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Porter’s Five Forces Analysis of Krispy Kreme
Introduce
Krispy Kreme Company, which Vernon Rudolph founded in 1937 as a family business, is
currently a renowned international chain of doughnut stores (Ireland et al. 105). The company’s
stock hit its peak in 2003 where it was traded at $49.37 before it started sliding through most of
the 2005 (Sutorius, Jordan, and Benjamin 5). Krispy Kreme experienced major closings of
Canadian stores, New York, and even southwest and all these were prompted by the 2005 and
2006 bankruptcy. It is interesting that the company stilled managed to produce 5.5 million
doughnuts per day and about 2 billion a year in 2007 (Ireland et al. 105). Krispy Kreme has also
managed to open more than 235 stores in the United States in about 43 states (Sutorius, Jordan,
and Benjamin 5). Restaurant industry where the company operates has performed considerably
well in the past years. The two primary competitors of Krispy Kreme include Tim Hortons and
Dunkin' Donuts. To understand the company’s cause of profitability, analyses restaurant industry
various mitigation factors that are related to the five forces. The strategy determines the intensity
of competition and the general attractiveness of a given industry (Hill and Gareth 45).
Consequently, it can be used to identify the competitive position of Krispy Kreme within the Fast
joining the industry. Entry level in the restaurant industry is relatively weak as sustaining new
business in an industry in its maturity stage is difficult (Fish et al. 7). For instance, the three top
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players, Krispy Kreme, Tim Hortons and Dunkin’ Donuts, have already developed and enjoys
significant economies of scale that give them a cost advantage over possible entrants (Sutorius,
Jordan, and Benjamin 6). Consequently, the threat of new entrants into the industry is weak.
Already established companies such as Krispy Kreme are capable of lowering their prices to a
level that new firms cannot maintain due to their high economies of scale.
A weak potential entrant from a global perspective is advantageous to the firms already in
the industry. For instance, it implies that the market share will remain unchanged, which does not
change the profitability of the industry. In fact, the few established firms in the Fast food
restaurants industry will only fight on their own without any additional business. Since the
market share will have a minimal effect due to the weak potential entry, the company's
prices. The company's customers have low switching costs and are very sensitive to price.
Therefore, substitute products have a significant influence on the firms operating in this industry.
prepared at home has a significant impact on the industry (Sutorius, Jordan, and Benjamin 11).
For instance, increase in the prices of gas globally increases the rate at which people prepare
Furthermore, chain supermarkets and even local groceries around the world have bakeries where
substitute doughnuts are produced, which is a significant threat to Krispy Kreme sales.
When customers are, sensitive to price and have low switching costs, the availability of
substitute products reduces sales of the Krispy Kreme and a reduced sale leads to reduced
profitability. The industry has a large choice of alternatives that are similar to the products
offered by the existing firms. Some of these commodities include cakes, chocolate, biscuits, and
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energy drinks among many others. Since there are almost zero switching costs, a slight increase
in the price of doughnuts or reduced quality can quickly push customers into buying the
alternative products, which will significantly affect the profitability of the firm and the industry.
Power of Suppliers
Supplier power is weak, as it is Krispy Kreme that supplies machinery and mixes to its
franchise. The industry has a significant number of suppliers that firms can choose at low
switching costs. Krispy Kreme is equally applying the forward purchases contracts as well as
future contracts with the aim of reducing risks such as price fluctuations on the commodity. The
restaurant industry has high laborer turnover, which is an indication that employee retention
significantly low and the tenure short (Sutorius, Jordan, and Benjamin 11). However, replacing
and hiring of new laborers is simple, which shows that Krispy Kreme is experiencing a low
supplier power.
The profitability of Krispy Kreme depends on the changes in the price of the commodity.
Global price shocks that may result from natural disasters are capable of interfering with the
supplier of essential raw materials required by the company. Consequently, it may reduce the
production level, which will create shortage due to low supply of doughnuts.
The fact that the industry has a weak power of suppliers makes the profitability of the
industry relatively stable. Suppliers are not capable of increasing cost of supplying materials to
the industry, which has the potentials of increasing Krispy Kreme’s cost of production (Ireland et
al. 114). Stability of production costs that result from the stable cost of materials helps in
retailer’s stores have a specific kiosk for the company's products, which makes the company
compelling concerning branding. Retailers such as Wal-Mart have the power of sharing the profit
margins out of these vendors due to their market power that is capable of hurting the company
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should the products be excluded from their shelves. However, consumers are capable of
leveraging market power to pressurize firms into offering goods and services at a significantly
smaller profit margin (Ireland et al. 114). For instance, consumers prefer diversity and are
increasingly becoming conscious about their health. Consumption of “sweets” such as doughnuts
is becoming less preferred. Since they equally have low switching costs, buyers are always
enticed to excise that right to switch. Consequently, there is substantial bargaining power from
buyers. For instance, the consciousness of living a healthy life is becoming a global thing, which
consequently causes a threat to the fast food restaurants. It lowers switching costs of the buyers,
which makes it easier for them to leave the Krispy Kreme products.
The profitability of the industry is likely to be affected when most buyers have the power
to switch from doughnuts to other “healthier” products that do not have sugar. When customers
decide to buy different products, the industrial sales goes down. Decreased sales mean lower
restaurant and fast food. In the industry, the company has direct competitors such as Dunkin’
Donuts, Starbucks Company, and Tim Hortons (Fish et al. 8). The number and size of the direct
competition in the restaurant industry across the world. The increased competitive strength of
these firms gives them the power to compete in the same strength as Krispy Kreme, which makes
competitive rivalry in the industry even much stronger. In fact, with increased competitive
strength of the competitor, more market share is lost, which reduces the profitability of the
industry. For instance, many or much stronger firms are sharing the same market.
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threat from possible entrants as they have already large economies of scale (Hill and Gareth 46).
Consequently, the firms still capable of maintaining their market share. So many products and
supplements exist, which poses a significant threat to industrial sales. Thus, the company should
open many stores in congested areas such along the traffic areas to boost sales. The company
should practice a high level of differentiation of its products to provide a wider variety for its
products, Krispy Kreme will be capable of reducing the power of buyers, which is also a
challenge the company is facing. The power of suppliers remains weak, but the company must
work towards enhancing its relationship with suppliers to ensure a smooth flow of materials to
avoid possible disruption of production. Finally, to deal with the rivalry within the industry,
Krispy Kreme must make sure that its products are highly differentiated and unique in both
quality and price. That way, it will be able to remain competitive despite the high rivalry level in
the industry.
References
Fish Tim, White Brad, Christina, Vance, Stephanie Bogan, Anthony Vatterott. “KKD Case
Concepts and Cases. Mason, OH: Southwestern Cengage Learning, 2008. Print.
Ireland, R. Duane, R. E. Hoskisson, and M. A. Hitt. "Strategic Management: Concepts: