Krispy Kreme

Marketing Audit

MKT 551/Marketing Management

Jason Lamar Floyd

Professor Tonya Boddie

January 30, 2006

I. EXECUTIVE SUMMARY

Krispy Kreme's recent success has left many individuals in awe. This study attempts to de-mystify how Krispy Kreme has come to dominate the doughnut world and what problems lie ahead in the future. The tools used in this examination will begin with the history of Krispy Kreme. Then an external and internal analysis will dissect Krispy Kreme's current market and what steps Krispy Kreme is taking to compete in that market, including a look into competitors. Krispy Kreme provides equipment, services, and supplies to franchisees and doughnuts to consumers in a fashion similar to those of McDonalds and Yum! Brands For a healthy audit of Krispy Kreme, it is appropriate to analyze (1) the health of the specialty foods industry in which the company competes and derives its revenues and (2) how well the company is competing and deriving revenues. The accounting analysis will assess whether the company's accounting procedures and disclosure policy are beneficial to stakeholders. Finally, I will research financial data of Krispy Kreme, using relevant data and ratios to assess the position of the company.

These problems include Krispy Kreme's slow movement into international markets. Competitors such as Dunking Doughnuts are in the process of establishing markets in countries using a multi-domestic strategy. This could cause problems when Krispy Kreme inevitably moves into its international role. Krispy Kreme also ties up capital in inventory costs. Taking almost double the time of the industry average to turn over inventory wastes capital that could otherwise be used for store improvement or capital investments. The next threat faced by Krispy Kreme is its undiversified product line. While established restaurants use changes in product lines to attract new customers, Krispy Kreme has relied on it's core product line combined with small seasonal changes to maintain revenue. All of the problems found by this examination will be explored in more depth throughout the paper. This analysis will focus on product diversification as a means to securing market position and sustaining a competitive advantage in the future presence of increasing competitive rivalry.

The donut industry operates in a slow or standard cycle market, therefore there is increasing competition among firms, and they each have incentives to be first movers in employing innovative ideas to produce competitive advantages. Carefully observing and responding to the actions of competing firms is important for them to stay ahead of the competition. Krispy

Kreme, like many others attempts to differentiate their products based on quality, taste, and the Krispy Kreme experience.

TABLE OF CONTENTS

Page

Environmental Aspects 5

SWOT Analysis 10

Marketing Section 12

Conclusion 21

References 22

II. Environmental Aspects

There are several barriers to entry including supplier relationships, significant capital investment, and brand development; all of which protect incumbent companies. Mom-and-pop shops can start up quickly and easily, but larger-scale entrants must invest large amounts of capital in order to compete with larger companies, like Krispy Kreme. Companies within the industry have established brand identity with both customers and non-customers, therefore making the threat of entry low. Although new companies can break into the industry with the appeal of new products and lower prices, they take a significant risk since companies that are already in the industry are more powerful and established. Krispy Kreme has succeeded in building a strong brand identity among its customers throughout several decades of business. Krispy Kreme's goal was to bring its product outside of North Carolina to customers all over the United States, and management did so successfully, forging a strong company within a highly competitive industry. Customers do not pose a significant threat to Krispy Kreme because they are numerous and widely dispersed. Krispy Kreme franchises must buy from the franchising corporation, which guarantees some level of sales. As purchasers, franchisees still have only limited bargaining power because they are locked in through a large investment. Another significant factor is the value of the product to the customer. While food is essential for living, the products offered by Krispy Kreme are dispensable, and for leisure consumption only. However, increased profitability in the industry suggests that people are becoming more dependent on fast food and specialty restaurants than they have ever been.

Large and small companies compete fiercely for market share in the industry. Therefore, the prices and perceived value of products are crucial to company performance. There are no significant exit barriers for firms in the industry. However, exiting the primary arena of competition is not feasible for most companies because of the large franchising base and the futility of abandoning core competencies derived from years of experience.

Economic

The US economy is currently recovering from a recession. Despite the poor economic conditions, Krispy Kreme managed to grow 15% in 2001 with $394 million in revenues ending the fiscal year (2/3/02). 10 Krispy Kreme however is in a low cost industry therefore the rise and fall in the market does not affect their revenues as significantly as higher priced luxury goods.

Sociocultural/Global

If and when Krispy Kreme decides to go global they will enter a whole new world of adaptation to different markets. They will no longer be able to offer their staple hot fresh plain glazed doughnuts and expect them to sell in every market. France for instance has built a world reputation on fresh baked goods; therefore their key branding technique would