned and franchised stores proprietary doughnut-making equipment as well as doughnut mixes.

♦ Acquisition of Digital Coffee as another vertical integration step that not only provides additional source of revenue, but also improves the caliber and appeal of the company's on-premise coffee and beverage product.

1997 2003 CAGR

Total Revenue $132,614,000 $491,549,000 24.40%

Net Income $2,427,000 $33,478,000 54.86%

Number of Stores 116 276 15.54%

KKD's strategies have successfully exploited its business model's revenue sources. As a measure of its success, KKD's total revenues from fiscal year 1997 - 2003 shows a compound average growth rate (CAGR) of 24.4%, which is above average when compared to industry standards. The net income growth rate of 54.86% is exceptionally attractive and clearly shows the profitability of the current strategies. The increase in the number of stores is quite lagging and this is an indication of KKD's expansion potential.

SWOT ANALYSIS

Strengths

♦ Customer passion for Krispy Kreme donuts and the valuable word-of-mouth advertising it provides.

♦ The company's growing brand image and reputation that generates strong buyer appeal.

♦ Vertically integrated value chain that supplies proprietary doughnut-making equipment, mixes, and coffee products and ensures quality and consistency.

♦ Ability to attract top caliber franchisers that helps with expansion at reduced company risks.

Weaknesses

♦ A product with little or no nutritional value that does not appeal to increasing health-conscious consumers.

♦ Limited number of product offerings that fails to attract customers who are not particularly interested in eating doughnuts.

♦ A product and strategy that is easy for rivals to duplicate (Lack of sustainable competitive advantage).

♦ Heavy reliance on franchisers in expanding nationally and internationally.

Opportunities

♦ Reasonably attractive growth rate of the doughnut industry