Krispy Kreme's strategic challenges in product diversification and expansion

Krispy Kreme Case Analysis

Krispy Kreme Doughnuts Inc. certainly seemed in an excellent position in the doughnut business at this moment, however, both analysts and managers of the company have been wondering whether the high level the stock had reached could actually be sustained by the sale of doughnuts and whether in the future there is a possibility that the company's stock and, subsequently, its value, will be dropping.

Indeed, the stock exchange market had reacted to the low diversification of the company and many were keen to speculate the fact that Krispy Kreme was practically a "single- product concept," with only a limited lifespan, and many turned into stock short- sellers.

As such, I will be briefly analyzing the strategic issues that lay with the company at this moment. I will be then having a look at the internal environment, including a strength and weaknesses thorough analysis. The external environment will include threats and opportunities, as well as general remarks on the doughnuts market, on the competitors, etc. Finally, the issues that have been raised in this paper will have several recommendations in the end.

Strategic issues

The most important thing, as I have already suggested in the paragraphs here above, is the fact that the company is perceived as being a single- product company. Of course, there have been several diversifying attempts, coffee being the most serious of all, however, the company is still perceived as being a doughnut producer and that's about it.

If we look at the rivals in the business (and we will be analyzing them closer in the external environment part), we will notice that the product portfolio of Dunkin' Doughnuts, for example, is much larger and much more diverse. 50 varieties of doughnuts (compared to only 20 for Krispy), other things like muffins or brioches and especially coffee. Indeed, even if associated with doughnuts, Dunkin' Doughnuts makes excellent coffee and has formed a serious package doughnut + coffee that it sells to its customers. In this sense, the first strategic issue that needs to be addressed is the company's product portfolio: obviously, this needs to be expanded, but one also has to decide on how to expand it.

On the other hand, there is the geographical expansion of the company, which, as we have seen, is considered by the top management. However, this is something that needs to be considered carefully: an international expansion implies a high level of costs and the negative consequences, in case it doesn't succeed, may be quite catastrophic for the company.

A third strategic issue that needs to be analyzed and considered relates to the distribution system and to franchising. Is this system efficient? Can it be adopted in the event of an international expansion? These are strategic issues that the company needs to deal with.

So, we may resume by saying that there are mainly three strategic issues that Krispy will need to look into and decide on its future. The first one relates to its portfolio of products, with a low degree of diversification. The second one refers to the international expansion that the company has been planning for a period of time, while the third issues regards franchising and the distribution system, as well as the means by which this can be adopted in the opportunity of an international expansion.

Internal Environment- Strengths and Weaknesses

The company seems to have many advantages in its behalf, all residing in the company's strengths. The first and most important of them is the "enthusiasm and loyalty of the customers." Indeed, throughout the case study, this has been more than obvious. It seems to me that Krispy Kreme has managed to build from its founding onwards, a loyal clientele, a clientele which will always choose a Krispy Kreme doughnut over any other doughnut. For these people, the doughnut itself is the most important thing and they will probably never be influenced by things like Krispy Kreme coffee or other products.

Of course, this loyalty is based on the product itself, whose qualities have been appreciated throughout the decades and which has actually built the company's fame. In this sense, probably the most important strength of the company, strength on which everything else is built, is the product.

Another strength worth mentioning is the absolutely untraditional, but highly efficient system of advertising. I need to insist as little on this issue, because the system is truly magnificent.

As we have seen, the company has spent very little money on advertising and had relied more on "local publicity, product giveaways, and word of mouth." This is the first advantage: generally, advertising campaigns are extremely costly and it is often the case that they turn out to be rather less effective. However, Krispy Kreme has invested in its clientele by offering product giveaways and by cultivating a sort of familiar intimacy. Indeed, the word of mouth publicity seems highly effective here. We tend to have the picture of small cities in the Midwest, where everybody knows everybody else and where it is easier to sell by a type of direct marketing.

It is quite interesting to note that, even if it has not paid for such media campaigns and it has decided on cheaper forms of advertising, the company's events have always managed to be covered by local media. We have examples where, at the launch of a new store, several local TV stations came to cover the event. This was not only the case in the Midwest, as we have seen with the Buffalo, New York example. As such, we may conclude that the company has managed to use an advertising strategy that costs little and reaches its original goal: keep the customers one already has and bring new customers.

The third strength I have noticed in the case study is that the company seems to have a sound financial situation. Indeed, the IPO in 2000 raised enough cash to pay off debts and now the company can focus on its expansion. Of course, it has decided to cease paying dividends in the period to come, which I have considered a weakness and will discuss it further below, however, it is obvious that the company has no financial problems and that it can concentrate on its expansion.

Of course, nothing can be perfect and Krispy Kreme has a series of weaknesses that it needs to consider. The foremost of them all, which I have previously mentioned, relates to its portfolio of products. Indeed, the company seems to rely almost exclusively on its 20 varieties of doughnuts and all its attempts to diversify its portfolio of products have not been entirely successful.

Finally, a fourth strength that the company has resides in its distribution and franchising system. This seems to have brought the company many benefits. First of all, certain revenues have come from this strategy and the company managed to implant itself in different regions of the United States with little cost and for a safe revenue. Second of all, people became acquainted with the Krispy Kreme name with this method and it has thus proved an efficient marketing method as well.

For the moment, the company seems to be doing extremely well and is expanding based on its product alone. However, as the markets have been keen to sense it, this may be short lived. Studies and the general trend have shown that a company relying on a product only will not have a long way to go. Even more worryingly is the fact that the stock market has already begun to underline a downwards trend and people began to sell short. As I have mentioned before, the company's product has a strong clientele, an efficient advertising strategy and it is selling quite a lot. However, it needs to pay attention at signs from the markets and it needs to reconsider its product portfolio strategy.

A second weakness I see for Krispy is the fact that it has decided to cease paying dividends. Of course, this is for a noble cause: international expansion, however, it may cause difficult tensions within the shareholders. Given the fact that the stock price will probably be going down in the near future and that the company is no longer paying dividends, there may come a time when the shareholders will be asking themselves what the profit of investing in the company actually is.

Recommendations

Having analyzed the company's strengths, weaknesses, opportunities and threats, as well as the strategic issues revolving around the company's future, we are now able to make several recommendations for the company's management.

I will insist on a theme that has been my thesis all along: the company's portfolio of products needs to be expanded and diversified. You cannot rely on a single base product, because it may be the case at some time in the future that your product will no longer be liked and bought. This will not necessarily mean that it is no longer good, but will simply reflect a change in customers' preferences. As such, Krispy Kreme needs to consider either additional bakery products, such as muffins or bagels, for example, or needs to insist more on the coffee and beverage aspect.

On the other hand, we needed to consider the international expansion that the company is preparing. There are two recommendations I wish to mention here. The first one relates to the markets to be approached. These need to be carefully selected and analyzed. For example, one needs to ask oneself whether an expansion to France would be fortunate and profitable, given the fact that the company is renowned worldwide for the patisserie products it makes. Will the Frenchmen positively react to the American doughnuts? Second of all, the method of expansion needs to be considered. I tend to go with one of the proposals in the case study and support the franchising method. This has proved extremely efficient in the United States and I see no reason why it wouldn't work in similar conditions such as in Europe. Indeed, Europe has almost the same population and size as the United States, as well as a similar cultural background. It is likely that the distribution system that has paid off so well in the United States will work here as well.