University of Luzon

College of Accountancy

A CASE STUDY ON KRISPY KREME DOUGHNUTS, INC.

A Case Study

Presented to the

College of Accountancy

University of Luzon

Dagupan City

In Partial Fulfilment

of the Requirement in Strategic Management

Abalos, Reinalyn B.

Basa, Donald Chuck C.

Cayabyab, Ronaldo Jr T.

Decano, Jessa C.

Locquiao, Michelle B.

Olermo, Allyssa Mhae C.

Reyes, Lira Daisy Camille S.

Tamayo, Mika Ann S.

Velasco, Beverly C.

BLOCK D TTH 10:00– 11:30

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Table of Contents

I. Background of the Study.................................................................................................................1

History............................................................................................................. 2

II. Introduction........................................................................................................................................4

Statement of the Problem..................................................................................5

Objectives of the Problem..................................................................................6

Scope of the Study............................................................................................7

Core Values......................................................................................................8

Mission and Vision Statement...........................................................................8

III. Analysis..............................................................................................................................................9

SWOT Analysis....................................................................................... ....................9

PESTLE Analysis.............................................................................................16

Porter's Five Forces Model...............................................................................26

Selected Financial Data based on 2015 Annual Reports...................................36

IV. REVIEW OF RELATED LITERATURE......................................................................................38

V. Alternatives Courses of Action....................................................................................................42

VI. SUMMARY AND CONCLUSION.................................................................................................46

VII. RECOMMENDATION..................................................................................................................48

VIII. BIBLIOGRAPHY...........................................................................................................................50
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I. Background of the Study

Krispy Kreme Doughnuts is one of the most widely-consumed food

products and popular branch in the world. It’s popularity in making best

donuts in the world caused the Krispy Kreme Doughnuts to expands its branch

to different places and led to the franchise of more store to mostly franchises. It

is surely an eye catching and mouth watering donuts, a must if you haven’t

tasted one especially fresh from the store, that keep customers from coming

back for more.

To adopt with customer’s preferences and beliefs in terms of their tastes,

Krispy kreme Doughnuts should have more variety of doughnut. Customers

tend to find new and suit for their taste buds. They have a well-known name,

and a signature doughnuts that customers looking for. Many competitors that

threaten the Krispy Kreme Doughnuts just like Dunkin Donuts due to a

common products. As years passed by, Krispy Kreme Doughnuts Inc. proved

that they have this charm and luck that maintains there competitive advantage

with other company. Having a strong foundation that no one really knows

what’s in them and it will forever be a mystery for everyone that is captivated

by its smells and taste.

This study is about securing growth in the markets which requires a

strong consistent image of Krispy Kreme Doughnuts as to be in touch from one

area to another where the consumer connects with the Krispy Kreme

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Doughnuts. Its operations in making and delivering products and services.

Guide to its employees for the betterment of its brand for the consumers

satisfaction. With increased global competition such operations, production,

price wars and location must be obtain positively.

History

Vernon Rudolph bought a doughnut shop in Paducah, Kentucky. He

sells it in Kentucky, Tennessee, and West Virginia, and the doughnut shop is

known today as Krispy Kreme Doughnuts was moved to Winston-Salem. Krispy

Kreme Doughnuts were sold to grocery stores at first and became popular with

customers so they requested the option to buy the doughnuts fresh and hot

from the store.

It was sold to Beatrice Foods Company in 1976 after it grew over the next

four decades. The group of franchise is purchase the corporation back from

Beatrice Foods in 1982.

Krispy Kreme Doughnuts expansion in 1996 outside the United States in

Canada. The company went public with its IPO launch in April 2000. In the

United Kingdom, Krispy Kreme Doughnuts just concocted a single, gigantic box

that holds 2,400 doughnuts. The box was part of a promotion for new “Krispy

Kreme Occasions” division that customizes doughnuts offerings for corporate

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event or special occasions, such as weddings and other celebrations. The

division even personalized doughnuts with customized, chocolate nameplates

or corporate logos. The company is happy to sell 100 of the so-called double-

dozen boxes for about $2600, they has no plans to create another box. Krispy

Kreme Doughnuts opened its first store outside the United States in

Mississauga, Ontario, Canada which is just outside Toronto. In 2013, Krispy

Kreme Doughnuts opened its first store in Bangalore, Karnataka and now there

are seven in that city. Krispy Kreme Doughnuts began opening stores in

Colombia, also in 2013. In the late 2013, Krispy Kreme Doughnuts opened its

first store in Taipei, Taiwan in 2014. Krispy Kreme Doughnuts opened its first

shop in Chennai in Southern India.

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II. Introduction

Krispy Kreme Doughnut Incorporation has been making donuts for more

than 80 years. It was founded by Vernon Rudolph in Winston-Salem, on July

13, 1937. A building in Old Salem was rented by him to make donuts and at

first he sold them to local grocery stores, but the demand soon led him to sell

his sweets directly to customers on the sidewalk through a window.

Krispy Kreme Doughnuts are fried in vegetable shortening before passing

through the process that Rudolph’s engineers invented back in the 60s which

is the waterfall of warm sugar glaze. It is surely an eye catching and mouth-

watering donuts that keep customers coming back for more since the

beginning of the business.

According to historians, the historic recipe of Krispy Kreme Doughnuts,

likely consisted of cream of fluffed egg whites, mashed potatoes, sugar,

shortening, skim milk and flour. There are also speculations that Vernon

Rudolph have bought the special donut recipe from a New Orleans French chef

and it’s now kept by them in the company vault at Winston-Salem. Up until

now, no one really knows what’s in them and it will forever be a mystery for

everyone that is captivated by its smell and taste.

Not only donuts, the chain has also been serving coffee, in its signature

green cups for decades, and offers not only one, but different variety of coffee

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like iced coffee. Furthermore, the company makes limited-edition treats to

celebrate holidays or special occasion coming up to add excitement and

additional sweets for our liking!

Krispy Kreme Doughnuts shocked us by being in the Guinness Book of

World Records. All because of having the world’s largest box of donuts

measuring over 19 by 13inches and weighing in at 297 pounds, 10 ounces.

2,700 pieces of donuts were in there!

Krispy Kreme Doughnuts was a success reporting $490 million total

revenue in fiscal year end February 2015 and 90% of it was derived from the

United States.

The company has been doing great since it started however, there will

always be ups and downs in every business. Krispy Kreme Doughnuts profit

has decreased in some quarters although, new branches have opened in

downtown Philadelphia and other location.

Statement of the Problem

A statement of the problem is a way to report the problem that needs to

solved. It is the description of an issue currently existing which needs to be

addressed.

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The study focuses on how to analyze, evaluate and identify abundant

strategies implemented by Krispy Kreme Doughnuts Inc. The outcome of this

study may be used as a citation for the betterment of the firm.

Specifically, the study seeks to answer the following objectives

 To identify what makes Krispy Kreme Doughnuts the world wide

leader in sharing delicious tastes

 To identify what external issues affects Krispy Kreme Doughnuts

 To describe how Krispy Kreme Doughnuts maintain the

competitive advantage among competitors

 To propose measure to manage competitive firm encountered by

Krispy Kreme Doughnuts

Objective of the Problem

• To help us figure out the possible or necessary implications that may

involved in the Krispy Kreme Doughnuts Incorporation. Besides this, investors

need to know that there are lots of opportunities expected to be achieved by

this popular doughnuts. In order to point out why to invest in this corporation.

• To help us address various problem about the Krispy Kreme

Doughnuts Inc. that may be encounter. To determine how healthy the

company is.

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• To improve customer satisfaction engaging with Krispy Kreme

Doughnuts Inc. which can help build relationship within the company.

• To be able to offer new possible ways and new realistic standards for

future franchisor and investors.

• To enhance the good relationship of the management in the company

as a whole.

Scope of the Study

This study was limited to determine the alternative ways to address the

circumstances the shop was facing. In addition, there are secret recipes

specially made for the frequent buyers to know. Krispy Kreme Doughnuts

products are sold via their own outlets. It is Scope of the study to analyze

Krispy Kreme Doughnuts competitive advantage among competitors, as well as

it’s financial status, business plan on managing their company’s external

issues and the ways how to address this.

Krispy Kreme Doughnuts has it's own signature doughnut and a secret

formula/ingredients that no one literally know and a well known name that

makes the company's competitive advantage with other branch.

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Core values

• Consequently

• Quality

• Collaborating

• Best company

Mission and Vision Statement

Krispy Kreme Doughnuts does not appear to have a published vision

statement. The company’s mission statement, however, is given as follow:

Consumers are our lifeblood, the center of the doughnut.

There is no substitute for quality in our service to consumers

Impeccable presentation is critical wherever Krispy Kreme is sold.

We must produce a collaborative team effort that is unexcelled.

We must cast the best possible image in all that we do.

We must never settle for “second best;” we deliver on our commitments.

We must coach our team to ever-better results.

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III. Analysis

SWOT Analysis

STRENGTHS WEAKNESSES

 Recognizable Logo and Brand  Limited menu

Name  Lacks a clear mission vision

 Fund raising statements

 Length of service in the market  Loss of uniqueness

 New cooked Doughnuts  Limited menu

 Marketable to large  Lots of food competition

demographic
OPPORTUNITIES THREATHS

 Increased fund raising  Competition due to a common

 Market expansion product

 Social media advertising  Increased health alertness

 Addition of menu variety  Customers patience

 Increasing utility and fuel costs

STRENGTHS

• Recognizable Logo and Brand Name

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Easily to recognize by others and doughnuts attached with

the Krispy Kreme Doughnuts

• Fund raising

Offer fund raising opportunities

• Length of service in the market

Reliable and devoted

• New cooked doughnuts

• Marketable to large demographic

WEAKNESSES

• Limited menu

Doesn’t suit to every meal

• Lacks a clear mission vision statements

Doesn’t have a clear and straight statements

• Loss of uniqueness

Many store that also sells doughnuts

• Lots of food competition

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OPPORTUNITIES

• Increased fund raising

Charity alliance

• Market expansion

Worldwide

• Social media advertising

• Addition of menu variety

THREATS

• Competition due to a common product

Dunkin donuts, starbucks as competitors

• Increased health alertness

It makes people to be more attentive

• Customers patience

• Increasing utility and fuel costs

INTERNAL AND EXTERNAL FACTORS

WEIGHTED

KEY INTERNAL FACTORS WEIGHT RATINGS SCORE

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STRENTGH
Affordable, high-quality doughnuts 0.09 4 0.36
with strong visual appeal and "one-
of-a-kind" taste

Market research shows appeal 0.08 4 0.32

extends to all major demographic
groups including age and income

Hot shop stores save money while 0.07 3 0.21

keeping Krispy Kreme Doughnuts
customer experience intact

Vertical integration helps ensure 0.07 3 0.21

high quality product

Product sold at thousands of 0.06 3 0.18

supermarkets, convenience stores,
and retail outlet through US

Newly cooked doughnuts 0.06 3 .18

0.08 3 .24
Marketable to large demographic

WEIGHTED

KEY INTERNAL FACTORS WEIGHT RATINGS SCORE

WEAKNESSES

Return on equity, assets, and

investments all negative in the 0.10 1 0.10
trailing twelve months; skill of
management is questionable

Management states in recent 10-K 0.07 1 0.07

that it is struggling with how to
make stores profitable

Product line slow to expand with 0.04 2 0.08

nothing outside "sweet treats" to
draw in health-conscious

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0.03 2 0.06
Advertising not aggressive enough
to appeal to areas outside
southeast of U.S. where most
stores are

Revenues down, net losses in each 0.08 1 0.08

of past three years

Shareholders have not received 0.07 1 0.07

dividends recently, and are not
expected to in near future; stock
price in state of flux

Closing stores when stores should

be opening globally at steady rate 0.06 2 0.12
to keep up with competitors'
growth

Per 10-K, continued disputes with

franchisees could hurt future 0.04 2 0.08
business
TOTAL 1.00 2.36

WEIGHT

KEY EXTERNAL FACTORS WEIGHT RATING AVERAGE

OPPORTUNITIES

Families crave convenience 0.08 3 .24

because of busy lifestyle

0.05 2 0.10
Asians love sweets and are open to
trying foreign foods

Starbucks lacks a diversified and 0.10 3 0.30

distinctive pastry line

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Dunkin' Donuts does not have hot 0.07 4 0.28

doughnuts to sell.

Many children love sweet treats 0.03 2 0.06

Tim Hortons has yet to expand 0.04 2 0.08

beyond the U.S. and Canada, and
its product line does not appear to
be competitive

South America, Africa, and 0.09 1 0.09

Southern Asia are markets to
conquer
THREATHS

Restricted cash flow from banks 0.06 2 .12

and massive layoffs have stifled the
world economy, decreasing
discretionary income

Europeans prefer their local brands 0.05 2 .10

of doughnut

Britons tend not to have cars,

which inhibits drive-thru 0.06 2 .12
customers, and their eating habits
and office etiquette differ from
Americans

Shareholders may sell Krispy

Kreme Doughnuts stock for lack of 0.09 1 0.09
returns and dividends compared to
other similar firms in the industry.

Dunkin' Donuts presently 0.12 1 0.12

dominates the doughnut market,
particularly in northeastern U.S.

Starbucks has approximately 25 0.08 2 .16

times the amount of stores
worldwide that Krispy Kreme
Donut has

People are becoming more health- 0.08 2 .16

conscious, which does not bode
well for high-sugar, high-fat treats
TOTAL 1.0 1.94

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PESTLE ANALYSIS

PESTLE analysis is extensively utilized management tool and strategic

planning. It shapes the macro business environment and it is also an acronym

for political, economic, social, technological, environmental and legal factors.

Krispy Kreme Doughnuts operates in a complicated and vigorous geographical

area characterized by regulatory changes, growing environmental activism,

collective social trends, technological changes and evolving legal system.

• Political Factor

Krispy Kreme Doughnuts should consider the latest trends in every

country’s political scenario because changes in government can possibly alter

the governments precedence regarding the development of different industries.

Frequent adjustment in government policies will result to destruction on the

business performance by rising environmental apprehension. Krispy Kreme

Doughnuts teach their staff, and demand slight experience or education and

they fund their employees minimum wage or slightly above. The company was

affected by minimum wage increases. Other political factors seemed to be the

government operation to lessen obesity, although its improbable that the

government will legislate against high fat and unhealthy foods. Political factors

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on the specialist eateries industry are few and consist mainly of minimum wage

changes and employment law changes.

Launching in countries with excessive taxation level will immediately

impact the profitability of Krispy Kreme Doughnuts. High taxation would

influence the international trade and precludes exports. However, the company

can take part in low taxation markets which will help them with the

satisfaction from high profits that could be invested in research and

development activities. Also, the company should also take a serious

consideration from the governments of the countries who are not critical about

protecting the intellectual property rights of business organizations, it will put

off the entrepreneurs from investing in organizations considering the thought

of high risk being stolen.

Bureaucracy and corruption in the business environment will have a

bleak outcome. Launching in countries with a high corruption level and weak

law enforcement will construct the business environment more and more

unforeseeable for Krispy Kreme Doughnuts by reason of jeopardized public

trust on business organizations and overall political and economic structure.

The corruption can influence various business operations, ranging from

licensing, contracting, fraudulent deals to frequent lawsuits.

• Economic Factor

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It is essential for Krispy Kreme Doughnuts to acknowledge the economic

factors or forces which involves labor market conditions, inflation, saving rates,

foreign exchange, interests rate, growth of economy, cost of living, working

hours, wage rate since they figure out the comprehensive economic

environment of the country. Combining these elements, it last greater and

inevitable impact on organization.

The continuous economic recession had stiffen the consumer from

spending and Krispy Kreme is a non-essential food product which may result

from pressured sales. An increase in interest rates will raise the value of

working capital which will denote an excessive borrowing for the company

whenever they call for expansion to oppose their competitors.

The demand and supply of labor calculates the wage rates and supply of

skilled workforce. Krispy Kreme Doughnuts should examine and foresee the

labor market conditions to recognize how it can allure talented workers and

leverage their skills to enhance their business performance. When labor

markets are adaptable, the company has the edge of higher labor productivity.

In addition, Krispy Kreme Doughnuts should evaluate discreetly the

accessibility of skilled human capital because a shortage of skilled labor can

influence business efficiency and make talent attraction and retention more

challenging.

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The economic development of a country explicitly impacts organizational

performance. Expanding economies propose utmost growth opportunities to

Krispy Kreme Doughnuts. Likewise, it is significant to comprehend the

industry life cycle phase. Launching into developed industries could possibly

be more oppressive due to market saturation than industries at the growth

stage.

The Gross Domestic Product (GDP) growth rate will analyze the Krispy

Kreme Doughnuts capacity to seek its long-term growth strategies. High Gross

Domestic Product indicates the clients potential on how they would consume

more on offered products. High unemployment suggests the availability of

surplus labor at comparatively lower wages. Operating in such a market can

lower the production cost of Krispy Kreme Doughnuts. Furthermore, the

organization should carefully consider the interest rate and its influence on

borrowing ability and attitude towards investment. The high interest rate will

encourage the attitude towards investment and increase growth opportunities.

Finally, the exchange rate fluctuation can also influence the profitability and

international trade. The high fluctuation on local currency can be a cause of

serious concern for Krispy Kreme Doughnuts.

• Social Factor

The social influence on individual businesses alter from country to

another. The social factors are important which includes population growth

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rates, safety and health consciousness, cultural aspects and various

demographic.

A social habit that is not possible to change in the future is probably

going out to eat and drink, however, clients can shift their routines from eating

doughnuts to some other sweet-based food like as ice-cream or pastries. A

social shift to eating full course meals could influence but this is unlikely to

happen in the near term.

Krispy Kreme Doughnuts should require corresponding its business

management practices when launching starting its market with high or low

power distance. The rising inequality in many countries is adjusting the power

structure, which may be alarming implications for international business

organizations like Krispy Kreme Doughnuts.

Paying attention on the demographic characteristics can aid the

organization in selecting the proper market segment/segments with high

growth potential. Changes in demographic patterns like migration trends aging

population, and socioeconomic variables have excessive significance for

international business organizations.

The online shopping behavior of consumers has been persuaded by the

occurrence of social media and e-commerce. The organization should

comprehend the online shopping behavior by evaluating all the generational

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distinction as younger consumers are more fond to shop online than older

customers. The growing use of mobile phones and social networking sites must

be considered when developing marketing and communication strategies.

Culture should be carefully though about and significant variable by

international marketing managers. Krispy Kreme Doughnuts must expand

local teams and develop local partnerships for analyzing the societal attitudes

and norms to adapt marketing strategies according to unique cultural context.

Offering luxury products at premium prices to a market where the high-end

market is considerably small in number will require the business to adopt the

niche marketing strategies. Likewise, market segmentation based on social

class may be ineffective where social class stratification is low.

The clients spending patterns are determined by their purchasing power

of money. In some societies, consuming the proposed product is considered a

status symbol, while, some people use the same items for functional aspects.

Krispy Kreme Doughnuts must spend time on comprehending the utilization

motivations and social trends that define the consumption behavior. Moreover,

the organization should also try examine the consumers leisure interests and

should focus more on enhancing the customer experience if customers prefer

experiential products over traditional product offerings.

• Technological Factor

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Technology is the primarily way of aggressiveness in the highly

competitive market field. Additionally, it drives globalization, the factors

includes environmental and ecological aspects, and available services as well

as products. An organization must innovate and be compatible with the

technologies. Due to the environment of buying and preparing foods, few

technological trends has a large impact in the industry. Nonetheless,

technology can be utilized to a enhanced efficiency, production, distribution,

and monitor the commodity market changes in real time.

Use of social media has become common in a modern business

environment. The development of information and communication technologies

has led towards the adoption of innovative marketing techniques to enhance

collaboration with customers. The business can take advantage on the

opportunities provided by social media marketing to boost business

performance. Technological trends can be exploit to begin the creative social

media campaigns for developing online brand communities.

The participation of new technologies has reduced the life phase of new

product development. Today, new products are developed quickly, and supply

chain partners have also gained more power. It persuades the organization to

progress new products quickly, increase product range diversity, integrate

flexibility into the value chain and develop healthy business relationships with

value chain partners. Research and development activities are primarily

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significant in an environment characterized by creative disruption. In that

nature, the business should invest in disruptive technologies to maximize the

profits and re-invest the profits for future disruptive technologies.

• Legal Factor

Intellectual property regulations are created to safeguard the companies

patents and valuable ideas. Failure to protect intellectual property rights can

execute in losing competitive advantage, which may weaken the positioning of

Krispy Kreme Doughnuts against other market players.

Krispy Kreme Doughnuts should abide the employee/labor health and

safety laws as some countries have strict regulations to guarantee labor safety.

Maintaining a secure work environment for the workforce is the ethical and

moral commitment of the company. Moreover, anti-discrimination laws should

be deliberately examine when expanding human resource practices as

discriminatory suits against employer harm the organizational image and affect

organizations’ ability to attract and preserve the talent.

The data protection has turn into a significant with a reason of

consumers privacy and security concerns. The business must consciously

analyze the data protection regulations to secure the customer data.

Furthermore, there are laws to set the maximum price, assures a definite

quality standard and protect consumers from fraudulent marketing claims.

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• Environmental Factor

The environmental factors is consist of everything included in factor

continuing impact or influence, the encompassing environment necessarily

resolve environmental factors. The factors involves awareness of the seasonal

or climate change or terrain variation. The analysis of the environment

including internal and external elements is vital for organization since it

influences the performance of an organization. The growing environmental

consciousness and changing climatic conditions have made environmental

analysis an important part of the PESTLE analysis.

There is a expanding trend in relation to the usage of green/eco-friendly

products. Krispy Kreme Doughnuts can adopt it as a chance and follow green

business practices to gain the trust of stakeholders. Regulatory bodies

emphasis on guarantee compliance with environmental norms is modifying the

product innovation priorities. It ought to the business to prioritize and

concentrate on marketing the eco-friendly nature of their products over

customary value propositions. The expanding environmental pollution together

with technological advancement has obliged business organizations to adopt

contemporary recycling and waste management practices. In some countries,

recycling has almost become a business norm. Some countries provides

subsidies for promoting investment in renewable technologies. The business

can have advantage from it and invest in renewable technologies to secure

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long-term sustainability. This investment will also increase stakeholder

satisfaction and expand the customer base due to enhanced brand image.

Shifting in weather and climate conditions can affect the business

efficiency. For example, the extreme weather conditions can raise the value of

activity and constrain the business to make the value chain more adaptable.

Such changes can also influence the consumers’ spending patterns, causing

the organization to revise its product and marketing strategies.

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 Entering the industry needs a high  Affordable alternative

amount of finances and venture. product/service is accessible.
 Patrons can simply change the  No switching Cost
brands due to weak or no-brand  Alternative product proposes
loyalty. similar or equal superior quality
 Provide superior handiness for and performance as presented by
customers through off-premises Krispy Kreme Doughnuts
channels like supermarkets.  The psychological switching cost of
 Product and Brand Differentiation. affecting from industry to
alternative products is low.

 Strong Competition
 Constant Market Development
 Consumable goods
 High Fixed Costs

 Low switching cost  Disintegrated and numerous

 Vertical Integrated Business with buyers
only commoditized raw materials  No switching cost however
 Guarantees constant recipe foods and drinks market are part
PORTER'S
quality andFIVE
doughnutFORCE
making MODEL of the framework of society
 Designed as a “doughnut
theater”

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The purpose of Porter five (5) forces model in real-world situation

allocate organizations to formulate sensible planned decision. Impact and

significance of every five forces is circumstance dependent. By using Five Force

analysis, Krispy Kreme Doughnuts can establish the industry charisma,

construct efficient entry/exit judgment and evaluate the influence of these

forces on their own business and competitors. In addition, the dynamic

analysis of this model discloses significant information. Krispy Kreme

Doughnuts can be merged with the Porter 5 force model with PESTLE

framework to determine the industry’s prospective future charisma. The study

can be accomplished with the aid of hypothesis. Generally, professionals

believe this model as a preparatory point, and other frameworks (like PESTLE)

are used in combination for an improved perceptive of the exterior

environment.

• Rivalry among existing competitors

The business will face extreme competition along with existing firms if

market players are strategically different and aim the similar market. The

rivalry will moreover be strong if clientele are not loyal with present brands and

it is easier to attract new regulars due to low switching costs. Competitors with

equal size and offering undifferentiated products with slow industry growth are

likely to take aggressive strategies against each other.

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The Quick Service Restaurant business possesses a selection of

firms/products including Krispy Kreme Doughnuts indirect competitors are

McDonalds and Burger King. Krispy Kreme Doughnuts direct competitors are

Dunkin’ Donuts, Starbucks Corporation, and Tim Hortons. The outsized

quantity of direct and indirect competitors in the Quick Service Restaurant

business indicates a important quantity of competition. Krispy Kreme

Doughnuts try hard to differentiate its product offerings to remain competitive.

Under the Krispy Kreme name, the business sells a “premium” private

label brand of coffee permitting the earning margins on coffee to be a lot larger

than the margins on doughnuts. Gotham Global persuades the company to

enhance coffee sales. At the recent Annual Meeting, the proposal of selling a

doughnut and coffee “combo” was recommended. Connecting coffee sales to

already-healthy doughnut sales is an excellent scheme and supposed to be

followed all the way through. The improving focus on coffee sales will set the

business up in opposition to coffee chains like Starbucks direct competitor

Dunkin’ Donuts. While these companies represent a strong market force,

consumers in the fast food and fast casual restaurant market have low

switching costs, and the unique product mix of high-quality doughnuts and

premium coffees can attract customers from rival companies.

Krispy Kreme competes in two separate markets. The first, and most

noticeable, is the restaurant industry, which is divided into three segments:

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fast food, fast-casual, and full service. The first two are primarily separated by

the quality of food and atmosphere. The businesses limited set of choices

offerings and store interior decoration suggest its place in the fast food sector,

but the quality of their doughnuts is more in line with the quality of food

served at fast-casual locations. This business has achieved well in the last

year, regardless of under performing the wide-ranging market. Restaurants are

gaining from the current trend away from at-home dining: about half of total

food expenditures of the last year were depleted outside of the household, and

the percentage is expected to rise. Krispy Kreme’s main competitors in the fast

food and fast-casual markets are Dunkin’ Donuts and Tim Hortons. Dunkin’

Donuts is privately held, with over 5,300 stores in 34 states, and foreign

locations in 30 countries. Tim Hortons was recently spun off from Wendy’s,

going public in March 2006. Product differentiation is the key in this market.

Tim Hortons is directly comparable Krispy Kreme with its goods offering of

doughnuts, baked goods, and coffee. Dunkin’ Donuts freshly established a

latest importance on their coffee-based beverages, but maintaining to benefit

from the greater part of the doughnut industry’s market share. The coffee

segment of fast food and fast-casual restaurants is an significant one.

Krispy Kreme also sells their doughnuts to supermarkets, gas stations,

and retailers (including Wal-Mart) for resale. In this market of pre-packaged

doughnuts, the company faces competition from the likes of Little Debbie,

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Hostess, and Entenmann’s. These companies have a wide range of product

offerings, extending beyond doughnuts to snack cakes, cookies, and pastries.

Krispy Kreme’s offerings are less spread out than its competitors, so promoting

the Original Hot Glazed and other strong sellers in this market would leverage

the power of the company’s reputation towards competitive sales. An issue with

off-premises sales is freshness. One of Krispy Kreme’s strongest brand assets is

the Hot Doughnuts Now sign, signaling fresh and warm products. This sign

has proven to be a significant influence on impulse purchases. Doughnuts left

on a shelf have no way of recreating the same fresh, hot experience as

doughnuts manufactured on-site. Off-premises kiosks should be redesigned to

incorporate heating technology, and have a stronger aesthetic tie-in to the

corporate brand and image. The company has experimented in the past with

such a heating technology, referred to internally as “tunnel ovens.” These

heating setups were tested in 2002 in company satellite stores as a method of

providing the Hot Doughnuts Now experience remotely. All but three were shut

down as of February 2006 due to poor financial performance and an

unfinished technology. It would be unwise to dive right back in to a proven

failure, but refining the tunnel oven and deploying it not just to satellite stores

but also doughnut kiosks is recommended. The issue of consumer preferences

for healthy foods is one that will be revisited throughout this report. It is worth

noting here that the doughnut industry as a whole has been declining in recent

years in part due to health issues.

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• Threat of New Entrants

It contemplates how new market players compel threats to the

existing market players. If the business will be cost-effective and barriers to go

through the commerce will be low, it will attract further players and therefore,

the threat of new entrants, will be high.

There is a high expense in joining the market because you need a

large amount of capital which will provide start-up cost consisting of legal cost,

marketing expense, distribution cost and licensing cost. Contrary, those

existing restaurant industry providers have a low threat of brand new entrants

because they have been thoroughly working with their specific specialization

and target sections. Krispy Kreme Doughnuts can be capable of increasing

brand loyalty by focusing on customer relationship management. It will elevate

psychological switching costs. Numerous small-scale restaurants intended

presently to capture a local market are simple to start-up because of low

barriers to entry and high profitability, but in the end, they quit for the reason

of high risk. Advance chance of failure was brought by widespread competition.

In the fast food and fast-casual sectors of the restaurant industry, there are

higher barriers to entry in the form of established brands. Nationally

identifiable names like McDonald’s, Burger King and Wendy’s bring in the

significant majority of sales in these sectors. These companies have built up

smart pricing schemes, corporate images, purchasing power, and economies of

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scale from years of success. With these business advantages and established

market presence, it is hard to start up a new business in this sector. Brand

uniqueness of Krispy Kreme Doughnut is well-known for their “Hot Doughnuts

Now” signs as well as “doughnut-making theaters” wherein their customers can

watch them frying the doughnut production process all the way through glass

window.

• Bargaining Power of Suppliers

It reflects the demands applied by the suppliers in the business by

acquiring diverse strategy like lessening the product accessibility, reducing the

quality or increasing the prices. When suppliers have extreme bargaining

power, it expenses the buyers. Furthermore, high supplier bargaining power

can enlarge the competition in the industry and lower the profit and growth

potential for Krispy Kreme Doughnuts. Likewise, weak supplier power can

create the industry attractive due to high profitability and growth potential.

Krispy Kreme provides its own supplies and equipment to its

franchises. These embody pricey inputs after labor, and as a result, supplier

power is not a significant force. The ingredients for the supplies are acquired

from various suppliers. Particularly of note, only one supplier provides the

ingredients to the company’s trademarked original glaze. Krispy Kreme

Doughnuts manufactures barely a small proportion of suppliers’ on the whole

sales and unavailability of the substitute products. Mutual franchise stores

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and company stores are essential to acquire every supplies and materials from

Krispy Kreme Supply Chain which provides foodstuffs, equipment, signage,

and uniforms. They purchase and processes the entire ingredients used in the

doughnut mixes and manufacture the doughnut-making apparatus that all

stores are necessary to obtain. It also includes the coffee roasting operations

and ships every food ingredients, juices, display cases, uniforms, and further

items to store locations on a weekly basis by common carrier. This recognizes

efficient influence when negotiating expenditure for staples such as potato

flour and sugar, by volume, and offers supplier additional bargaining power.

This allows controlled power over the cost of goods provided to the vendors,

maintaining operation costs lower for the franchisee while still allowing a

healthy profit margin. If suppliers do not distribute goods on time, Krispy

Kreme Doughnuts cannot deliver its company and franchise stores and they

would lose valuable revenue.

• Threat of Substitute Products

Accessibility of substitute products or services constructs the competitive

environment challenging for Krispy Kreme Doughnuts and other existing

restaurants. High substitute threat indicates that customers can utilize

substitute products/services from other industries to meet their needs.

Over the past two decades rivalry in the fast-food industry has been

constantly growing. There is lesser time being spent in household kitchen

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because both spouses are working in today’s environment. It is common, and

handy, to take a swift meal than traditional home cooked meal. For that

reason, it comes with no surprise that alternate products cross the casual-

dining part to gain market share of the fast-food chains. In the doughnut and

pastry shop industry there’s no difference. Price wars are initiated in attempt to

take away income from other restaurants and keep up viable growth. Thus,

Krispy Kreme Doughnuts must be aware of replacement products from

numerous diverse areas of the market place. Such substitutes demanded today

includes healthier menu items include zero Trans fats in all products. Going

organic or using 100% natural ingredient items to favor similar products.

Hence, companies in this industry must pay attention on alternate products

from many different areas of the marketplace. Krispy Kreme’s clients are

searching for tasty doughnuts at affordable prices. These clients exhibit the

identical behavior as most fast food and fast-casual customers: price sensitivity

and low switching costs. Therefore, alternative goods have a extensive power on

firms in these sectors. Advertising and promotions, as well as competitive

prices, are key tools to maintain a healthy customer base amidst substitute

goods.

• Bargaining power of buyers

It shows the force that consumers apply on the industry organizations to

obtain worthy quality products at affordable prices with outstanding customer

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service. It precisely influences the Krispy Kreme Doughnuts’ capability to

achieve the business objectives. Strong bargaining power lowers profitability

and makes the business more aggressive. Whereas, when buyer power is weak,

it makes the business less competitive and raises the profitability and growth

opportunities for Krispy Kreme Doughnuts.

The cost of switching is low and there are several of alternative products

for Krispy Kreme Doughnuts. As a matter of fact, numerous clients choose

diversity in their diet and with an increasingly health cognizant market place

wherein the spending of sweets like doughnuts is limited. Merging this with the

soaring endorsement budgets of market influential like McDonald’s, Burger

King, and Dunkin Donuts whereas clients are enticed on a daily basis to

exercise their right to switch. Krispy Kreme Doughnuts can deal with the

bargaining power of buyers by increasing and expanding their purchasers

stand. This can be able to be achieved by launching new products, aiming new

market segments and implementing the goods various tactics. Marketing and

promotional strategies can be useful. Constructing loyalty by implanting

innovation and offering exceptional customer experience can increase the

switching costs, which will eventually reduce their bargaining power. Krispy

Kreme Doughnuts can implement these strategies to strengthen its competitive

location in the market.

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Aside from selling doughnuts in its own stores, Krispy Kreme sells its

goods to retailer for resale. Within each of these retailer’s stores, there is

generally a display kiosk set aside specifically for the company’s products. This

allows the company to maintain some power in the form of branding. Krispy

Kreme has developed national accounting systems with these retailers to cut

costs of transaction, making for efficient business when prices remain slightly

above those at company stores.

Selected Financial Data based on 2015 Annual Reports

INCOME STATEMENT

Report Date February 2, 2015 February 2, 2014

Revenues $490 $460

Operating Expenses 441 413
EBIT 49 47
Interest and other benefit 0.8 1.5
EBT 48 45
Tax 18 10
Net Income 30 34

BALANCE SHEET

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Report Date February 2, 2015 February 2, 2014

Assets
Cash and Equivalents $51 $56
Accounts Receivable 28 25
Inventories 18 17
Deferred Tax 23 23
Other Current Assets 8 6
Total Current Assets 128 127
Property, Plant & Equipment 116 93
Goodwill & Intangibles 30 24
Deferred Tax 68 83
Other Assets 11 11
Total Assets 353 338
Liabilities
Short-term debt - -
Accounts Payable 49 17
Taxes 1 2
Other Current Liabilities 0 27
Total Current Liabilities 50 46
Long-term Debt 9 2
Other Liabilities 26 25
Total Liabilities 85 73
Common Stock 311 338
Retained Earnings (430 (73)
Total Equity 268 265
Total Liabilities & Equity 353 338
IV. REVIEW OF RELATED LITERATURE

The alignment of business and operating models rarely align as sweetly

as they do in Krispy Kreme Doughnut’s glaze waterfalls, melt-in-your-mouth

doughnuts, and finely tuned production lines.

Introduction for the Uninitiated

Starting at 6:00 am on Monday, November 2, 2015, hundreds of

customers lined up outside a Krispy Kreme Doughnuts (KKD) shop in Houston

with dreams of warm, glazed doughnuts glistening in their eyes. After a 26-

hour wait, customers finally entered the new store, the manager lit up the

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franchise’s iconic “Hot Doughnuts Now” sign, and Krispy Kreme Doughnuts

began luring in passersby with the sights, sounds, and smells of its signature

Original Glazed.

The Simple Beginning of a Business Model

After buying a proprietary recipe from a French chef in New Orleans,

Vernon Rudolph, the founder of Krispy Kreme Doughnuts, opened an otherwise

standard doughnut shop in North Carolina. As the story goes, passers-by were

drawn to the unique scent and taste of his hot doughnuts, so he cut a hole in

the wall, let the aroma permeate nearby streets, and began advertising “Hot

Doughnuts Now.” For decades to come, his simple business model – sell

delicious doughnuts hot out of the glaze – set Krispy Kreme Doughnuts apart

from other bakeries and doughnut shops. In fact, even until the 1996 opening

of its first Manhattan location, the company still had less than 100 stores, all

focused narrowly on perfecting and selling the hot Original Glazed.

Today, Krispy Kreme Doughnuts has 1000 stores across 24 countries,

and it has added several more ingredients to its recipe for doing business. For

example, starting in 2000, Krispy Kreme Doughnuts began selling flavored and

shaped specialty doughnuts, and in 2011, it began selling flavored coffees and

branded coffee mixers. In spite of headwinds from health trends and some

skepticism from “purists” in Krispy Kreme Doughnuts customer community

who disliked the idea of new products that wouldn’t be hot-off-the-line like the

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Original Glazed, the company continues to achieve top line and operating

margin growth.

The Evolution of an Operating Model

This story of growth and success is largely explained by the way Krispy

Kreme Doughnuts operating model decisions have aligned with or even enabled

changes in the business model.

Krispy Kreme Doughnuts built its reputation for quality and consistency

by operating for decades as a fully vertically-integrated company that invested

heavily in technology and process standardization. As early as 1950, the Krispy

Kreme Doughnuts Laboratory on Ivy Avenue in Winston Salem began

perfecting the art of manufacturing, bagging, testing, and distributing the

company’s proprietary doughnut mix to local shops. The laboratory developed

proprietary equipment like the Automatic Ring King Junior Doughnut Machine,

the predecessor to Krispy Kreme Doughnuts iconic Factory Store production

lines, to ensure each doughnut was the same size and shape.

Furthermore, as Krispy Kreme Doughnuts franchise network grew and

the company decided to outsource distribution to Sysco, it invested in

supplementary training and technology that continued to ensure franchisees

had the materials and information required to uphold quality standards. For

example, the company developed the 16-week Krispy Kreme Doughnuts

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University training program for franchisees, as well as an Information Services

Department, which creates electronic tools, reports, and forms to give the

Laboratory visibility into franchisees’ mix consumption. In these ways, even

though the company is no longer fully vertically integrated, it can still ensure

franchisees are ready to make doughnuts that are worthy of the Krispy Kreme

Doughnuts name.

Of course, a discussion of Krispy Kreme Doughnuts operating model

wouldn’t be complete without examining the Factory Stores themselves. With

Factory Stores across the US, Krispy Kreme Doughnuts realized each location

could be more than just a novelty retail store where customers watched

doughnuts move through the finely-tuned production line, slide through glaze

waterfalls, and meet them at the cash register. Specifically, the company set up

satellite stores and wholesale partnerships to which Factory Stores could sell

the specialty doughnuts that it made during off-peak times and weren’t served

hot, anyway. This operational decision was highly strategic for the business, as

specialty doughnuts justified premium prices and actually required less labor

and machine content. Krispy Kreme Doughnuts engineered a process where

the next doughnut type could be mixed while the first was on the production

line, allowing stores to run machines and sell doughnuts up to 24 hours per

day.

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In summary, while Krispy Kreme Doughnuts has moved far beyond the

Original Glazed and a literal “hole-in-a-wall” shop, it has achieved continued

growth by unlocking opportunities in its business model through operating

model innovations, and by keeping the alignment between those models as

consistent as the taste of its doughnuts themselves.

V. Alternatives Courses of Action

• Simplicity of the new product or innovation of the product

The simplicity factor analyses if the option proposed is easy to

implement. Because adopting or proposing an alternative that is difficult

to implement or takes a lot of resources with no definite outcomes is

vain. Simplicity that the staff and employees will easy to follow it. Simpl e

but attractive that will surely attracts the buyers and can also attract

new buyer to try the product.

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• Conduct financial and operational audit

Random stores of Krispy Kreme Doughnuts must conduct financial

and operational audit to determine whether the operations of the

organization are being carried out effectively and efficiently and to know

where does the Krispy Kreme Doughnuts earns the most and losses the

most. This must be done to further improve the performance of the

business.

• Minimizing cost and maximizing profit

Considering the prices of the ingredients used in making products

are increasing, Krispy Kreme Doughnts Inc. should look for some ways to

maintain high quality product while minimizing their cost and

maximizing their profit.

They can look for some alternative ingredients for the production of

their product or buying in a bulk is another way.

• Will ensure existence of the business.

Krispy Kreme Doughnut is one of the famous company when it

comes to serving Doughnut not just here in our country but in the whole

wide world. Many people are patronizing it for it gives one of a kind taste

of doughnut, it is also for all ages. By patronizing it, it will promote the

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company more and it will provide profit so that it will ensure that the

business will exist no matter what happens.

• Krispy Kreme Doughnuts must be compelled to boost their

promoting tactics.

To determine the reasons of negative ratio of incomes to expenses,

Krispy Kreme Doughnuts franchises and company owned, must

supervise a ventures extensive financial and operational audit on their

stores.

Regulating an economical, efficient and time saving of Krispy

Kreme Doughnuts supply chain.

Customer Segmentation and Product Proposition

• Sales promotion

In every business we can’t say that they won’t experience loss in

order for them to cover it they should make an extra effort in selling their

products to boost sales they should do some alternative ways to maintain

their status in the industry, for example, coupons, freebies, premiums,

product samples and others. In that case you can gain customers loyalty.

• Krispy Kreme Doughnuts must make products cheaper than the

competitors

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Cheaper products but has a high quality can attract more

customers with increase global competition such as production and price

wars cheap but quality always has a huge advantage. Also having a

cheaper price can attract customers specially those resellers. As for the

resellers alone, Krispy Kreme can gain bulk orders that can also help

introduce the product to people.

• Earn and build customer’s loyalty

Aside from creating new products/flavors based from the trends, it

is also important to build your customer’s trust and loyalty to your

business. Formulation of strategies such as promos, freebies and

discount vouchers will help to gain one’s loyalty for them to have

valuable customers, however, we can determine the loyal customers as

the one who patronize your business even you aren’t on sale. Therefore,

Krispy Kreme must ensure to have promos such discounts that adds up

satisfaction to the buyers aside from the mouthwatering products

• Increase brand popularity and make orders quick and easy

As fast growing economy, technologies now help to be popular

anytime and anywhere. Krispy Kreme Doughnuts can gain more sales

and popularity through venturing into internet marketing and selling. It

can reach lot of customers at very low cost at shortest time. Krispy

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Kreme Doughnuts can create a website that advertises and sells their

products online to be done through automatic and free membership

registration.

Members with bulk orders who are located within the area can

enjoy free delivery. Otherwise, they can simply order online and pick

their orders up at the nearest stores without the hassle of lining up,

waiting for orders, and the possibility of stock-outs for their favorite

flavors.

VI. SUMMARY AND CONCLUSION

Krispy Kreme Doughnuts have been in the food industry for a long time.

It had been through hardships and victories since then and now and have

learned from their failures and achievements. The journey of the company from

nothing to what it is now have led them to a realization as to what needs to be

done to regain control and establish stricter internal command within the

company. Krispy Kreme Doughnuts implements a differentiation strategy,

attempting to distinguish their donuts based on taste, quality and simplicity.

Krispy Kreme Doughnuts does actions that will further improve and level up

the organization to achieve their objectives and goals, actions need to be

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accounted for and policies need to be enforced for a realistic implementation of

accounting practices.

Krispy Kreme Doughnuts Inc. will not be what it is today if they have

continued the wrong decisions from the past, mistakes is truly a good teacher

and these experiences made them stronger and better and had pushed the

company to strive harder and be consistent in their services and products.

Stock sales have increased over the years from a measly $7.51 in 2005 to

reflect an increase of twelve dollars in 2015. Although this is not the $40 it saw

in 2003, it is a start to a reasonable increase that has allowed the company to

better assess its future and make adjustments to meet the needs of their

customers and shareholders.

Krispy Kreme Doughnuts is a slice of life that represents what is simple

and good about the lifestyle of today’s discerning customer. The company have

reached different places worldwide with 1,005 number of stores. Krispy Kreme

Doughnuts have been serving baked goods, soft drinks, hot beverages, frozen

beverages, and iced beverages as of now. The revenue of the Krispy Kreme

Doughnuts company is now in US$ 518.714 million (2016) and they plan to

continue to soar higher.

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VII. RECOMMENDATION

Krispy Kreme Doughnuts known all over the world because of their

product that many netizens loved it. Strengthen competitive advantage through

differentiation and having a large variety of products and services that can

captivate the heart of the customers.

Increasing customer’s satisfaction by reducing their waiting length of

time and in that case you can sell a lot, innovation of products into simple yet

satisfying with high quality to customer wants, maintaining customers loyalty

by making them feel they are valued through the products and services you’ve

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offer. Earn and build customer loyalty, admit when you make mistake, don’t

get defensive or sensitive if you get called out on something that was your fault.

Instead, use these platforms to take responsibility and resolve the issue. Be

reliable, earn a reputation for being consistent and dependable. Offer a loyalty

program, go beyond a reward system and initiate a loyalty program for

customers. Krispy Kreme Doughnuts must make product which is cheaper

than the competitor. A low-priced good offering can make a product accessible

to more customers. Offering specially-reduced prices can be a powerful tool.

Starting at a low price and gaining market share before competitors catch up

with you. And lastly, Krispy Kreme Doughnuts must have a sales promotion to

increase their sales, limited-time offers as it trigger consumers fear-of-missing-

out, brilliant sales since it promotes well with the company’s target audience,

and offer real value because customer is interested in just one thing from the

company and that is the value.

Reduce operating expense to allow individual stores to decrease cost,

thus lowering per store operating cost to a more appropriate level for sales

volume.

Develop stronger relations and control to franchises to help them

advertise new franchises in different places in order to inform people where

they can buy the product.

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Increase work efficiency in smaller workforce to minimize the expenses

and also, to save more resources.

Introduce a discount to resellers by giving discount for bulk orders. It

can help the company to spread worldwide by the help of resellers.

VIII. BIBLIOGRAPHY

Argyres, N., &McGahan, A. M. (2002). An interview with Michael Porter.

Academy of Management Perspectives, 16(2), 43-52.

Williams, B., &Figueiredo, J. (2014). Lessons from an innovation-leader and

tools to learn them. Journal of Industrial Engineering and Management, 7(4),

932-960.

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Utami, R. M., &Lantu, D. C. (2014). Development competitiveness model for

small-medium enterprises among the creative industry in bandung. Procedia-

Social and Behavioral Sciences, 115, 305-323.

https://digital.hbs.edu/platform-rctom/submission/krispy-kreme-doughnuts-

the-sweet-success-of-business-and-operational-alignment/

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