Krispy Kreme Case Study

Krispy Kreme

Industry Environment

Krispy Kreme (KK) operates in two industries, both of which are highly competitive. The QSR side of the business has low switching costs, moderate brand loyalty, and at the local level especially there are few barriers to entry. At the national level, barriers to entry are much higher, but intensity of rivalry, especially between Krispy Kreme and Dunkin Donuts, is high. This affects pricing power, though KK has been able to offset that by successfully differentiating its product. This line of the business was the source for most of the issues that plagued the company after it expanded too rapidly.

The second key element, besides the intense competition in the industry, is where the industry fits in the context of consumer choice. Aside from competition, consumers could also choose not to eat doughnuts. An aging population more concerned with health, the Atkins diet fad, and the declining novelty of Krispy Kreme challenged the brand. It needs today to find loyal customers to serve as the foundation for building a business for the long-run.

Overall, the attractiveness of the industry is minimal. This is a tough place to make a business. Dunkin is massive. Tim Horton\'s is the second-largest doughnut chain in the US, but is wildly popular in Canada, which supplies it with a steady cash flow for expansion. Mom-and-pop shops have low barriers to entry and have proven formidable competitors for any one individual KK store. The margins are small once the novelty factor wears off, and because consumers have low switching costs and many potential substitutes, Krispy Kreme has only limited bargaining power with which to influence consumer decision-making. Doughnuts are not an attractive industry.

Core Competencies

By all accounts, Krispy Kreme does doughnuts well. The flagship product has proven popular among a wide range of audiences, so clearly product serves as a strength. This is a doughnut that offers differentiation. That differentiation allowed it to expand in the past, provides much of the brand reputation today, encourages repeat visitors, and allows Krispy Kreme to charge higher margins. There are even black markets for Krispy Kreme (Linthicum, 2017)..

Another core competency is in the company\'s marketing. It had a couple of big marketing wins early, particularly with the Hot Donuts sign, and enjoyed more success during the company\'s boom. That boom was scuttled more by internal issues than it was by marketing -- the marketing of Krispy Kreme during that period was strong, and could have continued with some of the momentum had it not been for other the accounting and governance problems, and issues with the franchisees.

Weaknesses

The biggest weakness that Krispy Kreme faced -- and to an extent continues to face -- is with its talent pipeline. The company grew too fast, and did not have the managerial talent to keep up with that growth. The issues it faced during that period -- governance, franchise relations -- were directly the result of inexperienced and incapable management. Unfortunately, the company is not nearly as attractive as many other QSR companies, in part because of these issues, and will continue to lag in attracting top industry talent, to its detriment.

Another weakness that Krispy Kreme has is actually with the reputation the product has for being unhealthy. This is a problem because it dissuades many people from seeking out its products. Yet at 200 calories, the regular glazed is not out of step with other snack food. It\'s not healthy, but neither are a lot of other snacks, and one could do much worse than Krispy Kreme. The reputation is in part because of the product\'s richness, but creates issues in trying to appeal to people even as a decadent treat.

Firm Performance

Recent firm performance is unknown, as KK is part of a privately-held group and no longer publishes financial statements. The company had executed a turnaround plan under James Morgan, and that had boosted sales and optimism at the company, as it turned a healthy profit in 2011 for the first time in several years. The company still operates with a differentiated strategy. The corporate strategy is focused on a mix of franchising and company-owned stores. There are international markets, such as Australia and Canada, and Krispy Kreme is still operating in both QSR and the packaged market. So the company retains some market reach and flexibility to respond to shifts in demand, but may also lack of focus.

Alternatives

The first potential alternative for Krispy Kreme is to continue down its current path. The downside is that this strategy was designed for turnaround, and reliant on Morgan for execution. That raises questions about the sustainability of the strategy -- it looks good based on past performance but may not be the most suitable option moving forward.

The second potential alternative is to add new products. Most competitors focus on a mix of coffee, donuts and meal items. Krispy Kreme could either add lunch options, improve its coffee with espresso drinks and the like, or otherwise pursue menu expansion to attract broader markets. This does not really differentiate the company, but allows it to maintain level with the competition, so it is more of a defensive strategy, conducive to the short run rather than the long run.

The third alternative is to sell to a private firm. This is what the company did. The key is that the company is no longer beholden to shareholders with short-run interest, and can take the time it needs to set out a long-term growth strategy. Without having to answer to short-term interests, the company is in better position to make long-run strategic changes and investments.