The organization has been able to effectively use their large buying volume to lower the cost of supplies and reduce supplier power even further.
Bargaining Power of Buyers:
Krispy Kreme is highly vulnerable to the power of buyers, as there are a variety of substitutes and competition in the industry is intense.
However, because the industry is moderately fragmented, Krispy Kreme finds power in their strong brand name, which attracts and retains consumers. This, coupled with their variety of nearly two-dozen doughnut types has allowed Krispy Kreme to offset this buyer power better than some others.
Barriers to Entry:
The barrier to entry into the doughnut is considerable, when desiring to compete on a national or international scale, such as Krispy Kreme. Considerable capital is required to outfit stores to meet the considerable demand to be competitive and profitable. These considerable fixed costs and daily operation expenses are a significant barrier. In addition, the fact that the market is quite mature, makes entry even more difficult for new organizations hoping to build a brand name.
Entry on a local scale, however, is quite low. Ingredients are available at the local supermarkets. The doughnut making process is quite simple. However, to be a significant threat to Krispy Kreme, a higher barrier is encountered.
Threat of Substitute Products:
In the general sense of food, there are an endless number of substitute products that compete with Krispy Kreme. More specifically, there are also a considerable number of doughnut specific substitute products available. These are found in a variety of places, from other doughnut specialty retailers to grocery stores to pre-packaged food manufacturers. For this reason, price wars have been instigated and forced the industry into low profit margins.
Rivalry is quite intense in this mature market. Competitors are constantly trying to eek away small percentages of valuable market share, as there is very little room to grow. For this reason, new entrants in the marketplace find it very difficult to realize a decent return.
Krispy Kreme has been in business since 1937 and has several strengths it relies upon. Despite this longevity and because of it, a new store opening often sees long lines from eager customers, thanks to a very strong brand name. A store located in Medford set an opening week sales record of more $500,000 in sales. ("Krispy Kreme Doughnuts").
In addition, Krispy Kreme has 30.6% of the U.S. market share.
This is further complimented by the company's healthy balance sheet and cash flow. Their "debt-to-capital stands at 6.1% and models suggests that the company can post a five-year 25% EPS CAGR without taking on any more debt. The company has bought back a number of franchise systems, however, which has increased debt from $8.5 million in FY02 to $136.1 million in FY04" ("Krispy Kreme Doughnuts").
Krispy Kreme has focused on one market. They have had little differentiation in their organization, other than a fairly recent acquisition of Montana Mills. This has made the company hypersensitive to changing consumer tastes, such as the low-carb diet fad. In addition, their Montana Mills acquisition has not been as successful as originally hoped.
The final weakness lies in the lack of financial information released regarding Krispy Kreme franchises. This limited information makes it difficult to determine the true state of the franchise system, which accounts for 60% of the organization. Losses by franchisees will negatively affect the expansion is one such opportunity, especially in Asian markets including Japan and South Korea. "The company's first UK location, Harrod's in London, is generating sales of $70,000 per week. The Mexico City location opened with $219,000 in sales its first week, while the Penrith (outside Sydney), Australia unit is currently running at about $90,000 per week" ("Krispy Kreme Doughnuts"). There is also opportunity to expand domestically, as well as expand off-premises distribution.
The intense competition is a significant threat to Krispy Kreme. In addition, investors may be more attracted to investment in other faster growing sectors, now that the U.S. economy is improving. Changing consumer tastes, such as the low-carb diet craze currently gripping the U.S., is a significant threat to Krispy Kreme's carb-rich product lineup. and, finally, changing food and franchise regulations may negatively impact the company.
The generic strategy Krispy Kreme has employed is the best-cost provider strategy. With this strategy, Krispy Kreme has strived to produce a low-cost, yet high quality product. Although they are not the lowest-priced competitor in the marketplace, they do strive to deliver a superior product, exceeding consumer expectations for the price point.
In addition, they utilize a variety of complementary strategies. Krispy Kreme has employed strategic alliances and collaborative partnerships to distribute their product off-site. They have also used vertical integration and have tried acquisition with Montana Mills. These strategies have been very effective, other than their acquisition of Montana Mills. However, further complementary acquisitions and continued buy-back of franchised units could further benefit the organization.
It is recommended that Krispy Kreme continue their buy back of franchised units. With this strategy, the organization will be able to completely control all of the organization's operations.
This would have several benefits.
First, Krispy Kreme would be able to ensure their consumers receive a consistent quality product, as well as consistent training and process implementation at all levels of the Krispy Kreme organization.
In addition, the company's wholly owned units are the largest profit generators for the organization. Increased revenues could help fund further international and domestic expansion. It also may inspire stakeholder action. In that they would see how expansion into new markets and existing market expansion will profit the corporation directly.
This recommended strategy will also help Krispy Kreme address many of the objectives identified in their Balanced Scorecard. These include: Increasing revenues, increasing operation efficiencies, maintaining product quality, improving customer service time, reducing waste, improving employee retention and satisfaction, as well as providing more opportunities for current Krispy Kreme employees to be promoted from within and grow their career with the organization.
No greater economies of scale will be the result of this strategy, as franchised units currently obtain all product and equipment through Krispy Kreme Manufacturing and Distribution. and, this recommendation will be costly. However, given Krispy Kreme's healthy financial condition, which includes their respectable debt-to-capital figures, the organization is well positioned to take on this endeavor, and the benefits far outweigh the costs.
Bierce, a. Personal phone call. July 19, 2005.
Bread & Rolls in the United States." Datamonitor. July 2004. Datamonitor. Apollo Library database. University of Phoenix, Phoenix, AZ. July 19, 2005…
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