Table of Contents
Introduction p.3
1. Company Overview p.3
2. Companys mission and vision p.5
3. External analysis p.6
3.1 The macroenvironment p.6
3.1.1 Demographic environment p.6
3.1.2 Economic environment p.7
3.1.3 Natural environment p.7
3.1.4 Technological environment p.8
3.1.5 Political environment p.8
3.1.6 Socio-cultural environment p.9
3.2 The industry p.9
3.2.1 Generic environment p.9
3.2.2 Industry attractiveness p.10
3.2.3 Industry structure p.11
3.2.4 Competitive environment p.13
3.2.4.1 Dunkin Donuts p.13
3.2.4.2 Starbucks p.14
3.2.4.3 Grocery Stores p.15
3.2.4.4 Bakeries p.15
3.2.5 Rowes Balance of power p.16
3.2.5.1 Bargaining power of suppliers p.16
3.2.5.2 Bargaining power of buyers p.16
3.2.5.3 Barriers to entry p.16
3.2.5.4 Threat of substitute products p.17
3.2.5.5 Industry competitors p.17
3.2.5.6 Innovation p.17
3.2.5.7 Growth p.17
3.2.5.8 Management p.18
3.2.6 Market assessment p.18
3.2.7 Opportunities and threats p.19
3.2.8 Scenario building p.19
3.2.9 External factor evaluation (EFE) matrix p.20
Introduction
This present paper will look into Krispy Kreme Doughnuts external environment and the
various factors affecting its business in its industry sector.After a brief overview of the
company and its situation, the industry and the market will be analyzedin details. Yet, it is
important to note that Krispy Kreme has recently gone through various problems and that
the change of its CEO might affect its overall business strategies. This present report has
therefore been based mainly on information published before the change of CEO, yet has
tried to incorporate possible new aspects.
1. Company overview
Krispy Kreme Doughnuts (KKD) is a restaurant services company that offers 25 types of
doughnuts, a coffee line, espresso-based drinks, frozen beverages and milks. The company
produces 7,5 millions doughnuts a day, 2,7 billions a year. In addition to 390 stores in 45
states, the company sells its doughnuts in supermarkets, convenience stores and other retail
outlets throughout the United States. Since early 2005, the company expanded
internationally with stores in Mexico, Canada, the United Kingdom, Australia, South
Korea and Spain. Krispy Kreme employs now 3913 people and has its headquarters in
Winston-Salem, North Carolina.
In 1933, Vernon Carver Rudolph bought a doughnut shop in Kentucky from a French chef,
as well as the chefs secret doughnut recipe. Krispy Kreme was born. The company started
selling doughnuts to local grocery stores, yet as people walked by Krispy Kremes factory,
they started asking to buy directly the hot doughnuts. Rudolph therefore cut a hole in his
wall to accommodate his customers. Over the years, the doughnut-making process became
automatic and outputs grew. In 1976, Beatrice Foods Company of Chicago acquired the
company, which
was bought back six years later by a group of franchisees led by JosephA. McAleer. A
renewed focus on the doughnut experience became a priority to the company, with the
introduction of “doughnut theaters,” where consumers could watch the doughnuts being
made and glazed.
In 2001, KKD acquired Digital Java Inc., a small coffee company that offered a wide array
of hot and cold coffee-based and non-coffee-based beverages. This acquisition was mainly
sought to provide a genuine coffee experience to the customers, but also to increase Krispy
Kremes vertical integration, allowing it to control the sourcing and quality of its coffee,
while broadening its beverage offering. In April 2003, Krispy Kreme went on acquiring
Montana Mills Bread Co., a bakery chain offering more than 80 types of bread, muffins,
cookies, brownies and other treats, to complete its range of products and develop a
bakery-caf* strategy.
The company also opened doughnut-making retail stores within Wal-Mart supercenters,
where consumers can buy fresh products. Other stores have doughnuts delivered several
times a day from the nearest factory store.
Krispy Kreme recently installed an Internet portal designed for employees use. It provides
employees with data and quick and secure delivery application. In 2003, KKD started
using Network Appliance storage systems, in order to maximize storage resources and
increase efficiency. It also allows KKD to reduce costs and increase productivity.
At the end of 2001, Krispy Kreme opened its first store outsidethe United States, in
Canada where KremeKo, Inc. is the exclusive developer. Since then the company has
expanded to other international locations.
Although the company had had constant growth over the past years and had expanded at a
rapid pace, its profits have not met expectations in 2004 due to growing consumer tastes
for low-carb food, according to the company. It is still showing important profits though.
Figure 1 illustrate KKDs revenues, while figure 2 show KKDs net income from 2000 to
2004.
Figure 1: Krispy Kremes revenues (2000-2004). Source: Krispy Kreme annual reports.
Figure 2: Krispy Kremes net income (2000-2004). Source: Krispy Kremes annual reports.
The company faces now a SEC (Security and Exchange Commission) investigation and
more than 20 shareholder lawsuits about misreporting profits and failing to issue a profit
warning as soon as it knew that its profits would fall short of predictions. The company is
also accused of “channel stuffing”, a method consisting of delivering more doughnuts to
the suppliers than ordered at the end of a reporting period, in order to boost revenues and
meet projections, and then taking back the unsold doughnuts at the beginning of the next
period.
As a result, its usually well-performing stock has dropped. It traded around 33 dollars in
May 2004. Now it is at around 6 dollars! It shows how the company has declined in the
eyes of the market. KKD announced the elimination of more than a hundred jobs and
major restructuring changes within the company,
with the replacement of Scott Livengood by Stephen Cooper as CEO. The company plans
on selling and closing down the Montana Mills locations that are underperforming and on
which the company is losing a lot of money.
2. Companys mission and vision
KKDs business is high-volume sales and production of its 25 varieties of doughnuts. Its
commitment to quality, affordability, customer service and local community involvement
has created a faithful enthusiastic customer base. Its doughnut theaters and quality
ingredients differentiate the company from others. It is currently drafting a mission and
vision statement.
KKDs doughnut-and-coffee shop concept functions well in locations accommodating
drive-through and the company is planning on expanding its presence in locations with
substantial customer foot traffic, such as airports, malls or casinos. As the company has set
up stores in urban and largely-populated areas, leaving small communities out, it plans on
expanding in markets with fewer than 100000 households. It will also continue its
international implementation. The company plans on extending its beverage program, as it
believes it will bring substantial new sales. It also pursues a penetration strategy with
off-premises sales in grocery stores and supermarkets to increase its visibility and
customer base.
The company expanded rapidly over the years, but its overexpansion (notably through the
acquisition of Montana Mills) and mismanagement have led to the recent decline of the
company in the market.
The next months should witness major changes within the company.
3. External analysis
3.1 The macroenvironment
The following analysis of the macroenvironment does not take into consideration the
specificities of the international markets that Krispy Kreme has recently entered or plan on
entering. Indeed each international market has other economic, social, political and
cultural caracteristics and therefore should be assessed separately to take into consideration
the many factors influencing businesses. This analysis thus focuses on the American
territory where KKD is mainly present, while underlying some key factors and changes
that have been witnessed more globally as well. It is important to keep in mind that each
international market has another culture, habits and values and therefore each has to be
assessed on a separate basis.
3.1.1 Demographic environment
The American population counts a little less than 300 millions people, while the world
population totals over 6 billions individuals (and it is growing quickly). The population is
getting older. Individuals aged 65 and above in the United States will account for 18.5% of
the whole population by 2025, which forecasts major shifts in consumption patterns and
thus strategic orientation of businesses as well. Nowadays, the United States face a
growing mix of ethnicities. Caucasian people account for the majority of the American
population, closely followed by Hispanics, who will reach 15% of the population by 2021.
There will soon be no majorityin ethnicities.
Households patterns are changing. There are more people living alone and more
restructured households after divorces and remarriages.
The populations migration is increasing, especially towards the “Sunbelt.” Areas such as
Nevada, Arizona, Colorado and Florida see an increase in people arriving. On the contrary,
states such as North Dakota, West Virginia, Iowa, Louisiana and Pennsylvania see many
people leaving.
Overall, the American population is greatly using the Internet for purchases, except for
clothing. There is an increasing number of two-income households. And people also place
great importance on time. They are therefore willing to pay more for convenience.
3.1.2 Economic environment
Like other countries, the American economy is slowly recovering from a recession.
Consumer confidence and disposable income are the lowest in a decade, whereas
unemployment and consumer debt are the highest in a decade. Stock prices and interest
rates are both low.
The American GDP growth has been the highest among G7 countries and reached 11.649
trillion in 2004. Following a period of sluggish growth and massive policy stimulus, the
economy has now enjoyed nearly a year of strong expansion, growing by about 4.4%. The
economic recovery has broadened, spreading from spending by households and
government to business capital formation. Yet significant downside risks to this positive
