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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

using Porter’s Five Forces.
Porter’s Five Forces Analysis
This tool has its root in the industrial organization, and it works towards identifying

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

food restaurants industry (QSR).
Potential Entrants
The first force is the new entrants, which looks at the possibilities of the new firms

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

have already developed and enjoys significant economies of scale that give them a cost advantage over possible entrants (Sutorius. Therefore. substitute products have a significant influence on the firms operating in this industry. Consequently. and Benjamin 6). The industry has a large choice of alternatives that are similar to the products offered by the existing firms. Jordan. sensitive to price and have low switching costs. 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. and . the threat of new entrants into the industry is weak. and Benjamin 11). Some of these commodities include cakes. In fact. the few established firms in the Fast food restaurants industry will only fight on their own without any additional business. increase in the prices of gas globally increases the rate at which people prepare meals at home. chain supermarkets and even local groceries around the world have bakeries where substitute doughnuts are produced. biscuits. A weak potential entrant from a global perspective is advantageous to the firms already in the industry. For instance. It makes threats of substitute goods to be relatively strong. which is a significant threat to Krispy Kreme sales. The increase in the global substitute and complement goods such as groceries and food prepared at home has a significant impact on the industry (Sutorius. Jordan. For instance. it implies that the market share will remain unchanged. Threats of Substitute Products Customers of Krispy Kreme are interested in quality doughnuts at considerably lower prices. When customers are. chocolate. Tim Hortons and Dunkin’ Donuts. as everyone is interested in cutting transportation costs to restaurants. Surname 2 players. Since the market share will have a minimal effect due to the weak potential entry. which does not change the profitability of the industry. the company's profitability will not be affected much. Furthermore. The company's customers have low switching costs and are very sensitive to price. the availability of substitute products reduces sales of the Krispy Kreme and a reduced sale leads to reduced profitability. Krispy Kreme.

The fact that the industry has a weak power of suppliers makes the profitability of the industry relatively stable. it may reduce the production level. 114). Stability of production costs that result from the stable cost of materials helps in stabilizing the profitability of the company. The industry has a significant number of suppliers that firms can choose at low switching costs. Since there are almost zero switching costs. replacing and hiring of new laborers is simple. which will create shortage due to low supply of doughnuts. 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 . Consequently. 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. Surname 3 energy drinks among many others. Most of the retailer’s stores have a specific kiosk for the company's products. The profitability of Krispy Kreme depends on the changes in the price of the commodity. a slight increase in the price of doughnuts or reduced quality can quickly push customers into buying the alternative products. Power of Suppliers Supplier power is weak. and Benjamin 11). which shows that Krispy Kreme is experiencing a low supplier power. Global price shocks that may result from natural disasters are capable of interfering with the supplier of essential raw materials required by the company. as it is Krispy Kreme that supplies machinery and mixes to its franchise. which has the potentials of increasing Krispy Kreme’s cost of production (Ireland et al. which will significantly affect the profitability of the firm and the industry. which is an indication that employee retention significantly low and the tenure short (Sutorius. Suppliers are not capable of increasing cost of supplying materials to the industry. Jordan. However. Power of Buyers Krispy Kreme sells its doughnuts in its stores as well as to retailers for resale. The restaurant industry has high laborer turnover. which makes the company compelling concerning branding.

Starbucks Company. Consequently. Decreased sales mean lower revenue. buyers are always enticed to excise that right to switch. 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. Changes in consumer preferences worldwide have a significant effect on the power of buyers. . However. the company has direct competitors such as Dunkin’ Donuts. It lowers switching costs of the buyers. there is substantial bargaining power from the customer's perspective. For instance. For instance. 114). Since they equally have low switching costs. whether direct or indirect. the consciousness of living a healthy life is becoming a global thing. which makes competitive rivalry in the industry even much stronger. In fact. In the industry. and Tim Hortons (Fish et al. many or much stronger firms are sharing the same market. from a foreign market. which makes it easier for them to leave the Krispy Kreme products. consumers are capable of leveraging market power to pressurize firms into offering goods and services at a significantly smaller profit margin (Ireland et al. Consumption of “sweets” such as doughnuts is becoming less preferred. intensifies competition in the restaurant industry across the world. which reduces the profitability of the industry. which consequently causes a threat to the fast food restaurants. consumers prefer diversity and are increasingly becoming conscious about their health. The increased competitive strength of these firms gives them the power to compete in the same strength as Krispy Kreme. When customers decide to buy different products. Internal Rivalry It is important to note that Krispy Kreme operates in two markets. the industrial sales goes down. Surname 4 should the products be excluded from their shelves. 8). The number and size of the direct as well as indirect competitors is an indication of an intense rivalry in this industry. with increased competitive strength of the competitor. which translates to low profitability. The competition. For instance. more market share is lost. which include a restaurant and fast food.

Consequently. Krispy Kreme must make sure that its products are highly differentiated and unique in both quality and price. “KKD Case Analysis. Finally. the firms still capable of maintaining their market share.” Krispy Kreme Doughnuts. So many products and supplements exist. References Fish Tim. Thus. Krispy Kreme will be capable of reducing the power of buyers. Krispy Kreme Company is not facing a significant threat from possible entrants as they have already large economies of scale (Hill and Gareth 46). it will be able to remain competitive despite the high rivalry level in the industry. That way. Surname 5 Conclusion and Recommendation From the porter’s five forces analysis. Through differentiated products. the company should open many stores in congested areas such along the traffic areas to boost sales. White Brad. Christina. which poses a significant threat to industrial sales. . Anthony Vatterott. Print. to deal with the rivalry within the industry. 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. 2009. The company should practice a high level of differentiation of its products to provide a wider variety for its consumers to prevent switching to products offered by competitors. Stephanie Bogan. Vance.

Print. 2008. A. and M. Inc. Hoskisson. . Boston: Houghton Mifflin. L. OH: Southwestern Cengage Learning. Hitt. Jordan Kunz." Cengage Learning. Print. Strategic Management: An Integrated Approach. Benjamin White. Robert E. R.” Gotham Global. and Michael A. Mason. Hitt. Print. 2008. Understanding Business Strategy: Concepts and Cases. Ireland. Duane. Sutorius Brian. Hoskisson. Charles W. “Strategic Report for Krispy Kreme Doughnuts. Surname 6 Hill. Ireland. "Strategic Management: Concepts: Competitiveness and Globalization. R D. Print. 2010. 2007. E. and Gareth R. Jones. R.