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Are We Still Going Nuts Over Donuts? - The Gonuts Donuts Case
Are We Still Going Nuts Over Donuts? - The Gonuts Donuts Case
Vidar Halvorsen
Mike Maquilan
xx xxx
Contents
1.1 Introduction...................................................................................................3
1.2 Background of the case.................................................................................3
1.3 Statement of the problem.............................................................................3
1.4 Objectives.....................................................................................................4
1.5 Case analysis.................................................................................................4
1.5.1 Marketing Mix ............................................................................................4
1.5.1.1 Price ....................................................................................................... 5
1.5.1.2 Place........................................................................................................6
1.5.1.3 Product....................................................................................................6
1.5.1.4 Promotion................................................................................................7
1.5.2 Swot Analysis.............................................................................................7
1.5.3 Porters 5 forces..........................................................................................8
1.5.3.1 Potential Entrants....................................................................................9
1.5.3.2 Substitutes..............................................................................................9
1.5.3.3 Suppliers powers...................................................................................10
1.5.3.4 Buyers Powers.......................................................................................11
1.5.3.5 Industry Rivals.......................................................................................11
1.5.4 BCG Matrix6 ............................................................................................12
1.5.5 Understanding consumers behavior ........................................................13
1.5.6 Internal marketing issues.........................................................................14
1.6 Theoretical Framework................................................................................15
1.6.1 Marketing Mix...........................................................................................15
1.6.2 SWOT Analysis..........................................................................................17
1.6.3 Porters 5- Forces Model............................................................................18
1.6.4 The BCG Growth-Share Matrix..................................................................22
1.6.5 Hub and Spoke Theory ( logistics )...........................................................25
The hub-and-spoke distribution paradigm (or model or network) is a system
of connections arranged like a chariot wheel, in which all traffic moves
along spokes connected to the hub at the center. The model is commonly
used in industry, in particular in transport, telecommunications and freight,
as well as in distributed computing..............................................................25
Benefits........................................................................................................25
Drawbacks....................................................................................................26
1.1 INTRODUCTION
This case presents the analysis, findings and recommendations of the case Are
we still going nuts over Donuts? A case study on Go Nuts Donuts (From now
called GND). The case is a recent one from August 2010, which made researching
through internet easier and easier to analyze in context of contemporary
marketing thinking.
1.2 BACKGROUND OF THE CASE
Inspired by the success of Krispy Kreme in the USA, Go Nuts Donuts was started
by the Trillianas and de Ocampos. After a year-and-a-half market research and
taste testing, the first store of Go Nuts Donuts opened at the Fort Strip Mall in
Bonifacio Global City on December 11, 2003. It opened to a sale of 700 donuts on
the first day. Initially priced at 15 pesos per donut, it was meant to be a quality
product with a mass market.
Since then, Go Nuts Donuts had spread 36 outlets as of September 2007,
including its first international branch in Kuwait. ( According to GND homepage
there are now 23 outlets registered. )
Aside from donuts, Go Nuts also sells coffee, iced tea, milk shakes, cupcakes,
cinnamon rolls, pizza and ice cream.
Now, 7 years later, the situation is one of negative growth, stagnant sales, and
increased competition. GND finds itself being a shade of its former self, and are
wondering what to do next.
After analysing the case, and discussing the problem, the following problem
statement was authored:
What marketing strategy should Go Nuts Donuts employ in order to
change a stagnant /declining market situation into a growing and
sustainable one?
1.4 OBJECTIVES
The objective of this case will be in 3 parts:
-
see how GND operate in the market, and give us basis for further analysis with
for example SWOT1 and 5-forces2.
1.5.1.1
PRICE
GND prices its products affordable and comparatively cheap. They opened up
with a price strategy of low cost/price differentiation, but have since adjusted
their prices more to the market median around
Thou GND is comparatively cheap, they do not cater to the low/low income
brackets, but rather the social /income ranges from the high/low to the High/high
income/society levels, giving them a wide area of impact. However; their price
strategy has led them into the same price bracket as the other 4 competitors,
now giving them an undifferentiated price in the eyes of the consumers which
give reduce the consumers cost of switching to competitors products. Though
the case state GND entered into a market primarily catering to the upper socio
economic classes, their price differentiation versus the competition soon
established them in the mass market area. Laterly, prices having gone up to an
average of 30 peso, move GND away from the lower socio-economic areas and
back to the upper area where they first started out. This might explain parts of
consumer flight, as competitors like Dunkin Donuts offer a wide range of their
Donuts from 10 peso and upwards.
Product cost: initially cost per donut was set to a mere 4 peso, giving a healthy
profit margin of 11 peso per unit. In 2010, prices are 30 peso per, giving the
assumption of linear cost increase to 6 peso per unit. Question is whether or not
the perceived cost/benefit to the consumer is the same as it was when GND
opened in 2003.
Competition is an important factor of the pricing strategy, and could account for
todays unit price. With several of the competitors average price being in the 30
peso range (for their main product line), this could be one of the reasons for
GNDs price, but also an opportunity for growth, if the profit margins of the donuts
can be strategically adapter for a stronger market position, whilst still retaining a
defendable financial position.
1
2
http://en.wikipedia.org/wiki/SWOT_analysis
http://en.wikipedia.org/wiki/Porter_five_forces_analysis
Another issue that might influence buyers is the potential price sensitivity of the
market. While the price of the average donut with GND is 30 peso, ranging down
to 15 peso for their bites, and upward to 35 peso for pizza, Dunkin Donuts sells in
range from 10 peso and upward. With a lower price difference of 5 peso per
donut, consumers might opt to forego size to that of price.
1.5.1.2
PLACE
1.5.1.3
PRODUCT
The core product of GND is naturally Donuts. The concept has a wide range of
self-developed donuts, with the original ones developed through detailed
consumer research on tastes and preferences.
LifeCycle : One of the distinct benefits of GNDs products is its shelf life. While the
main competitors have mass-produced donuts with a day shelf life, GNDs donuts
incorporate a recipe which enables a full 3 days shelf life, giving rise to a wider
range of distribution possibilities.
GND employs
-
This gives a vast product assortment which can be both a blessing and a curse.
With a total of 45 products, franchises / outlets runs a larger risk of waste from
unsold donuts, and thereby a greater risk of lower financial stability. In
combination then, with potential changes in consumer preferences and tastes,
GND would do well to look into further Consumer preference research.
1.5.1.4
PROMOTION
GND seems to be little active on the promotional front. The group has seen little
advertising, except their webpage and their immediate outlets ( in Makati and
Robinsons Manila ) .. Their employees execute orders but are reactive, not
proactive, offer little sales-promoting advices or salesmanship.
We failed to find traces of recent end user marketing or mass marketing but were
told there occasionally have been some adverts in printed press (newspapers).
This leaves a major part of functional marketing to word of mouth which is a
highly uncontrollable and non-dependable marketing channel.
We therefore conclude with their PROMOTION channel being their weakest link
in the 4 P analysis.
1.5.2 SWOT ANALYSIS
Strengths
-
Weaknesses
Lack of originalty
consumer research.
advertising
products
Co-branding w/ Disney
competitors
o
-
23 vs hundreds ...
Donuts unhealthy!
Opportunities
Undifferentiated products
Threats
-
systems
in terms of healthier or
Repositioning of brand
advertising purposes
-
our SWOT analysis, and several of the forces influencing GND will be issues that
are important in the SWOT analysis.
1.5.3.1
POTENTIAL ENTRANTS
Baking donuts is not a hard task, and there are several mini stalls in various
malls that offer their own type of donuts and alike. However, as with all National,
international or otherwise large scale concepts, there are barriers to entry in
terms of Investment for quality production equipment, marketing channels and
Marketing Information Systems, the economies needed to obtain economies of
scale, and of course political / local rules, regulations and certifications needed.
However; there is nothing that says entrepreneurs here in the Philippines cannot
come up with a concept that could prove to be a challenger to all these 4 major
market leaders.
The entrants to the market must be seen in terms of what market GND sees itself
in. GND state they operate in the Comfort Food market, which has seen a vast
expansion the last 20 years. In here there is a much greater threat, ad new
entrants to this market also consists of competitors of substitutes like Ice-cream ,
Gelato, Waffles, and many more. Entrants to the comfort food market need not
necessarily invest as much money to enter the market, nor have the same range
of offerings in order to steal consumers from GND. Given the totality of
alternatives competitors entering and catering to the same market, we find this
to be a medium high risk.
Krispy Creme opened in 2007 in Greenhills, putting great efforts into its preopening marketing and advertising. Among the stunts promoted was the
giveaway of a years supply of donuts. Go Nuts donuts being the direct
competitor, with a business model close to Krispy Cremes would naturally suffer
from the entrance of the original. Krispy Kreme has since grown, and focused
efforts in targeted marketing, using a well experienced marketing backup from
U.S side.
1.5.3.2
SUBSTITUTES
The market since GND opened up has changed dramatically, and the concept of
comfort food, has changed dramatically. This is much caused by globalization
which has brought numerous new offerings to cater to the palate of the Filipino.
Examples of new substitutes that cater the comfort food market include (but not
limited to)
-
Waffles / wafflesticks
ice cream / gelato,
Coffee-buns / buns / bakeries and pastry,
Chokolateries etc.
Hot-dogs etc
Fried banana,
Camote
Bicho bicho
With the increase in disposable income, the initial customer segments GND
catered to now finds themselves with the ability to try more choices. Given that
case the chance of selecting something else than a) donuts and b) GND donuts
increase incrementally. We therefore rank this issue as a medium-high risk as
well.
Adding to the traditional comfort foods now sweeping the nation, it is also
interesting to see threats of subsidies in light of changes in consumer health
awareness. Donuts is, considering its sweet contents, not a particularly healthy
comfort food, and with the rise of heath issues and focus on healthier lives, it is
probable that a part of comfort food consumers have simply shifted away from
traditional sugar and calories heavy comfort foods to healthier alternatives.
1.5.3.3
SUPPLIERS POWERS
GNDs local suppliers could hold a certain grip over GNDs operations. Though the
recipes of the donuts themselves are a well-kept secret, there are certain base
ingredients that can pose problems. Given base ingredient like flour and the
special yeast used, it is thinkable that this is supplied by one, single supplier (in
each case), where long-term contracts has been signed. Providing this would be
the case, the change to another supplier, could be a hurdle hard to overcome.
The flour qualities, and yeast specifications can take long time to find, and would
be a time consuming, costly and added risk for GND.
We measure this as a moderate risk in this analysis as GND would be a key
account, if not strategic account for the supplier.
1.5.3.4
BUYERS POWERS
Consumers power is clearly where the greatest threat arises from, as a result of
increased competition. With the multitude of offerings from 4 major competitors
in the market, now with several choices in both variety and price, the cost of
change to the consumer is near non-existent. This poses a significant threat to
GND, which we measure as high.
The consumers now also have increased buying power, which mean many of the
wide segment GND originally catered to, might have tastes and unspoken needs
GND has been unsuccessful in uncovering. That tells us that changes in
consumers preferences also pose a high risk for GND.
1.5.3.5
INDUSTRY RIVALS
Dunkin' Donuts is the world's largest coffee and baked goods chain, serving
more than 3 million customers per day. Dunkin' Donuts sells 52 varieties of
donuts and more than a dozen coffee beverages as well as an array of bagels,
breakfast sandwiches and other baked goods. As of 2008, Dunkin' Donuts boasts
8,835 stores in 31 countries.3
Since coming to the Philippines in 1981, Dunkin' Donuts is the largest donut
chain in the Philippines in terms of sales, with over 700 outlets. Dunkin' Donuts
maintains its market share with their low price and store presencean outlet is
always within reach.
This gives them a significant market position and a brand awareness/ recognition
hard to compete with.
Mister Donut was once the main competitor to Dunkin' Donuts. Since being
acquired by Dunkin' Donuts' parent company, most of its North American stores
changed their name to Dunkin'. However, Mister Donut as a brand still maintains
a strong presence in Asian markets.4
Mister Donut is the second largest donut chain in the Philippines, with 1,300
outlets nationwide, including concessions inside convenience stores and
Kentucky Fried Chicken branches.
In addition to donuts, Mister Donut also sells croissants and meat buns, as well as
coffee, spaghetti, sandwiches and rice meals in selected branches. The variety of
offerings puts them a little on the sideline compared to GND as their offerings
also span into merienda food and small meals, yet still being a significant rival
in the industry.
Krispy Kreme
Krispy Kreme is an international donut brand. Established in 1937 at Nashville,
Tennessee, it has since expanded to the United Kingdom, Australia, Dominican
Republic, Kuwait, Mexico, Puerto Rico, South Korea, Hong Kong (20062008),
Thailand, Indonesia, Japan, the United Arab Emirates, Qatar, Saudi Arabia,
Lebanon, Ethiopia, and Bahrain.5
Krispy Kreme has 11 stores since it came to the Philippines in November 2006. It
is Go Nuts Donuts' rival in terms of market and reach. It sells its original glazed
and flavored donuts, as well as other products like coffee, muffins, shakes, fruit
juices and novelty items. Priced in the upper range of the rivals, it has a more
limited consumer base than Dunkin Donuts and Mr. Donuts.
http://en.wikipedia.org/wiki/BCG_Matrix
Now with this in mind, the question GND need to address is if the results of the
initial consumer analysis in 2003, would be the same, today, and if not, what has
changed in the consumer purchasing decision process?
1.5.6 INTERNAL MARKETING ISSUES
(reasoning based on personal experience, and theory7 )
As a company depending on end users to approach their
Company
Conumers
Employees
http://www.strategicmarketsegmentation.com/category/marketing-other/internalmarketing/
This group know little about what training the franchisees and their personnel
undergo, but from first-hand experience, the general sales techniques,
extrovertness and proactivity of their front-personnel leave much to be desired.
Summed up, the benefits of a focus on internal marketing are well summed up
through the words of www.interalmarketing.co.za8:
Increased profitability
8
9
http://www.internalmarketing.co.za/
http://www.quickmba.com/marketing/mix/
These variables are known as the marketing mix or the 4 P's of marketing. They
are the variables that marketing managers can control in order to best satisfy
customers in the target market.
The firm attempts to generate a positive response in the target market by
blending these four marketing mix variables in an optimal manner.
Product
The product is the physical product or service offered to the consumer. In the
case of physical products, it also refers to any services or conveniences that are
part of the offering.
Product decisions include aspects such as function, appearance, packaging,
service, warranty, etc.
Price
Pricing decisions should take into account profit margins and the probable pricing
response of competitors. Pricing includes not only the list price, but also
discounts, financing, and other options such as leasing.
Place
Place (or placement) decisions are those associated with channels of distribution
that serve as the means for getting the product to the target customers. The
distribution system performs transactional, logistical, and facilitating functions.
Distribution decisions include market coverage, channel member selection,
logistics, and levels of service.
Promotion
Promotion decisions are those related to communicating and selling to potential
consumers. Since these costs can be large in proportion to the product price, a
break-even analysis should be performed when making promotion decisions. It is
useful to know the value of a customer in order to determine whether additional
customers are worth the cost of acquiring them.
Promotion decisions involve advertising, public relations, which media types, etc.
Strengths
A firm's strengths are its resources and capabilities that can be used as a basis
for developing a competitive advantage. Examples of such strengths include:
* patents
* strong brand names
* good reputation among customers
* cost advantages from proprietary know-how
* exclusive access to high grade natural resources
* favorable access to distribution networks
Weaknesses
The absence of certain strengths may be viewed as a weakness. For example,
each of the following may be considered weaknesses:
* lack of patent protection
* a weak brand name
* poor reputation among customers
* high cost structure
* lack of access to the best natural resources
10
http://www.quickmba.com/strategy/swot/
Threats
Changes in the external environmental also may present threats to the firm.
Some examples of such threats include:
* shifts in consumer tastes away from the firm's products
* emergence of substitute products
* new regulations
* increased trade barriers
http://www.quickmba.com/strategy/porter.shtml
rival firms can use this model to better understand the industry context in which
the firm operates.
I. Industry Rivals
In the traditional economic model, competition among rival firms drives profits to
zero. But competition is not perfect and firms are not unsophisticated passive
price takers. Rather, firms strive for a competitive advantage over their rivals.
The intensity of rivalry among firms varies across industries, and strategic
analysts are interested in these differences.
If rivalry among firms in an industry is low, the industry is considered to be
disciplined. This discipline may result from the industry's history of competition,
the role of a leading firm, or informal compliance with a generally understood
code of conduct. Explicit collusion generally is illegal and not an option; in lowrivalry industries competitive moves must be constrained informally. However, a
maverick firm seeking a competitive advantage can displace the otherwise
disciplined market.
When a rival acts in a way that elicits a counter-response by other firms, rivalry
intensifies. The intensity of rivalry commonly is referred to as being cutthroat,
intense, moderate, or weak, based on the firms' aggressiveness in attempting to
gain an advantage.
possess characteristics that protect the high profit levels of firms in the market
and inhibit additional rivals from entering the market. These are barriers to entry.
Barriers to entry are more than the normal equilibrium adjustments that
markets typically make. For example, when industry profits increase, we
would expect additional firms to enter the market to take advantage of the
high profit levels, over time driving down profits for all firms in the industry.
When profits decrease, we would expect some firms to exit the market thus
restoring a market equilibrium. Falling prices, or the expectation that future
prices will fall, deters rivals from entering a market. Firms also may be
reluctant to enter markets that are extremely uncertain, especially if entering
involves expensive start-up costs. These are normal accommodations to
market conditions. But if firms individually (collective action would be illegal
collusion) keep prices artificially low as a strategy to prevent potential
entrants from entering the market, such entry-deterring pricing establishes a
barrier.
Barriers to entry are unique industry characteristics that define the industry.
Barriers reduce the rate of entry of new firms, thus maintaining a level of
profits for those already in the industry. From a strategic perspective, barriers
can be created or exploited to enhance a firm's competitive advantage.
12
http://www.netmba.com/strategy/matrix/bcg/
This framework assumes that an increase in relative market share will result in
an increase in the generation of cash. This assumption often is true because of
the experience curve; increased relative market share implies that the firm is
moving forward on the experience curve relative to its competitors, thus
developing a cost advantage. A second assumption is that a growing market
requires investment in assets to increase capacity and therefore results in the
consumption of cash. Thus the position of a business on the growth-share matrix
provides an indication of its cash generation and its cash consumption.
Henderson reasoned that the cash required by rapidly growing business units
could be obtained from the firm's other business units that were at a more
mature stage and generating significant cash. By investing to become the market
share leader in a rapidly growing market, the business unit could move along the
experience curve and develop a cost advantage. From this reasoning, the BCG
Growth-Share Matrix was born.
The four categories are:
Dogs - Dogs have low market share and a low growth rate and thus
neither generate nor consume a large amount of cash. However, dogs are
cash traps because of the money tied up in a business that has little
potential. Such businesses are candidates for divestiture.
Question marks - Question marks are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do
not generate much cash. The result is a large net cash comsumption. A
question mark (also known as a "problem child") has the potential to gain
market share and become a star, and eventually a cash cow when the
market growth slows. If the question mark does not succeed in becoming
the market leader, then after perhaps years of cash consumption it will
degenerate into a dog when the market growth declines. Question marks
must be analyzed carefully in order to determine whether they are worth
the investment required to grow market share.
diversified company always should have stars that will become the next
cash cows and ensure future cash generation.
Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined
soley by whether it had become the market leader during the period of high
growth.
While originally developed as a model for resource allocation among the various
business units in a corporation, the growth-share matrix also can be used for
resource allocation among products within a single business unit. Its simplicity is
its strength - the relative positions of the firm's entire business portfolio can be
displayed in a single diagram.
Limitations
The growth-share matrix once was used widely, but has since faded from
popularity as more comprehensive models have been developed. Some of its
weaknesses are:
The matrix depends heavily upon the breadth of the definition of the
market. A business unit may dominate its small niche, but have very low
market share in the overall industry. In such a case, the definition of the
market can make the difference between a dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple
tool for viewing a corporation's business portfolio at a glance, and may serve as a
starting point for discussing resource allocation among strategic business units.
1.6.5 HUB AND SPOKE THEORY ( LOGISTICS )
The hub-and-spoke distribution paradigm (or model or network) is a
system of connections arranged like a chariot wheel, in which all traffic
moves along spokes connected to the hub at the center. The model is
commonly used in industry, in particular
in transport, telecommunications and freight, as well as in distributed
computing.
Benefits
nodes; that is, the upper bound is n - 1, and the complexity is O(n). This
compares favorably to the
transportation resources. For example, aircraft are more likely to fly at full
capacity, and can often fly routes more than once a day.
for them since there are few routes, with frequent service.
Drawbacks
resources must be used carefully to avoid starving the hub. Careful traffic
analysis and precise timing are required to keep the hub operating efficiently.
Total cargo capacity of the network is limited by the hub's capacity. Delays at
the hub (caused, for example, by bad weather conditions) can result in delays
throughout the network. Delays at a spoke (from mechanical problems with
an airplane, for example) can also affect the network.
Cargo must pass through the hub before reaching its destination, requiring
http://en.wikipedia.org/wiki/Guerrilla_marketing
http://www.gmarketing.com/
edge mobile digital technologies to really engage the consumer and create a
memorable brand experience.
not sales.
The marketer should also concentrate on how many new relationships are
other businesses.
campaign.
Messages are aimed at individuals or small groups, the smaller the better.
http://en.wikipedia.org/wiki/Spoke-hub_distribution_paradigm
16
http://en.wikipedia.org/wiki/Guerrilla_marketing