Business
External and Internal Environments:
The Case of Krispy Kreme Doughnuts Inc.
I. Company Profile and Operations Overview
Opening its doors on the 13th of July 1937, the history of the company began with its founder Vernon Rudolph during the time of the Great Depression. Working in his uncle Ishmael Anderson, they bought the rights to a yeast-raised doughnut recipe together with a bakery from French Chef Joe LeBeau who carried the recipe with him from New Orleans. Rudolph took the recipe when he left the family business and started his own bakery business in the historic Old Salem, North Carolina which he named as Krispy Kreme (Calegari, 2010; Krispy Kreme Doughnuts, 2016). The original operations strategy of Vernon Rudolph included the supplying of fresh doughnuts to local business like hotels, cafés and restaurants. However, according to Krispy Kreme Doughnuts (2016), the delicious aroma of the cooking doughnuts have attracted passers-by in the streets and have begun asking if they could readily buy hot doughnuts from the store. In order to adjust with the new stream of consumer demand, Rudolph created a hole in a portion of the store’s outside wall and started selling hot doughnuts to customers on the sidewalk. From here, the popularity of Krispy Kreme’s Original Glazed Doughnuts flourished.
According to its most recently available report to the US Securities and Exchange Commission (Krispy Kreme Doughnuts Inc., 2016), as of January 31, 2016, Krispy Kreme Doughnuts Inc. have a total of 1, 121 stores globally. Of these stores, 116 of them were direct company stores in the United States, 181 were US franchise stores, while the remaining 824 were franchise stores situated all over the globe.
In terms of its resources, capabilities and core competencies, Krispy Kreme sells its products through two primary channels: on-premises transactions and consumer packaged goods (CPG). In terms of on-premises transactions, this includes all of the sales derived from walk-in and drive-thru customers in company and franchise stores, and the discounted sales made by community organizations selling doughnuts as part of their fundraising efforts. On the other hand, CPG refers to the sales of doughnuts and other sweets to customers via partner establishments such as grocery stores, convenient stores, and mass merchants (Krispy Kreme Doughnuts Inc., 2016).
The business, in general, has four specific business segments from which it derives its revenues: company stores, international and domestic franchises, and the Krispy Kreme supply chains. The business’s company stores and domestic franchises are responsible for selling doughnuts and complementary products via on-premises and CPG primary channels through their satellite shops and factory outlets. Its complementary products include Krispy Kreme exclusive coffee beverages and souvenir items such as mugs, planners and so on. Its international franchises, on the other hand, are responsible in selling doughnuts and other complementary products using the on-premises and kiosk channels to international clientele. Lastly, the Krispy Kreme Supply Chain segment is responsible for the production and manufacturing of doughnut mixes, and doughnut making equipment. It also provides revenue to the firm by selling equipment and supplies to company and domestic franchise stores (Krispy Kreme Doughnuts Inc., 2016).
As further noted in its 10-K Report submitted to the US Securities and Exchange Commission, Krispy Kreme takes into account its brand elements which it perceived as among its core competencies in the business. These include (1) its one-of-a-kind taste especially its hot line of Original Glazed Doughnuts, (2) its Doughnut Theater which allows its customers to have a multi-sensory engagement with the process of making Krispy Kreme’s prized Doughnuts, (3) the Hot Now Sign of its Original Glazed Doughnut line which acts as a contributor in boosting sales and customer traffic, (4) its role is connection and sharing due to Krispy Kreme’s for-sharing per dozen doughnut packages, (5) its role in supporting local and fundraising events, and (6) its long-lived heritage for 78 years of producing unique and quality doughnuts (Krispy Kreme Doughnuts Inc., 2016).
Based on the details disclosed by the company to the SEC, the primary activity of Krispy Kreme is mostly concentrated on the production of doughnuts for sale to consumers and the sale and manufacturing of ingredients and equipment for current and potential franchises. With the availability of Doughnut Theater and the Hot Now Sign for Original Glazed Donuts, the greatest value created by the brand is the assurance of the freshness of its doughnuts. Being in the industry for 78 years and counting, its freshness assurances have been providing the greatest value to its consumers for the longest time. In fact, in the history of the business, the decision of Rudolph to sell doughnuts directly from his bakery was actually rooted on the public’s demand for hot doughnuts. With this, the current system of production is no longer in need of further significant changes. However, given its international exposure, it would be better to adjust or provide additional product offerings of the international franchises based on the preferences and tastes of its consumer typical to the offering of unique products in McDonald’s stores globally. Furthermore, the most potent activity that could be subjected to improvement is the KK Supply Chain business segment which is tasked with the production of ingredients and equipment for the firm. With its operations situated only in the United States, greater assurances of freshness and quality could be assured if Krispy Kreme would opt to create supply chain segments on a continental basis in order to sustain the needs of international markets and thus increasing the likelihood of further growth in international franchises.
II. External Environment of Krispy Kreme
According to the 2015 Annual Report of the company, the Krispy Kreme Doughnuts Inc. operates under the quick service restaurant classification of the restaurant industry. The company believed for successive instances as stated in their annual reports that the quick service restaurant or QSR classification by which they belong into a generally less vulnerable than the more upscale casual dining segment since the latter is often foregone during periods of tight budgets (Krispy Kreme Doughnuts Inc., 2015). However, as compared to other quick service restaurants, Krispy Kreme mostly offers doughnuts which are often treated as a dessert. Thus, there is a possibility that the demand for Krispy Kreme Doughnuts is also more elastic to income fluctuations of consumers as compared to quick service restaurants serving full meals.
According to Dess, Lumpkin and Eisner (2006), the general environment of the firm includes six key segments: sociocultural, technological, economic, demographic, global and so on. Based on the nature of the industry were Krispy Kreme belongs, by also taking into consideration the product offerings of the business, two general environments have the potential to impact the stability of the firm: sociocultural and global.
In terms of the sociocultural aspect, the recent study conducted by the Centers for Disease Control and Prevention has determined that there has been a slowdown in the number of obese individuals in the United States. Aside from this, the USDA also noted that a 20 percent improvement has also been observed on the number of Americans transitioning into healthier diets which means the cutting back of consumption on fastfood meals (Beck and Schatz, 2014). This means that the sociocultural changes in the American society is slowly transitioning into a culture encouraging healthier diets. This is a critical aspect on sweets and fastfood businesses like Krispy Kreme whose product, doughnuts, has been cited by numerous researches like those of Jeffery et al. (2006) and Drewnowski (1992) as one of the favorite foods of Americans that contributes into their obesity.
In terms of the global aspect, the same situation of growing willingness to consumer healthier diets is occurring worldwide. With this a higher majority of Krispy Kreme’s franchises situated abroad, this places the business exposed not only to shifts in global conditions but also on shifts in consumer diets as well.
Aside from being exposed to various external general environments, the firm is also exposed to threats of competition. Using Porter’s Five Forces Model, the following factors were identified: threat of new entrants, the power of buyers and suppliers, the threat of substitutes, and the rivalry among competitors. With Krispy Kreme being in the history for more than 70 years and having its own supply chain, the threat posed by new entrants and the bargaining power of suppliers is only minimal. However, the two possible significant forces could affect the doughnut giant, the threat of substitute products and the rivalry among existing competitors.
In terms of the rivalry among existing competitors, Krispy Kreme faces competitions on regional and US-wide doughnut shops like those branded as best doughnut shops in every state featured in the article of Avakian (2015) like The Heavenly Donut Co. in Alabama, Union Square Donuts in Massachusetts and so on. Likewise, the business also faces threats of substitution from industry giants like Mister Donut and Starbucks who is currently serving more snack and pastry offerings than Krispy Kreme together with a good cup of coffee. With the aims of gaining the loyalty of consumers, the threat of competition and substitutes are typical issues common among all firms across the food industry. These could be mitigated by the aggressive expansion of stores in the US market and the development of more attractive doughnut products, including potential options of improving complementary goods like coffee as well.
III. Assessment and Recommendations
Based from all of the details discussed pertaining to the internal structure and the external forces influencing the business of Krispy Kreme, two strengths and weakness were observed. In terms of the business’s strengths, these include its length of stay in the industry which caters to the possible of greater experience in the industry and a wider set of loyal customer, and the assurance of freshness in its doughnut offerings. The aforementioned were branded as the company’s greatest strengths since these factors brought in the beginning of the demand based on the firm’s history and are still its most sought after asset up to the present. In terms of the weaknesses of the company, as mentioned earlier, these include the isolated supply chain and the overwhelming share to total store count of its global store franchises. In order to further take advantage of Krispy Kreme’s strengths and mitigate its weaknesses, it would be recommended to explore the options of building supply factories to serve continental markets. In this way, the global segment will be able to receive a much fresher supply of goods.
On the other hand, the growing concern over the transition into healthier diets of consumers is the biggest threat facing the business. In order to mitigate this, the company could explore the possibilities of reducing the sugar content of its donuts or creating a healthier product line. This could be applied as the firm takes advantage of opportunities in unexplored markets.References
Avakian, T. (2015, November 5). The best doughnut shop in every state. Business Insider. Retrieved from http://www.businessinsider.com/best-doughnut-shops-in-the-us-2015-11
Beck, M., & Schatz, A. (2014, January 16). Americans' eating habits take a healthier turn, study finds. The Wall Street Journal.
Calegari, M. (2010). Financial analysis of Krispy Kreme’s earnings forecasts, joint venture investments, and franchise repurchases. Issues in Accounting Education, 25(1), 85-118. doi:10.2308/iace.2010.25.1.85
Dess, G. G., Lumpkin, G. T., & Eisner, A. B. (2006). Strategic management: Text and cases. McGraw Hill.
Drewnowski, A., Kurth, C., Holden-Wiltse, Jeanne, Saari, J. (1992). Food preferences in human
obesity: Carbohydrates versus fats. Appetite, 18(3), 207-221.
Jeffery, R. W., Baxter, J., McGuire, M., Linde, J. (2006). Are fast food restaurants an environmental risk factor for obesity? International Journal of Behavioral Nutrition and Physical Activity, 3(2).
Krispy Kreme Doughnuts Inc. (2016). 10-K Report. Retrieved from http://www.sec.gov/Archives/edgar/data/1100270/000120677416005268/kkd_10k.htm
Krispy Kreme Doughnuts Inc. (2015). 10-K Report. Retrieved from
http://www.sec.gov/Archives/edgar/data/1100270/000120677415001119/krispykreme_10k.htm
Krispy Kreme Doughnuts. (2016). Our story. Retrieved April 26, 2016, from https://www.krispykreme.com/about/Our-Story
