Krispy Kreme

Strategy-Making, Strategy-Executing Process:

The strategy-making, strategy-executing process consists of five phases. The first phase consists of the developing of a strategic vision. This involves determining the future of the company, creating a roadmap for the organization’s future, deciding future business positions, providing long-term direction, as well as giving the company a strong identity. This strategic vision phase is accomplished by Krispy Kreme’s CEO and the organization’s top executives (See Figure 1).

The second phase involves setting objectives for the organization. For Krispy Kreme, the CEO and top executives create these specific performance targets (See Figure 1).

These organizational members are responsible for creating yardsticks to track performance as well as ensuring that Krispy Kreme is focused on results and has not become complacent.

Phase 3 involves crafting strategies to meet these goals. Top executives and senior vice presidents are involved primarily in this phase (See Figure 1).

Analyzing external forces is used in conjunction with directing organizational efforts.

Implementing and executing the strategy is phase four in the process. This is an action-oriented phase where measurable progress is achieved. This phase is most often completed by senior vice presidents in the Krispy Kreme organization (See Figure 1).

The final phase of this process is the evaluation of performance, as well as the initiation of corrective adjustments to the strategies implemented.

Several facets could initiate the need for corrective action: Changing customer needs, new opportunities, new ideas, or failure of a Figure 1:

The Strategy-Making, Strategy-Executing Process

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

Stephen Cooper Stephen Cooper Steven Panagos Steve Brunner

CEO CEO President & COO Sen. VP of Supply Sen. VP of Supply

Chain Chain

Steven Panagos Steven Panagos Michael Phalan

President & COO President & COO CFO David McKie, Jr. David McKie, Jr.

Sen. VP & Gen. Sen. VP & Gen.

Michael Phalan Michael Phalan Frank Murphy Mgr. Of Krispy Mgr. Of Krispy

CFO CFO Exec. VP, Gen Kreme Coffee & Kreme Coffee & Counsel, Sec., & Beverages

Frank Murphy Frank Murphy Chief Governance

Exec. VP, Gen. Exec. VP, Gen. Officer Stanley Parker

Counsel, Sec., & Counsel, Sec., & Sen. VP Mar- Sen. VP Mar-

Chief Governance Chief Governance John McAleer keting

Officer Officer Exec. VP of Concept Devel. Jeff Welch

John McAleer Sen. VP of Dev- Sen. VP of Dev-

Exec. VP of Steve Brunner elopment

Concept Devel. Sen. VP of Supply

Chain Other Regional

Functional

David McKie, Jr. Mid-Level Mgrs.

Sen. VP & Gen.

Mgr. Of Krispy

Kreme Coffee & Beverages

Stanley Parker

Sen. VP Marketing

Jeff Welch

Sen. VP of Dev- elopment

Revise as Needed Revise as Needed Improve/Change Improve/Change Recycle to as Needed as Needed

Source: “Corporate Governance”) strategy to be as effective as predicted.

At Krispy Kreme, this phase is completed by senior vice presidents, as well as other mid-level regional and functional managers (See Figure 1).

Vision Statement:

Currently, Krispy Kreme does not have a vision statement. Without a clear vision, the organization does not have a statement for members to draw upon to detail where the organization is heading, what markets they are pursuing, and what kind of company the management is trying to create. For these reasons, the organization should develop a vision statement.

A vision statement for Krispy Kreme should, as mentioned, be a statement of where the company hopes to be in the future. This includes the company’s beliefs and mission that will guide the organization into the future.

It should be both positive and inspiring for Krispy Kreme members to rally around.

As such, a vision statement for Krispy Kreme is suggested as:

Krispy Kreme Doughnuts strives to become the leading specialty retailer of doughnuts, with its universal product that appeals to everyone – everywhere. To do this, the company will utilize its unique tasting product, its commitment to the highest standard of product quality and customer service, along with increased customer convenience through both off-premises and on-premises distribution and it’s historic brand development, to further penetrate both domestic and international markets.

Mission Statement:

An organization’s mission statement focuses on the organization’s current business activities. It is a statement of where they are now.

Krispy Kreme’s current mission statement is:

Krispy Kreme Doughnuts is dedicated to the enhancement of the doughnut experience by providing the best possible product and environment to the consumer through a commitment in excellence to services, innovation, quality, relationships, and positive growth (Bierce).

Although this mission statement addresses the organization’s dedication to customer service and quality, it does not address the current product offerings. As such, a revised Krispy Kreme mission statement such as follows is recommended:

Krispy Kreme Doughnuts is dedicated to the enhancement of the doughnut experience by providing the best possible product and environment to the consumer through a commitment in excellence to services, innovation, quality, relationships, positive growth, and by offering its unique and universally appealing doughnuts, as well as fine coffee at convenient on-site and off-site locations.

Balanced Scorecard:

The Balanced Scorecard was developed as a performance measurement system that takes into account several facets of an organization to give a more complete picture of how the organization is performing, than what is traditionally provided by traditional financial reporting. See Figure 2 for Krispy Kreme’s Balanced Scorecard.

Krispy Kreme Balanced Scorecard

Objectives: Measures: Targets: Initiatives:

Financial 1. Grow revenues from 1. Net revenues 1. Increase 25% per year 1. Expand into new existing and new 2. Profit margin 2. Increase 30% per year markets 3. Total Operating 3. Decrease 10% per year 2. Increase marketing

2. Increase margins to Expense/Revenues in exist. markets fuel further growth 3. Buy back franchises

3. Increase operating 4. Implement waste efficiency minimization processes

Customer 1. Maintain product 1. Customer satis- 1. 100% customer 1. Utilize customer quality faction satisfaction survey cards

2. Increase convenience 2. Net revenues 2. Increase 25% per year 2. Expand into new

3. Attract more cus- markets tomers 3. Increase marketing in exist. markets

Process 1. Always serve fresh, 1. Service time 1. No doughnut should 1. Monitor and track hot doughnuts 2. Total Operating be older than 30 min.

A doughnut life cycle

2. Reduce waste

Expense/Revenues 2. Decrease 10% per year times

3. Improve customer ser- 2. Implement waste vice time minimization processes

Learning 1. Improve employee 1. Employee tenure 1. Increase average 1. Annual employee retention 2. Employee feedback tenure by 25% per satisfaction surveys

2. Improve employee 3. Percentage of in- year 2. Employee suggestion satisfaction house promotions 2. Increase by 10% per action teams to imple-

3. Promote more ment employee sug- managers from gested programs within 3. Offer managerial training programs to interested employees

Strategically Relevant Industry Features:

Industry Overview and Trends:

Krispy Kreme’s doughnut products belongs in the bread and roll market of the retail food industry. This market grew by 3.6% in 2003, and reached a value of $18.8 billion, in the United States alone. The market is expected to increase to $21.9 billion by 2008, an increase of 16.4%. The industrial-white sector, which includes doughnuts, makes up the primary revenue source for the market, accounting for 51% of the market’s value (“Bread & Rolls”). The market is a mature to declining market. Pricing remains low due to competition, but focus is on loyal niche consumers, especially for Krispy Kreme which has received almost cult status in many areas. Promotion of Krispy Kreme’s product focuses on its unique taste as its main differentiation, as well as their ‘hot light’ that signals to customers that their Original Glazed doughnuts just came right out of the oven (“Original Glazed”).

The doughnut industry specifically generated sales of $4.7 billion in 2002, and is projected to reach $6.0 billion by 2007. This does not include grocery stores, convenience stores, or big box retail segments (“Krispy Kreme Doughnuts”). The company itself is moderately vertically integrated, handling distribution of doughnut mixes and equipment to their corporate and franchise stores, and utilizing other partner vendors for distribution of their products off-site.

Competitors:

Krispy Kreme’s primary products are doughnuts and coffee. As such, their competitors include a variety of organizations.

Doughnut specialty retailers, such as Dunkin’ Donuts and Winchell’s

Stand alone and grocery retailer bakeries

Pre-packaged doughnut or snack cake manufacturers, such as Hostess and Entenmann’s

And, coffee shops, such as Starbucks

Dunkin’ Donuts is one of Krispy Kreme’s largest competitors, they not only dominate the doughnut industry, but the coffee industry as well, selling approximately 800 million cups of coffee each year (“Product Facts”).

Dunkin’ Donuts was even rated the ‘best buy’ for the coffee industry, by Business Week, in 2004, over Starbucks (Symonds, Kiley, & Holmes 61).

Five Forces Model of Competition:

Bargaining Power of Suppliers:

To Krispy Kreme’s benefit, the production of doughnuts does not necessitate a complex ingredient list. Most supplies are readily accessible, by a variety of suppliers; this has lessened the bargaining power that these entities have. As mentioned, Krispy Kreme is moderately vertically integrated lessening this impact even further.

The Krispy Kreme Manufacturing and Distribution unit of Krispy Kreme Doughnuts was developed to produce the necessary doughnut mixes, as well as distribution of coffee and needed equipment. The organization has been able to effectively use their large buying volume to lower the cost of supplies and reduce supplier power even further.

Bargaining Power of Buyers:

Krispy Kreme is highly vulnerable to the power of buyers, as there are a variety of substitutes and competition in the industry is intense.

However, because the industry is moderately fragmented, Krispy Kreme finds power in their strong brand name, which attracts and retains consumers. This, coupled with their variety of nearly two-dozen doughnut types has allowed Krispy Kreme to offset this buyer power better than some others.

Barriers to Entry:

The barrier to entry into the doughnut is considerable, when desiring to compete on a national or international scale, such as Krispy Kreme. Considerable capital is required to outfit stores to meet the considerable demand to be competitive and profitable. These considerable fixed costs and daily operation expenses are a significant barrier. In addition, the fact that the market is quite mature, makes entry even more difficult for new organizations hoping to build a brand name.

Entry on a local scale, however, is quite low. Ingredients are available at the local supermarkets. The doughnut making process is quite simple. However, to be a significant threat to Krispy Kreme, a higher barrier is encountered.

Threat of Substitute Products:

In the general sense of food, there are an endless number of substitute products that compete with Krispy Kreme. More specifically, there are also a considerable number of doughnut specific substitute products available. These are found in a variety of places, from other doughnut specialty retailers to grocery stores to pre-packaged food manufacturers. For this reason, price wars have been instigated and forced the industry into low profit margins.

Rivalry:

Rivalry is quite intense in this mature market. Competitors are constantly trying to eek away small percentages of valuable market share, as there is very little room to grow. For this reason, new entrants in the marketplace find it very difficult to realize a decent return.

SWOT Analysis:

Strengths:

Krispy Kreme has been in business since 1937 and has several strengths it relies upon. Despite this longevity and because of it, a new store opening often sees long lines from eager customers, thanks to a very strong brand name. A store located in Medford set an opening week sales record of more $500,000 in sales. (“Krispy Kreme Doughnuts”).

In addition, Krispy Kreme has 30.6% of the U.S. market share.

This is further complimented by the company’s healthy balance sheet and cash flow. Their “debt-to-capital stands at 6.1% and models suggests that the company can post a five-year 25% EPS CAGR without taking on any more debt. The company has bought back a number of franchise systems, however, which has increased debt from $8.5 million in FY02 to $136.1 million in FY04” (“Krispy Kreme Doughnuts”).

Weaknesses:

Krispy Kreme has focused on one market. They have had little differentiation in their organization, other than a fairly recent acquisition of Montana Mills. This has made the company hypersensitive to changing consumer tastes, such as the low-carb diet fad. In addition, their Montana Mills acquisition has not been as successful as originally hoped.

The final weakness lies in the lack of financial information released regarding Krispy Kreme franchises. This limited information makes it difficult to determine the true state of the franchise system, which accounts for 60% of the organization. Losses by franchisees will negatively affect the corporation.

Opportunities:

There are a variety of opportunities available to Krispy Kreme. International expansion is one such opportunity, especially in Asian markets including Japan and South Korea. “The company’s first UK location, Harrod’s in London, is generating sales of $70,000 per week. The Mexico City location opened with $219,000 in sales its first week, while the Penrith (outside Sydney), Australia unit is currently running at about $90,000 per week” (“Krispy Kreme Doughnuts”). There is also opportunity to expand domestically, as well as expand off-premises distribution.

Threats:

The intense competition is a significant threat to Krispy Kreme. In addition, investors may be more attracted to investment in other faster growing sectors, now that the U.S. economy is improving. Changing consumer tastes, such as the low-carb diet craze currently gripping the U.S., is a significant threat to Krispy Kreme’s carb-rich product lineup. and, finally, changing food and franchise regulations may negatively impact the company.

Generic Strategy:

The generic strategy Krispy Kreme has employed is the best-cost provider strategy. With this strategy, Krispy Kreme has strived to produce a low-cost, yet high quality product. Although they are not the lowest-priced competitor in the marketplace, they do strive to deliver a superior product, exceeding consumer expectations for the price point.

In addition, they utilize a variety of complementary strategies. Krispy Kreme has employed strategic alliances and collaborative partnerships to distribute their product off-site. They have also used vertical integration and have tried acquisition with Montana Mills. These strategies have been very effective, other than their acquisition of Montana Mills. However, further complementary acquisitions and continued buy-back of franchised units could further benefit the organization.

Recommended Strategy:

It is recommended that Krispy Kreme continue their buy back of franchised units. With this strategy, the organization will be able to completely control all of the organization’s operations.

This would have several benefits.

First, Krispy Kreme would be able to ensure their consumers receive a consistent quality product, as well as consistent training and process implementation at all levels of the Krispy Kreme organization.

In addition, the company’s wholly owned units are the largest profit generators for the organization. Increased revenues could help fund further international and domestic expansion. It also may inspire stakeholder action. In that they would see how expansion into new markets and existing market expansion will profit the corporation directly.

This recommended strategy will also help Krispy Kreme address many of the objectives identified in their Balanced Scorecard. These include: Increasing revenues, increasing operation efficiencies, maintaining product quality, improving customer service time, reducing waste, improving employee retention and satisfaction, as well as providing more opportunities for current Krispy Kreme employees to be promoted from within and grow their career with the organization.

No greater economies of scale will be the result of this strategy, as franchised units currently obtain all product and equipment through Krispy Kreme Manufacturing and Distribution. and, this recommendation will be costly. However, given Krispy Kreme’s healthy financial condition, which includes their respectable debt-to-capital figures, the organization is well positioned to take on this endeavor, and the benefits far outweigh the costs.

References

Bierce, a. Personal phone call. July 19, 2005.

Bread & Rolls in the United States.” Datamonitor. July 2004. Datamonitor. Apollo Library database. University of Phoenix, Phoenix, AZ. July 19, 2005 http://80-dbic.datamonitor.com.ezproxy.apollolibrary.com.

Corporate Governance. No date. Krispy Kreme. July 19, 2005 http://www.krispykreme.com/investorrelations.html.

Krispy Kreme Doughnut Corporation.” MarketLine. 25 Dec 2004. Datamonitor. Apollo Library database. University of Phoenix, Phoenix, AZ. July 19, 2005 http://80-dbic.datamonitor.com.ezproxy.apollolibrary.com.

Original Glazed. No date. Krispy Kreme. July 19, 2005 http://www.krispykreme.com/glazed.html.

Product Facts. 2005. Dunkin’ Donuts. July 19, 2005 https://www.dunkindonuts.com/aboutus/company/products/CoffeeConsFacts.aspx?Section=company.

Symonds, William, Kiley, David, & Holmes, Stanley. A Java Jolt for Dunkin’ Donuts. 20 Dec 2004: p. 61-62.