Summer2010STRATEGIC MANAGEMENT[KRISPY KREME]By CAROLINA VOLPATO, JENNIFER NSIAH AND STEPHENTHANNICKAL
2Critical Success Factors R & D to adapt to consumer‟s changing preferences o Development of new products o Health- consciousness Regulations o International laws o FDA authorization (U.S.) Increasing growth rate of domestic Hispanic and Asian population Mergers/Acquisitions Accessibility/ Convenience o Fast-Paced Lifestyle Trademark/Brand Protection Size of Market Share (domestic and global) Brand loyalty and recognition o Effective marketing Technological advancements in production and packaging Customer service Product differentiation Continuous growth o Overseas expansion and franchising o Increased Foreign competitiveness Legal Compliance Reducing operating costs Company restructuring o Financially o Scaling back locations Ability to franchise Thorough distribution channels o Strategic alliances Problem IdentificationAfter defining the critical success factors and evaluating Krispy Kreme, the followingproblems were revealed: Krispy Kreme Problem Identification Weight Weak International Presence 0.17 Healthy/ Nutritious products - weak 0.33 Focused on too few products 0.30 Lower revenues 0.20 General Environment
3Political/Legal Environment The Lanham Trademark Act of 1946 This law explains the rights of trademark owners, as well as the remedies that are required when a trademark is infringed. The law provides protection against false reports that are stated to damage a business or its reputation (U.S. Trademark Law 2009). Franchise Regulations The FTC‟s Trade Regulation Rule on Franchising (“FTC Rule”) and certain state and foreign laws require that companies furnish potential franchisees with a franchise disclosure document with information prescribed by the FTC Rule and applicable state and foreign laws and regulations. Businesses also must fulfill with a numeral state and foreign laws that legalize some aspects of the franchisor-franchisee relationship. FDA & US Department of Agriculture Regulations The FDA is charged with protecting public health by ensuring that foods are safe and pure, cosmetics and other chemical substances harmless, and products safe, effective, and honestly labeled (Krispy Kreme 10K, sec.gov). Local Regulations To be able to have new doughnut stores in specific areas, the company is subject to obtain the required licenses and authorizations by local government figures with respect for land use, environmental factors and zoning. Any franchisees are required to obey with all appropriate federal, state and local laws and regulations. This also includes the ones in the United States and in international markets, which include health, sanitation, safety, fire, building and other agencies in the states or municipalities in which the stores are located. (Krispy Kreme 10K, sec.gov). Employment Regulations Food product manufacturers are subject to state and federal labor laws that govern relationships with employees, such as minimum wage requirements, overtime and working conditions and citizenship requirements. Furthermore, the work conditions at store facilities are regulated by the Occupational Safety and Health Administration and are subject to periodic inspections by this agency. Food, Drug & Cosmetic Act The Food, Drug and Cosmetic Act is enforced through the FDA and sets forth specific standards for food preparation, branding, packaging, transportation and other necessities companies must keep an eye on in order to serve the general public in the food industry. The Bioterrorism Act The Act contains a number of provisions designed to improve and track the food safety efforts of the Food and Drug Administration (FDA) in cooperation with U.S. Customs and Border Protection (CBP) (fda.gov). Federal Trade Commission Act Under the Federal Trade Commission Act (15 U.S.C. Act 41-58), the Commission is empowered to (a) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; (c) prescribe trade regulation rules defining with specificity acts or practices that are unfair or deceptive, and establishing requirements designed to prevent such acts or practices; (d) conduct investigations relating to the organization,
4 business, practices, and management of entities engaged in commerce; and (e) make reports and legislative recommendations to Congress. (ftv.gov) U.S. Environmental Protection Agency The U.S. Environmental Protection Agency (EPA) controls environmental regulations influencing the construction requirements for warehouses and facilities. The EPA also leads the nation in environmental research, with their goal in mind of protecting human health and safety. The U.S. CWA was derived from the Federal Pollution Control Act of 1972, which regulates water pollution.Political/Legal Environment SummaryThe political/legal environment for the food industry is unfavorable due to the fact that it ishighly regulated by the Federal Drug Administration (FDA) and the US Department ofAgriculture. It must also meet strict requirements governed by the Federal Trade Commission(FTC) which regulate the offer and sale of franchises.In addition, the EPA regulates several areasthat affect operations. International regulations also influence operations and expansion.However, the political/legal environment also shows that increasing efforts are being made indefense of innovative companies to deter trademark infringement.Socio- Cultural Perceived good food/ Quick Casual RestaurantsCurrently in America, people‟s perception of good food is shifting from just good taste to propernutrition benefits the food tends to provide the body with. FDA has advertisement on children‟schannels encouraging healthy eating lifestyles and even good choices when it comes to snacks.This becomes a threat to KKD as well as others in the quick casual restaurant industry. The quickcasual restaurant is a $6 billion segment and also one of the fastest growing niches in therestaurant industry. This significant growth is attributed to aging baby boomers who are willingto pay a little more for quality food in a comfortable environment and a youth culture that needsa place to, well, hangout (ENRG, 2010).Socio- Cultural SummaryThe Socio- cultural environment of KKD is favorable because Americans have a culture ofpatronizing doughnuts or breakfast items such as KKD‟s. Although much fuzz is being madeabout healthy eating which is a threat to the quick casual restaurants, with the followinggenerations after the boomers still longing for family times, and connecting, there is much hopefor this industryDemographics The U S population According to the U S census bureau 2010 data, the United States ranks third in world population with 310,232,863 people after China and India with 1,330,141,295 and 1,173,108,018 respectively. However for consistency in data, we shall use the 2008 population of 304,059,72 as of July 1.
5 Gender distribution ACS shows a 2006-2008 gender distribution of 49.3 and 50.7 for male and female respectively (census bureau, 2008). Gender Distribution of the U. S. female (50.7%) male (49.3%) Population by race By race the white population is 74.3 % of the total, black or African American 12.3%, Asian 4.4%, Native Hawaiian and other pacific islander 0.1% while Hispanic population is 15.1% and some other race is 5.8% (fact finder, 2006- 2008). Population by Race White (74.3%) Black/AA (12.3%) Asian (4.4) Native Hawaiian (0.1) Hispanics versus Non-Hispanics In order to get a clearer picture of the Hispanic population in the United States, the America Community Survey and Pew Hispanic Center (2008), divided the general population into two segments: Hispanic or Latino and Not Hispanic or Latino. The Hispanic and Latino race were over 15 percent (2008) of the total United States population (Those of Hispanic or Latino origin can be of any race).
6 Researchers predict that the Latino or Hispanic population is bound for rapid increase. The following chart illustrates the percentage of those who are Hispanic compared to those who are not in the United States and their projected growth rates. (Source: pew research, 2008) Age Ages 5 years, 18 years and over and 65 years have percentages 6.9, 75.5 and 12.6 respectively of the entire population while the median age is estimated at 36.7 years for 2008 (fact finder, 2008). Baby boomers/ Generations X & Y and Millennial The baby boomers are the portion of the U.S. population born between 1946 and 1964 and represent (Pew 2010). This large number of people will be one of the large contributors to the increase in the 65 and over category by year 2025. For the Millennial, their values in life are not far from the things older generations value. Family comes first, and fame and fortune are much less important. In a rating of how important a series of life goals are to them personally, being a good parent ranked at the top for all four generations. Overall, 50% of the public says this is one of the most important things in their lives. About half (52%) of millinnials say being a good parent is one of themost important things to them. This compares with 50% of those ages 30 and older (Pew research, 2010). Millennia‟s are significantly less likely to be working full time (41%) than Gen Xers (65%) or Boomers (54%), reflecting in part the very different life circumstances of millennial. At the same time, these youngest members of the labor force are about twice as likely to work part time (24%) as are members of the Gen X (10%) or Baby Boom (13%) generations. Also, according to Pew Research Center surveys, the older generations have more spending power than the millennial though the latter have much hope of higher buying power for the future.
7 Income The 2008 data of American Community Survey (U.S. Census Bureau) estimated 112,386,298 American households, 74,870,525 American families, and 37,515,773 American nonfamily households. The average American household made $71,128 a year in income. The income bracket of $50,000 - $74,999 a year accounted for 18.8 %, or 21,109,871 households, in 2008. This isthe largest income bracket, followed by the income bracket of $35,000 - $49,999 a year thataccounted for 14.2 % of households. Also, on the average American families made $82,719 a year in income. The income bracket of $50,000- $74,999 a year accounted for 20.2% or 15,159,442 families in 2008. This is the largest income bracket, followed by the income bracket of $100,000 - $149,999 a year that accounted for 15.3 percent of families. Also, the average American nonfamily households made $45,160 a year in income The median income for American families is $63,211 (U.S. Census Bureau, 2008). There have been fluctuations in the median household income between 1967 and 2008, but theincome level has not dropped below that of 1967. Real median household income peaked in2000, but began decreasing in 2002 through 2004 until 2005 when there was a slight increase inmedian income and even more, in 2008.Household income brackets or ranges population percentageTotal number of Households 112,386,298 112,386,298Less than $10,000 8,045,626 7.2%$10,000 to $14,999 6,139,558 5.5%$15,000 to $24,999 11,921,076 10.6%$25,000 to $34,999 11,899,350 10.6%$35,000 to $49,999 15,951,147 14.2%$50,000 to $74,999 21,109,871 18.8%$75,000 to $99,999 13,992,314 12.5%$100,000 to $149,999 13,758,104 12.2%$150,000 to $199,999 4,858,631 4.3%$200,000 or more 4,710,621 4.2%Median household income (dollars) 52,175 (X)Mean household income (dollars) 71,128 (X) Families 74,870,525 74,870,525Less than $10,000 3,241,830 4.3%$10,000 to $14,999 2,383,126 3.2%$15,000 to $24,999 6,123,123 8.2%$25,000 to $34,999 6,958,316 9.3%$35,000 to $49,999 10,256,471 13.7%$50,000 to $74,999 15,159,442 20.2%$75,000 to $99,999 11,064,155 14.8%$100,000 to $149,999 11,463,137 15.3%$150,000 to $199,999 4,164,789 5.6%$200,000 or more 4,056,136 5.4%Median family income (dollars) 63,211 (X)Mean family income (dollars) 82,719 (X)Per capita income (dollars) 27,466 (X) Nonfamily households 37,515,773 37,515,773
8 Median nonfamily income (dollars) 31,547 (X) Mean nonfamily income (dollars) 45,160 (X) Median earnings for workers (dollars) 29,530 (X) Median earnings for male full-time, year-round workers 45,425 (X) (dollars) Median earnings for female full-time, year-round 35,269 (X) workers (dollars)(Source: fact finder; U. S. Census Bureauhttp://factfinder.census.gov/servlet/ADPTable?geo_id=01000US&ds_name=ACS_2008_3YR_G00_&qr_name=ACS_2008_3YR_G00_DP3YR3&_lang=en&_sse=on Retrieved June, 2010) Poverty The United States Government uses money income and poverty thresholds to compute andmeasure poverty status (U.S. Census Bureau, 2010). Those in poverty are usually supported by800 hours of work per year, or 16 hours per week. Seventy-five percent of children would come16 out of official poverty if at least one adult worked 40 hours per week. In 2008, 13.2 percent of the population was in poverty. All families in poverty were at 9.6%, female householders estimated 28.2%, while those with children under age 18 were at 36.5% and 44.5% for those with children under age five. In 2007 it was 13.3% of the total population. All families were at 9.8% while families with female householder and no husband present had estimated 28.6%. Moreover, female householders with children under age 18 were at 36.9% while worst off; those with children under five years were at 45.5%. Education For ages 25 and over there is a percentage of 84.5 with education high school or a higher education while 27.4 have attained a bachelor‟s degree or higher. Education is usually positively correlated with income and spending. Spending Habits of Americans The table below, extracted from the Bureau of Labor Statistics (BLS) shows the spending attitudes of Americans from ages under 25 years to 75 years and older. On the average, the total number of consumer units of 120,770 has a disposable income of $61,774 and spends an average of $6,443 on food from their total annual expenditure of $50,486. Also, on the average all consumer units spend $507 on cereal and bakery products and also $337 on bakery products only. The consumer unit that spends so much on cereal and bakery products or on bakery products alone is ages 35-44. They spend $620 and $407 which is above the average of all the consumer units on cereal and bakery product and bakery products alone respectively. They are followed closely by ages 45-54 who also spend $600 and $397 on the above mentioned foods. On the whole the under 25 spends less which is $281 and $178.
9Table 47. Age of reference person: Shares of average annual expenditures and sources ofincome, Consumer Expenditure Survey, 2008 All 65 75 Unde consu 25-34 35-44 45-54 55-64 years 65-74 years Item r 25 mer years years years years and years and years units older olderNumber of consumer 120,77 20,20 22,83 25,61 19,82 24,06 12,58 11,48units (in thousands) 0 8,227 8 4 4 6 2 0 1Consumer unitcharacteristics: $63,56 $28,1 $59,8 $77,5 $81,8 $71,6 $39,3 $45,2 $32,8 Income before taxes 3 27 78 82 44 53 41 32 86 $61,77 $27,9 $58,8 $75,6 $78,5 $69,0 $38,8 $44,4 $32,7 Income after taxes 4 07 09 77 37 09 41 02 47 Age of referenceperson 49.1 21.5 29.6 39.7 49.4 59.3 75.0 69.0 81.6Average number inconsumer unit: Persons 2.5 2.0 2.8 3.3 2.7 2.1 1.7 1.8 1.5 Children under18 0.6 0.4 1.0 1.4 0.6 0.2 a/ 0.1 a/ Persons 65 andover 0.3 a/ a/ a/ a/ 0.1 1.4 1.4 1.3 Earners 1.3 1.3 1.5 1.6 1.7 1.3 0.4 0.6 0.2 Vehicles 2.0 1.2 1.7 2.1 2.4 2.2 1.6 1.8 1.3Percent distribution: Sex of referenceperson: Male 47 47 50 46 47 49 43 46 40 Female 53 53 50 54 53 51 57 54 60Average annual expenditures ($)… 50,486 29,325 48,159 58,808 61,17954,783 36,844 41,433 31,692 Food............................................. 6,443 4,447 6,229 7,849 7,6966,357 4,692 5,338 3,935 Food at home.................................... 3,744 2,330 3,393 4,509 4,4523,710 3,075 3,421 2,667
10Cereals and bakery products............ 507 281 454 620 600 492435 473 390 Cereals and cereal products...............170 103 169 213 203 152131 142 118Bakery products............................... 337 178 286 407 397 340304 332 271 Meats, poultry, fish, and eggs............. 846 573 742 1,014 1,018845 687 781 576Gifts of goods and services................ 1,209 429 579 856 2,0371,752 1,016 1,291 700 Food............................................ 97 37 51 73 155155 72 90 51Source: extracted from Bureau of Labor Statistics, 2010 (: Average annual expenditures andcharacteristics, Consumer Expenditure Survey, 2008)SummaryTechnology Internet Usage The use of the Internet continues to rise according to usage statistics provided by internetworldstats.com. In 2009, internet users represented 26.6% of the global population compared to 5.93% in year 2000. In the US, internet usage is highest at 76% population penetration with e-commerce sales reaching almost $142 billion in 2008. According to information from the US Census Bureau, e-commerce sales grew at an annual average rate of 21% from 2002 to 2008 compared to total retail sales growth of 4%. (U.S. Census Bureau, 2008)
11 The internet is playing an important part in consumer decision process with levels of trust increasing in thecontent posted. In research conducted by Nielsen Wire, it found that 70% trusted consumer opinions posted online, 70% trusted brand websites, 37% for online video ads and 33% for Online banner ads. (Nielsen, 2009) Communication Channels In a survey conducted by Datatran Media in December 2009 from 5,000 Fortune 500 companies, marketing executives felt that the use of technology in advertising performed better than other channels. In that survey, advertising through email, search, social media and mobile accounted for 68.5% of the channels that rated asmore effective. In their plans for use of digital marketing channels in 2010, the marketing executives indicated that 59.8% would use over half of their overall multi-channel advertising campaign versus print, radio, television, outdoor, etc. (Datatran, 2010) (Source: Datatran Media LLC, 4th annual marketing and media survey, 2010) The use of smartphone technology in the US is on the rise accounting for 21% of overall cell phone market in 2009, according information from Nielsen Wire. According their projections, by 2011 smartphone users will account for 49% of the market versus 51% of non-smartphone users. (Entner, 2010) In market research conducted in 2009 indicated that 37% of smartphone users purchased products using the device, 41-43% used the device to check prices at alternative locations, 31-39% checked customer reviews. (Stambor, 2010) Automation In this current environment of increased competitiveness, companies are seeking new ways to improve productivity and decrease operating cost. The use of technology such as Radio Frequency Identification (RFID) has enabled companies to more efficiently process, package and manufacture their products. In the food industry for example, this is a key element in reducing waste and shortening lead times due to the time sensitivity of the perishable nature of the products. Manufacturing concepts such as lean principles, production systems and mass customization principles with the use of greater automation are used in the food industry, similar to those used in the traditional
12 manufacturing industry. With labor, health and safety costs rising, companies have been turning to more automation to improve its efficiencies and remain competitive. (Mahalik, 2010)Technology SummaryThe technology environment is favorable towards Krispy Kreme and the food service industry.The increasing use of the internet has enabled companies to promote their products viacommunication channels such as social networking sites, smart phones and companies ownwebsites. It has enabled companies to be greater aware of consumer tastes and trends.Technological innovations in food processing, manufacturing and packaging have greaterefficiency in the industry.Economic Gross Domestic Product (GDP) The US economy has continued to slow in the past few years, with the GDP in decline from 2.1% in 2007, 0.4% in 2008 to -2.1 in 2009, compared to a 2.7% average over the previous 7 years. (U.S. Department of Commerce, nd) Despite the declining numbers, the CBO forecasts a growth of 2.0% in 2010 and 4.0% in 2011. (Congressional Budget Office, nd) Consumer Price Index (CPI-U) The U.S. Bureau of Labor Statistics reported that the CPI-U increased to 2.7% in 2009 from a low of 0.1% in 2008. Forecasts by the CBO in January, 2010 are that the CPI-U would be 1.6% in 2010 and drop slightly to 1.1% in 2011. (U.S. Department of Labor, 2010). The CPI for food away from home has gradually increased in the past few years as indicated below, but has leveled off in 2008 and 2009. Unemployment The unemployment rate has continued to remain consistently over the 9% mark from May 2009 to May 2010, which is a significant indicator on the shape of the US economy
13 considering the fact that the unemployment rate was around 5.5% just 1 year prior in May 2008. The CBO’s forecast for 2010 done in January, 2010 was that the unemployment rate would rise even higher to 10.1% before lowering slightly in 2011 to 9.5%. Their longer term forecast for 2012 through 2014 is that average unemployment rate will be 6.5%. (U.S. Department of Labor, 2010)Source: U.S. Department of Labor, 2010 http://www.bls.gov/news.release/pdf/empsit.pdf Disposable Income An important indicator for businesses to focus on is consumer disposable income, which was at its lowest level of increase in 2009 at a meager 1% compared to 3.9% increase in 2008. The contrast is even greater if we look at the average disposable income of 5.46% from 2000-2007, according figures from the Bureau of Economic Analysis. The chart below from the US Economic Research Service indicates despite the overall increase in disposable income, spending on purchase meals & beverages as a percent of disposable income has decreased.
14Economic SummaryThe economic environment is favorable to unfavorable to operate in. High unemployment hasled to lower disposable income and coupled with increases in the Consumer Price Index, haveaffected the food service industry. However, there are favorable signs in the quick service foodsector which has seen minimal increases despite the difficult economic situation.Global Environment Demographics According to the U.S. Census Bureaus latest estimates, the global population now is close to 6.8 billion.It‟s increasing at a rate of 143 people a minute, 8,607 people an hour, nearly 206,550 a day and 75 million this year. The world population increased from 3 billion in 1959 to 6 billion by 1999, a doubling that occurred over 40 years. The Census Bureaus latest projections imply that population growth will continue into the 21st century, although more slowly. The world population is projected to grow from 6 billion in 1999 to 9 billion by 2045, an increase of 50 percent that is expected to require 46 years. Although their underlying assumptions could change, Census Bureau demographers see world population totaling roughly 9.0 billion by the middle of the next century, given present trends (Census Bureau 2009). With the increasing number of the world‟s population, firms are exposed to more consumers that are demanding exceptional products and services. The elderly (age 60 or older) in Europe represented 21 percent of the people in 2006, but will represent 34 percent in 2050. Other countries that are not as advanced will also see a rise in the number of people age 60 and over; it is projected that these countries will experience an increase from 8 percent (2006) to 20 percent (2050).
15 Mergers/Acquisitions/Consolidations Almost every day, there is news of some new billion-dollar combination: banking, healthcare, and tobacco in just the past few days. Behind the new surge in acquisitions is a much healthier stock market. Since the beginning of the year, stock prices are up between 15 and 20%. This has given companies the means to snap up competitors, some weakened by an economic downturn. In the current general environment, there are also important global trends. Severallarge companies, instead of developing products internally, have grown through acquisitions in serious segments in order to create a presence overseas (Standard & Poor’s Industry Trends 2010). Companies will acquire another company that already has a specific segment, providing a faster and cheaper way to meet that consumer demand, other than developing products internally. (Standard & Poor’s Industry Trends 2009). In addition, there is a global trend toward consolidation in the retail channel, particularly in Europe and the United States. There is still room for global expansion into emerging markets, and larger companies already have the established distribution systems to easily “launch new products that smaller niche competitors lack” (Standard & Poor’s Industry Trends 2009 and Business Monitor Online 2009). Forward and Backward Integration Many companies have begun to take control of their customers in the distribution process. This gives more control to the supplier. Having full control over operations will strengthen your product‟s position to the marketGlobal Economy Globalization could raise economic growth of developing regions substantially, leading to a drastic shift of production activities to these countries. Moreover, increasing links between regions could affect consumer preferences and the dissemination of new technologies.The global economic downturn has had a significant impact on the retail sector, although to a lesser extent on Modern Grocery Distribution (MGD), due to the
16 fact that food remains a non-discretionary purchase. Grocery retailers have primarily responded to the downturn in two ways. One is by promoting value through, for example, the expansion of discount stores, economy ranges, price investments and increased promotions. The other is by reducing costs and therefore preserving cash. This has come in the form of slowed expansion plans and employee dismissals. Over the next five years, the Top 30 are expected to grow sales through grocery formats at a compounded annual growth rate (CAGR) of 5.2%, compared to the 10.8% recorded for the previous five years. Store numbers are expected to rise at aCAGR of 3.5%, reflecting the fact that a slowdown in expansion will see retailers focusing on their most profitable existing stores. As capital expenses budgets get squeezed, resulting in a slowdown in almost every grocery channel, it has turn out to be more significant constantly for retailers and manufacturers to be sure they are investing in the winning formats and in the winning regions. Indian growth has been behind China‟s, even though both countries had per capita incomes in 1980. Indian growth has enhanced and importantly it has become less variable, in more recent years. Chinese growth forecastsrecommends that GDP growth can be projected to average levels close to 9% in the period to 2015 providing a constantfoundation for strong commodity demand growth. Afresh study by the Development Research Centre under China‟s State Council decided that China‟s industrialization period will last into the 2020‟s with possible GDP growth rate at 10%in the period to 2015 and 8% from 2015 to 2020. China is also getting a „turning point‟ in its growth generating potential for resource severe growth in excess of 10% over the next two decades. Foreign Exchange Rates/ Imports and Exports Trends Because global real estate portfolios include assets influenced by different national economies, with very different drivers, growth rates, and risk, the correlation of total returns between assets in these markets can be very low. The movement of foreign exchange rates must be considered, however, as unfavorable currency movements can
17 severely hamper performance. Broadening our perspective to the entire private equity universe, expectations for capital flows to international real estate are the same, as it becomes more difficult to find attractive domestic investments in a period of unprecedented pricing, record-low cap rates, and a slowing U.S. economy.(Journal of Portfolio Management). Operating in international markets involve exposure in currency exchange rates, which affects inflation, the economic growth, interest rate, and other aspects. Once these alterationstake place, they will cause food companies such as Krispy Kreme to regulate itsoperating and financing strategies. Changes in currency exchange rates that would have the biggest impact on decoding Pepsi‟s international operating profit include British pound, Mexican peso, Brazilian real and Canadian dollar and. Through years, macro- economic conditions in Brazil, Mexico, and Russia and across Asia Pacific have impacted on Pepsi‟s operations. The value of U.S. agricultural exports totaled $30.1 billion in the three months ended March 2008, up 50% from the comparable year-earlier period; meanwhile, the value of agricultural imports to the U.S. rose 12% to $20.2 billion, according to the USDA The weak value of the dollar may be another contributing factor to the increase with overseas buyers having more purchasing power. Prospects for the agricultural sector in the near term reflect continuing U.S. and global adjustments to the recession of 2008-09 and the subsequent economic recovery. A resumption of steady global economic growth will support increases in consumption, trade, and prices in the longer run. Additionally, long run developments for global agriculture reflect continued demand for biofuels, particularly in the United States and the European Union. The value of U.S. agricultural trade and cash receipts to farmers grow through the projection period. Increases in production expenses offset some of the gains in cash receipts, resulting in net farm income in the United States rising moderately from 2011 to 2019. U.S. retail food prices increase more than general inflation through 2012, but then return to a longer term relationship of rising less than the general inflation rate over the last half of the projection period. International Regulations It should be noted that the elimination of trade barriers increases the efficiency of the world economic system by enabling countries to specialize in those sectors in which they possess economic advantages, which includes those sectors in which they possess favorable natural environmental conditions.The United States, as do many other countries, controls the export of certain items. Export control may mean that a product, service or technology cannot be exported to another country. The U.S. government, either unilaterally or as a result of the actions of international organizations such as the United Nations, prohibits trade with some countries or with certain individuals wherever located. Some form of U.S. trade embargo, for example, exists for Cuba, Iran, North Korea, Libya, the Sudan and Syria. These policy-based and policy-driven programs even affect businesses that do not market to a particular country. When conducting business internationally, companies must comply with the applicable laws in those countries. Competition laws are especially critical to large companies and their monopolizing power in certain jurisdictions around the world. China‟s Commerce
18 Ministry enforces anti-monopoly laws that took place in August 2008 (Chinese Officials 2008). These laws protect China‟s famous domestic brands. The European Food Safety Authority (EFSA), along with the UKFSA (United Kingdom Food Standards Agency), conducts extensive studies and regulates ingredients and preservatives in foods and drinks (Euro News 2007). Also, the EU Accession has tightened controls on labeling of food and beverage products in the European Union. Internationally, the production and distribution of products come under immense scrutiny and must comply with statutes and regulations. International laws also include “Eco taxes” or fees that must be paid by companies using certain packaging materials that are potentially harmful to the environment.SummaryThe global environment is favorable to unfavorable. Many companies are merging andacquiring other companies to expand product lines and increase market penetration. With thatbeing said, it increases foreign competition with inexpensive labor internationally. Additionally,international regulation generates a major threat to expansion. The cost of energy and rawmaterials generate an unfavorable environment, as these are necessary elements foroperations. Overall, private-label products are becoming more popular on a global scale, alsocontributing to increased foreign competition. General Environment Opportunities and ThreatsEnvironment Opportunities Threats Climate ImportancePolitical/Legal 1 Lanham Trademark Act 1 FDA & USDA Regulations Unfavorable 1 2 Local Regulations 3 Franchise Regulations 4 Waste Management 5 Employment Regulations 6 Food, Drug Cosmetic Act 7 Bioterrorism Act 8 FTC Act Demographic 1 Good number of boomers 1 Concern for healthy diet Favorable 1 2 Millinials: family time Rise in median household 3 incomeSocio/Cultural 1 Culture of eating out 1 Obesity concerns Favorable 2Technological 1 Internet Usage 1 Favorable 3 2 Communication Channels
19 3 AutomationEconomic 1 CPI-U forecasted to fall 1 Unemployment at a high Favorable - 1 2 Disposable Income rising 2 Consumer Spending down Unfavorable 3 GDP in decline International food Reg.Global 1 Population Growth 1 Foreign Country Favorable 1 2 Acquisitions 2 Translations Unfavorable 3 Increase Exports/Imports 3 Inc.Foreign Competition 4 Increasing Costs(energy)Critical Success Factors –General Environment Regulations o FDA (U.S.) o International laws Health-consciousness Growth rate of domestic Hispanic and Asian population (increasing) Size of Market Share (domestic and global) Mergers/Acquisitions Increased Foreign competition Accessibility - Lifestyle (fast-paced) Brand Protection Porter’s Five Forces – Industry Porters Five Forces - Industry Future Current Future Current Domestic Domestic Global Global High Moderate High High The large Difficult for new This market Many markets are Barriers: entrants to enter is maturing markets in likely to New because this but generics this industry gain market Entrants “jammed”&industry. post high are still share in the Threat from generics threats growing growing environment Very High Very High Very High Very High Numerous Numerous Numerous Numerous substitutes substitutes substitutes substitutes that bring Substitutes that bring that bring that bring different fulfillment different different different and reasons for fulfillment fulfillment fulfillment consumption and reasons and reasons and reasons
20 for for for consumption consumption consumption High Very High Very High Very High Consumers‟ increasing Large Many equally large consciousness competitors Rivalry competitors and Increase in of healthy and high rapid increase in generics meals and generic generic competition increase in competition generics Low Low Low Low Commodity Commodity Commodity Commodity prices prices prices prices Supplier decreasing, many decreasing, decreasing, decreasing, Power suppliers in the many many many industry suppliers in suppliers in suppliers in the industry the industry the industry Very High Very High Moderate High Highly Potential More Buyer saturated, for greater Highly saturated, choices Power cost consumer cost conscious, likely with conscious, spending in numerous substitutes increased numerous growing competition substitutes economies Barrier to New Entrants It is difficult for new entrants to enter this industry in the current and future domestic as well as global because this is an already mature industry. However, it is possible that the larger markets would continue to gain market shares while the market progresses. Though this is a differentiated market, the size or volume of the market plays an important role because the margin of this industry is usually on the low side. Substitutes The threat of substitutes is very high in the current and future domestic and global industries. The retail bakery industry is very mature with anextensivediversity of food choices that can substitute a baked good with no changing costs. It is easy to find substitutes for these food choices. Many substitutes exist for example, breakfast cereals, rice and potatoes are all possiblesubstitutes and individuals can also make all of the baked goods they want at home. Bakeries count on upon price and convenience to keep individuals switching to a substitute or baking what they need at home. Rivalry
21 The threat of rivalry is very high in this industry because this is a price differentiated market and so generics with cost advantages pose very high threats especially in these two years of the recession. Also, others that seem to provide nutritional advantages pose threats in an environment whose consumers are getting health-conscious. Supplier Power Suppliers do not have much negotiating power in the bakery business due to the well developed markets for their products and the commoditized nature of what they are selling. Bakeries can be affected by price swings of the raw inputs, but the changes are a result of global supply and demand determinants rather than suppliers negotiating power. Buyer Power The current environment in the domestic market is a reflection of the numerous choices in the domestic market for the Quick Service segment that Krispy Kreme competes in. Buyers are seeking value and healthier options. We see the buyer power continue to be very high in the future. However, opportunities currently exist for expansion globally in markets such as China, India and the middle-east (where KKD has some presence already).Industry Opportunities Rearrangement or reorganization to reduce costs Intensifying healthy products Growth Strategies o International development (China and India) o Franchising o Acquisitions Developing a differentiated channel o Superstores and small groceries store, vending machines, restaurants, convenience stores, cafeterias, drugstores. Fairly easy entry in the industry Neutroceutical Advancements Technological Improvements o Packaging, manufacturing ,distribution o Connecting self-checkoutsIndustry Threats Strong Competition – lower margins due to consumer price consciousness Decline in consumer spending due to low consumer confidence Access to capital for possible expansion Health Concerns – more health conscious consumer Increased regulation on labeling, safety Higher Taxation Higher Energy costs – Crude oil and Natural GasCritical Success Factors – Industry
22 Brand loyalty and recognition o Effective marketing R & D to adapt to consumer‟s changing preferences o Development of new products o Health conscious consumers Technological advancements in production and packaging Customer service Product differentiation Continuous growth o Overseas expansion and franchising Legal Compliance Reducing operating costs Company restructuring o Financially o Scaling back locations Ability to franchise Thorough distribution channels o Strategic alliancesCOMPETITIVE ANALYSISCompany Name 2010 Sales (Mil) 2010 Net Income (Mil) Number of EmployeesKrispy Kreme $ 346.5 $ (.157) 2,460Dunkin Donuts $ 6,900.0* N/A 1,126*Einstein Noah $ 408.95 70.71 380Starbuck’s $10,080.0 $ 760.30 142,000Industry averages $ 559.64 N/A 5600* as of 2008Dunkin DonutsStrengths Strong Overall Brand Recognition Focus on Coffee in the store and packaged in other stores Diverse Products – Breakfast sandwiches/Ice Cream Alliances with P&G coffee supplier and smaller retail outlets Strong International Presence
23 Customer Service ReputationWeaknesses Healthy product choices Franchise bankruptcies Lower demand for coffee Low margins on productsOpportunities Less expensive option than Starbucks (main competitor) Increase international presence Lower costs for commodities – wheat, corn, sugar Repeat Customers - Loyalty and value focus reputationThreats Unhealthiness – obesity, heart disease Highly competitive coffee segment Product Substitution from competitors Economic Concerns – high unemployment, cost sensitiveStarbucks SWOT AnalysisStrengths Largest coffee corporation of the planet o Relatively big international presence. o Brand loyalty (most of Starbucks‟ consumers drink only Starbucks‟ coffee). o Huge brand recognition. o Present in all 50 states and 47 countries (Over 16,000 stores). o Over 170 locations for distribution, storage, and headquarters. Innovative product portfolio o Continuing development into aliment industry. Strong relationships with suppliers o Fully controlled coffee bean supplier Key alliances o Hewlett Packard o Pepsi o Kraft Foods o Sysco o US Foodservice Prime retail locations R&D o Changing taste preferences ($7.2 million) Deeply cultured o Strong mission and vision o Global environmental concern o Motivated employees Company operated retail stores 84% of revenues Financials
24 o Strong Revenue Growth until 2008 o StabilityWeaknesses Publicly held. Geographic concentration in U.S. (it makes harder to achieve international success). High concentration on one product (coffee). Weak infrastructure. Cross-functional management Closed over 200 stores in 2008 (stores were not franchises) Financially unstable since 2008 o Stock price dropped from $39.43 to $16.92 o 8% revenue drop in 2008 o Negative outlook for 2009Opportunity Entry into emerging Asian markets like India, Pakistan, Bangladesh and China. Diversification of product line. Market penetration in International countries other than Asia (Brazil). Co-branding with other food manufactures. Whole bean sales in supermarkets (Wal-Mart, Carrefour (Brazil)). Expansion into retail operations. Technological advances. New distribution channels (delivery) as well as distribution agreements. Brand extension. Continued domestic expansion and domination of its segment.Threats Present recession may perhaps impact the sales. Entry barrier in the global market. Amount of competitors is greater than ever. Disparity of coffee prices in emergent countries. Company facing massive resistance in international countries over political and cultural matters. People started to become more health conscious leaning towards caffeine free products. Competitors are imitating. Labor Unions problems in America and international countries. Competition (restaurants, street carts, supermarkets, other coffee shops, other caffeine based products), mainly overseas. North American market saturation. Negative image from poorly treating farmers in supplying countries.Einstein Noah SWOT Analysis
25Strengths Leader of Quick Casual restaurant industry. o Operatesprimarily under the Einstein Bros. and Noahs New York Bagels® brands and primarily franchises locations under the Manhattan Bagel® brand. o Five distinct brands in four quick casual restaurants and one coffee chain; (Einstein Bros. Bagels, Noahs New York Bagels, Manhattan Bagel chains, Chesapeake Bagel Bakery and the New World Coffee). o About 600 restaurants in 36 states and the District of Columbia. This makes it strong competitively in terms of volume (overall about 690 company-owned and franchised locations in more than 35 states) o 300 Einstein Bros locations within 38 DMA markets in 27 states. o Manhattan Bagel boasts of 23 fresh-baked bagel varieties and 15 different cream cheese flavors available daily o Over 100 Manhattan Bagel locations in the US. o New World Coffee specializes in 30 varieties and blends of fresh roasted coffee from around the world. o Weak international presence. o Brand loyalty o Good brand recognition. Innovative product portfolio o The unique atmospherics of ENRG ties in well with their brand. Strong relationships with suppliers o Fully controlled coffee bean supplier Key alliances o Aramark o Sodexho o HMS Host o AAFES o Compass Group and o Hyatt Hotels Prime retail locations R&D o Changing taste preferencesand state-of-the-art test kitchen facility (Golden, Colorado) Deeply cultured o Strong mission and vision Financials o Strong Revenue Growth until 2008 o StabilityWeaknesses Publicly traded o NASDAQ (GM): BAGL Low earning per share
26 Growing concerns of consumers for cutting spending on specialty eateries So much competition in the quick casual restaurant industryOpportunities Less expensive option than Starbucks (main competitor) Increase international presence Lower costs for commodities – wheat, corn, sugar Repeat Customers - Loyalty and value focus reputationThreats Unhealthiness – obesity, heart disease Highly competitive coffee segment High product substitution from competitors Economic Concerns – impact of recession o high unemployment o cost sensitiveINTERNAL ANALYSISKrispy Kreme’s Strengths Strong reputation in the industry for their differentiation/ market share and sales capabilities Large number of outlets and franchises Large overall sales because of volume of outlets 1.1% rise in same-store sales in April 2010 There is a predicted rise in revenue in the low to mid single digits for the 2011 fiscal year (S&P Analyst Research Notes)Krispy Kreme’s Weaknesses According to S&P Analyst Research Notes and other Company News (April 16, 2010),KKD posts $0.01 Q4 EPS vs. $0.01 loss on 1.1% rise in same-store sales. Total revenue fell 5.6%. (not including the effects of refranchising company stores, consolidated) Equally large competitors increasing Low earnings per share Effects of the recession of these two years and its influence on consumers‟ spending on special eateries.SummaryKKD is well positioned in the Quick Casual Restaurants industry; however, because there arequite a large number of competitors who are as huge (and still advancing), KKD is in a toughposition to sustain, except with especially good marketing abilities and advantages.
27Krispy Kreme’s Opportunities Growth Strategies o International growth (China and India) o Acquired o Franchising Increasing healthy products Smaller store operations Utilizing in-store distinctiveness Breakfast productsKrispy Kreme’s Threats Highly competitive segment – numerous substitutes Health Concerns – few healthy choice items Menu Choices – product diversity Increased regulation on labeling, safety Higher Taxation Higher Energy costs – Crude oil and Natural Gas
29success factors, each factor is measured in same scale mean the weight continuethe same forevery single firm only the rating varies. Ratings range from 1 to 4 with 1 representing a majorweakness, 2 representing a minor weakness, 3 representing a minor strength and 4 representing amajor strength.By doing the CPM for this industry, all three companies are relatively close to the samescore;though Dunkin Donuts is first with a score of 3.12. This is mainly due to their large sizeand competent operations. They show flexibility to the current economic times and ongoinggrowth through overseas expansion. Following the ranking is Starbucks with a score of 3.10. Abig part of this score is due to their huge size and well-organized operations. They have amassivequantity of stores and are continuing to grow in emerging markets overseas regardless ofthe downturn in the economy. Right before KKD is Einstein Noah with a score of 2.71. On thewhole, Einstein Noah has a strong product mixwith good health consciousness because of its mixof salads among others and a large number of locations but has weak international presencerelative to the competition.Krispy Kreme ranks the lowest among all of its competitors on the Competitive Profile Matrix,with a score of 1.675. The company‟s focal problem is the misalignment of its corporate ownedstores and its incapability to change or give a special attention to the current health trends oftoday. They would need precise R & D to forecast this problem. By doing the research,it wasnot found that Krispy Kreme had a research and development program internally at this time, nordoes it outsource one. Many of the other factors that received low scores in this matrix are bi-products of the above-mentioned issues.
30KRISPY KREME EFE MATRIXCritical Success Factors Weight Rating Weighted ScoreOpportunitiesUniqueness 0.14 4 0.56Expansion(Asia/India) 0.12 3 0.36Alliances 0.08 2 0.16Health Consciousness 0.14 1 0.14Store Operation – small 0.1 1 0.01ThreatsProduct diversity 0.09 2 0.18Health Concerns 0.07 1 0.07Market Saturation 0.07 1 0.07Higher Taxation 0.06 1 0.06Increased Regulation 0.07 1 0.07Higher Energy costs 0.06 1 0.06TOTAL 1 1.74EFE SUMMARYEFE matrix can be defined as the strategic tool to evaluate external environment or macroenvironment of the firm include economic, social, technological, government, political, legal andcompetitive information.The EFE matrix is similar to IFE matrix the only difference is that IFEmatrix evaluate the internal factors of the company and EFE matrix evaluate the external factors.There are significant amount of threats for firms in this industry in the Domestic market and inlooking closer at Krispy Kreme, it shows that work needs to be done in reducing their impact andeven shifting some of the threats to opportunities. More importantly threats that Krispy Kremeneeds to focus on diversifying its product line and offering more healthy options in the highlycompetitive Quick Service segment. Krispy Kreme has a low score of 1.74, which reveals thatsignificant work needs to be done to take advantage of the opportunities in focusing on itsuniqueness and exploring global markets for future expansion.
31KRISPY KREME IFE MATRIXCritical Success Factors Weight Rating WeightedStrengths Score 0.16 4 0.64Market share (global &domestic) 0.13 4 0.52Strong reputationLarge number of outlets and franchises 0.14 4 0.56Brand Recognition (Hot Now) 0.08 3 0.241.1% rise in same-store sales in April 2010 0.1 3 0.30Predicted rise in revenue (l-m single digits 2011FY) 0.1 3 0.30WeaknessesTotal revenue fell 5.6% 0.07 1 0.07Low earnings per share ($0.01 Q4) 0.05 2 0.10Weak health conscious meals 0.11 1 0.11Few product lines 0.06 2 0.12TOTAL 1.0 3.04IFE SummaryIFE (Internal factor evaluation) matrix is one of the best strategic tools for internal audit of thecompany. IFE is use for internal audit of functional area of business such as finance, marketing,IT, operations, accounts and others depend upon the nature of business and its size. Internalfactors are removed after deep internal analysis of the company. Obviously every company hassome weak point and strong point that is the reason why internal factors are divided into twocategories, specifically; strengths and weakness.Krispy Kreme is on the border of a strong internal position, as indicated by the weighted score of3.04. This means that it is maximizing its strengths and minimizing its weaknesses to a degreebut there would have to be an improvement to take them above this score and where they slackthere is a possibility for them to drop closer to the average which is between 2.0 and 2.99.
32Summary of SustainabilitySustainable competitive advantage is the focal point of a corporate strategy. It allows thepreservation and development of the company‟s enterprises competitive position in the market.It is a benefit that enables business to last against its competition over a long period of time.Sustainable competitive advantage have four criteria that each one of the competitors can use toevaluate their capabilities and resources to specify if they have the possibility of being corecompetencies, or if they already are core competencies. If resources andcapabilities meet thecriteria of: rare, valuable, costly to imitate, and non-substitutable, then they are considered to becore competencies. A sustainable competitive advantage is accomplished when competitorshave not been able to replicate the benefits of a firm‟s strategy. Valuabl Rar Costly to Nonsubstitutabl Competitive e e Immt. e Consequence Performance Implication Dunkin Yes Yes Yes No Temporary Competitive Advantage. Avg/Above Avg Returns Einstein Yes Yes Yes No Temporary Competitive Advantage. Avg/Above Avg Returns Starbucks Yes Yes Yes No Temporary Competitive Advantage. Avg/Above Avg ReturnsClearly, Dunkin, Einstein and Starbucks brand have successfullyrushed their resources andcapabilities to form core Competencies that distinguish them from competitors, on the otherhand, the strategies used by its competitors are exchangeable and for that reason it only givesthem a temporary competitive advantage. The competitors core competencies of the includecharacteristics such as strategic alliances,the ability to change to taste preferences, quality ofproducts and company size and ability.SummaryDunkin, Einstein and Starbucks are clearly unique, and operate in a highly competitiveenvironment. The companies‟ have core competencies and abilities that have given them aprovisional competitiveadvantage with average/above average returns. It is crucial that everysingle company continue to produce and reinforce their organizations, and readjust if necessary,for example Starbucks, to keep up as industry leaders.
33 IE MATRIXSUMMARYThe IE matrix employs two key dimensions which is the IFE total weighted score on the X-axisand the EFE total weighted score on the Y-axis. On the X-axis, a total weighted score of 1.0 to1.99 is considered weak, 2.0 to 2.99 is average while 3.0 to 4.0 is strong. Also, on the Y-axis andEFE, a total weighted score of 1-0 to 1.99 is low, 2.0 to 2.99 is medium while 3.0 to 4.0 is high.Moreover, the matrix is divided into three main regions; cells I, II and IV are classified as growthand build, cells III, V, and VII are hold and maintain while cells VI, VII and IX are classified asharvest or divest. For Krispy Kreme, the combined score of IFE and EFE puts it in cell VIIIwhich is a harvest or divest. This translates that the business strategies to be employed by KKDshould be defensive, appropriate sub-strategies include concentric diversification and divestiture.
34 IE Matrix - Geographic Region Sales (In Thousands) % of sales US (1) 314,528.00 91.68% Asia/Pacific (2) 15,469.00 4.51% Middle East (3) 8,852.00 2.58% Other N America (4) 4,231.00 1.23% Europe (5) 3,440.00 1.00% Total 343,080.00 100.00%IE Geographic Summary:The IE Geographic matrix indicates sales by region, with the Krispy Kreme‟s largest share ofsales being in the US, followed by the Asia Pacific, Middle East, Other North Americancountries and lastly Europe. The US quick service industry as whole is highly competitive andprice/value sensitive. Krispy Kreme‟s presence internationally is currently week and greaterfocus needs to be placed on increasing its market share in the growing Asia Pacific regions.
35 IE Matrix – Sales IFE Total Weighted Score Strong Average Weak 3.0 to 4.0 2.0 to 2.99 1.0 to 1.99 EFE Total Weighted Score High I II II 3.0 to 4.0 1 Medium 2 2.0 to 3 IV V VI 4 2.99 Low 5 1.0 to VII VIII IX 1.99 % of Sales Type 2010 sale Retail Sales (1) 103,856.00 42.20% Fundraising (2) 13,481.00 5.48% Grocers/Mass Merchants (3) 70,952.00 28.83% Convenience (4) 55,451.00 22.53% Other Off-premises (5) 2,371.00 0.96% Total 246,111.00 100.00%SummaryThe IE Sales Matrix indicates Krispy Kreme‟s strength in its core retail sales channel, located inthe Grow and Build quadrant I area. The fundraising channel has proved to be fairly effectiveaccounting for 5.48% of overall sales. The Grocers/Mass Merchants (28.83%) and ConvenienceStore (22.53%) channels have contributed effectively to sales for Krispy Kreme resulting in itsposition in quadrant IV(Grow and Build) on the matrix. Based on these numbers, we can safelyrecommend that Krispy Kreme strengthen its efforts in Retail, Grocers/Mass Merchants andConvenience store sales channels.
36 SPACE MATRIX Space Matix Scoring Internal Factors External Factors Competitve Advantage (CA) Rating Industry Strengths (IS) Rating Market Share -6 Growth Potential 4 Product Quality -3 Profit Potential 2 X Axis Product Life Cycle -4 Financial Stability 2 Customer Loyalty -1 Resource Utilization 3 Technology Know-how -2 Productivity 3 Average -3.20 Average 2.80 Total X axis score: -0.40 Financial Strength (FS) Rating Environmental Stability (ES) Rating Gross Profit Margin 1 Technological Changes -1 Return on Invested Capital 1 Rate of Inflation -2 Price/Cash Flow Ratio 5 Demand Variability -3 Y Axis Inventory Turnover 5 Barriers to Entry -2 Total Debt/Equity 3 Competitive Pressure -5 Revenue Per Share 1 Price Elasticity -2 Average 2.67 Average -2.50 Total Y axis score: 0.17Space Summary:The Space Matrix is an evaluation tool in the strategic decision process that dettermines thecurrent position of where a company stands the four cells, which are Aggressive, Competative,Conservative or Defensive. The four factors that postion a company in the appropriate cell are
37Internal, External, Financial and Enviromental. Based on our evaluation of these factors, we feelthat Krispy Kreme is in the Competitive section of the matrix. We feel that Krispy Kreme canstrengthen its position in taking advantage of the external factors by increasing its presenseinternationally. It can also work on improving its internal factors, by developing newer productsthat are health conscious and improving choice which will envariablly result in increased sales. Grand StrategySUMMARYKrispy Kreme is located in Quadrant II of the Grand Strategy Matrix which indicates a betterposition than might have been a few years ago. This position on the matrix general recommendsthat companies focus on Market Development, Market Penetration, Product Development,Horizontal Integration, etc. Krispy Kreme should focus on improving its position internationallyand improving its product line. Being in the highly competitive quick service sector, KrispyKreme needs to be focused on price sensitivity and therefore deliver its products in an efficientand cost effective manner.
38 BCG MATRIXSUMMARY…Krispy Kreme is located in the Question Marks position on the BCG Matrix. It has a lowRelative Market Share Position but a high industry Growth Rate. Companies in this section ofthe BCG, need to focus on market penetration, market development and product development.
39 TOWS Strengths Weakness 1 Strong Reputation 1 Fall in Total Revenue 5.6% 2 Big Market Share 2 Low Earnings Per Share Krispy Kreme 3 Rise in Sales 3 Few Products Large number of Weak Health-Conscious 4 Locations/Outlets 4 Meals Opportunities S-O Strategies W-O Strategies 1 Uniqueness Expand in the US with hub Improve Alliances with 1 1 2 Expansion (Asia/India) and spoke (S1, O1, O5) retailers/buyers (W1, W2, 3 Alliances Expand Internationally in Restructure Distribution and 2 2 4 Health Conscioueness Emerging Markets (S1, O2) production Channels (O5, 5 Store Operations- Small Improve brand awareness by Improve product line with 3 3 advertising (S1, O5) focus on Health (O4, W4) Threats S-T Strategies W-T Strategies 1 Product Diversity Acquire Ice Cream/Smoothie Close non performing larger 1 1 2 Health Concerns retailer (T1, S2, S3) retail stores (T3, W1) 3 Market Saturation (Domestic) Improve Beverage Product Improve food safety training 2 2 4 Higher Taxation line (S4, T1) and handling (T2, T5) 5 Increased Regulation Decentralize Donut Mix Increase international 3 3 6 Higher Energy Costs distribution (S4, T6) Presence (T4, T3, W1, W2)SUMMARY:The TOWS matrix is a evaluation tool in the strategic decision process that attempts to merge theStrengths and Weakness with the Opportunities and Threats into formulating effective strategiesthat will enable a company to succeed. In summarizing Krispy Kreme‟s Tow strategies,improving its position in the US market by implementing a hub and spoke system for deliveryand sales will enable it to not only develop its market share, but also reduce the need for largerretail locations. Improving its product line, by offering a greater variety of products and alsoaddressing the health conscious consumer are important strategies suggested. Another keystrategy that is discussed is the need to expand internationally in growing economies with largepopulations such as China and India. Finally, another key strategy that Krispy Kreme needs toimplement is seeking new ways to increase brand awareness, by advertising in local mediasources and using technology such as social media and smartphone technology.
40 Summary Table Strategies IE BCG Space Grand Count Market Penetration x x x x 4 Product Development x x x x 4 Market Development x x x x 4 Backward x 1 Forward x 1 Horizontal x x 2 Divestiture x x 2 Liquidation x 1SummaryThe summary table brings together the three main strategies from the IE, Space andGrand Business strategies to bring consensus on which strategies that a companyneeds to follow. In looking at summary table, Krispy Kreme’s three ideal strategies thatare recommended are Market Penetration, Product Development and MarketDevelopment.Strategy SelectionMarket PenetrationIncreasing number of retail outlet with Hub and Spoke systemImplement an advertising campaign to create brand awarenessProduct DevelopmentImprove product line, greater food and beverage choicesOffer alternative healthier productsMarket DevelopmentExpand internationally in the growing Asia Pacific region.
41QSPM MatrixThis matrix shows the strategies that stand out to be the best from the inputs of the EFE matrix,IFE matrix, and CPM matrix at the first stage of strategy formulation while the TOWS, SPACE,BCG, IE, and the grand strategy matrixes, all at the second stage of the strategy formulationprovide the necessary information for the setting up of the QSPM.Strategy SelectionOptions for Strategy SelectionThe two overarching strategies analyzed for Krispy Kreme were concentric diversification anddivestiture. The sub strategies are listed below:Concentric Diversification Utilizing a merger or acquisition to introduce breakfast products Utilizing a merger or acquisition to introduce healthy productsDivestiture Utilizing a strategic alliance to franchise more small operating store locations internationally (Asia/India) Quantitative Strategic Planning Matrix for Krispy Kreme Strategic Alternatives Strategic Strategic PR Advertising to Increase to Increase MS (US & MS (US & Market Penetration International) InternationalKey Factors Weight AS TAS AS TASOpportunitiesUniqueness 0.14 3 0.42 2 0.28Expansion(Asia/India) 0.12 3 0.36 2 0.24Alliances 0.08 2 0.16 3 0.24Health Consciousness 0.14 4 0.56 3 0.42Store Operation – small 0.1 2 0.2 1 0.1ThreatsProduct diversity 0.09 _ _Health Concerns 0.07 2 0.14 1 0.07Lower Margins 0.07 _ _Higher Taxation 0.06 _ _Increased Regulation 0.07 _ _Higher Energy costs 0.06 _ _ 1
42StrengthsMarket share (global &domestic) 0.16 4 0.64 3 0.48Strong reputation 0.13 _ _Large number of outlets and franchises 0.14 3 0.42 2 0.28Brand Recognition (Hot Now) 0.08 4 0.32 2 0.161.1% rise in same-store sales in April 2010 0.1 _ _Predicted rise in revenue (l-m single digits 11FY) 0.1 2 0.2 1 0.1WeaknessesTotal revenue fell 5.6% 0.07 _ _Low earnings per share ($0.01 Q4) 0.05 _ _Weak health conscious meals 0.11 2 0.22 1 0.11Few product lines 0.06 _ _ 1Sum Total Attractiveness Score 3.64 2.64 Quantitative Strategic Planning Matrix for Krispy Kreme Strategic Alternatives Strategic Alliance to Open small franchise operating small stores operating through stores Acquisition (China& (China& Market Development India) India)Key Factors Weight AS TAS AS TASOpportunitiesUniqueness 0.14 2 0.28 1 0.14Expansion(Asia/India) 0.12 4 0.48 3 0.36Alliances 0.08 3 0.24 4 0.32Health Consciousness 0.14 _ _Store Operation – small 0.1 3 0.3 2 0.2ThreatsProduct diversity 0.09 1 0.09 2 0.18Health Concerns 0.07 _ _Lower Margins 0.07 4 0.28 3 0.21Higher Taxation 0.06 _ _Increased Regulation 0.07 _ _Higher Energy costs 0.06 _ _ 1
43StrengthsMarket share (global &domestic) 0.16 4 0.64 3 0.48Strong reputation 0.13 _ _Large number of outlets and franchises 0.14 4 0.56 3 0.42Brand Recognition (Hot Now) 0.08 4 0.32 3 0.241.1% rise in same-store sales in April 2010 0.1 _ _Predicted rise in revenue (l-m single digits 2011FY) 0.1 2 0.2 1 0.1WeaknessesTotal revenue fell 5.6% 0.07 _ _Low earnings per share ($0.01 Q4) 0.05 _ _Weak health conscious meals 0.11 _ _Few product lines 0.06 1 0.06 2 0.12 1Sum Total Attractiveness Score 3.45 2.77 Quantitative Strategic Planning Matrix for Krispy Kreme Strategic Alternatives Introduce New Introducing Breakfast Healthy Products Products in (US & Product Development (US &Intl.) Intl.)Key Factors Weight AS TAS AS TASOpportunitiesUniqueness 0.14 4 0.56 3 0.42Expansion(Asia/India) 0.12 2 0.28 1 0.12Alliances 0.08 2 0.16 1 0.08Health Consciousness 0.14 4 0.56 3 0.42Store Operation – small 0.1 _ _ThreatsProduct diversity 0.09 4 0.36 3 0.27Health Concerns 0.07 4 0.28 3 0.21Lower Margins 0.07 3 0.21 2 0.14Higher Taxation 0.06 _ _Increased Regulation 0.07 _ _
44Higher Energy costs 0.06 _ _ 1StrengthsMarket share (global &domestic) 0.16 2 0.32 1 0.16Strong reputation 0.13 _ _Large number of outlets and franchises 0.14 _ _Brand Recognition (Hot Now) 0.08 2 0.16 1 0.081.1% rise in same-store sales in April 2010 0.1 2 0.2 3 0.3Predicted rise in revenue (l-m single digits 2011FY) 0.1 3 0.3 4 0.4WeaknessesTotal revenue fell 5.6% 0.07 _ _Low earnings per share ($0.01 Q4) 0.05 _ _Weak health conscious meals 0.11 3 0.33 4 0.44Few product lines 0.06 3 0.18 4 0.24 1Sum Total Attractiveness Score 3.9 3.28QSPM InterpretationAfter running the QSPM Analysis the following attractiveness scores were assigned to each substrategy:Market Penetration Utilizing a strategic PR to increase market share (3.64) Utilizing advertising to increase market (2.64)Market Development Utilizing a strategic allianceStrategicAllianceto franchise small operating stores (China& IndiaProduct Development
45EBIT/EPS AnalysisEarnings before interest and taxes (EBIT) or operating income is a measure of a firmsprofitability that excludes interest and income tax expenses. An estimated 40 million dollarswould be needed to integrate healthy products into Krispy Kreme‟s product portfolio. Also theinterest rate projected was 13%. The current stock price is attached with the pro-forma analysisstatements, with that being said they feel confident that the numbers created would lendsupport to financing these strategies through debt. Amount Needed 40 Interest Rate 13% Tax Rate 3.60% EBIT 7252 Total Debt 146 Stock Price 1.97 Shares Outstanding 65.8 Projected shares outs. 20 Comon Stock Debt Financing Int. 13% High Mid Low High Mid Low EBIT -3 -23 -43 -3 -23 -43 Interest 0 0 0 -0.39 -2.99 -5.59 EBT -3 -23 -43 -2.61 -20.01 -37.41 Taxes -0.1 -0.828 -1.548 -0.0939 -0.7203 -1.3467 EAT -2.89 -22.172 -41.45 -2.516 -19.289 -36.063 #Shares 85.8 85.8 85.8 65.8 65.8 65.8 EPS -0.03 -0.26 -0.48 -0.04 -0.29 -0.55
46 WORK CITEDBenefits of Global Diversification on a Real Estate PortfolioJournal of Portfolio Management; Sep2007 Special Real Estate Issue, Vol. 33, p53-62, 10pBureau of Labor Statistics, (2010).Average annual expenditures and characteristics, ConsumerExpenditure Survey, 2008 retrieved June 4, 2010 fromU.S. Department of Labor. (2010, June 4). The Employment Situation – May 2010. Bureau ofLabor Statistics. Retrieved on June 7, 2010 from http://www.bls.gov/news.release/pdf/empsit.pdfCongressional Budget Office. (nd). CBO‟s Economic Projections for 2009 to 2019. Appendix A.Retrieved on June 7th, 2010 from http://www.cbo.gov/ftpdocs/110xx/doc11014/01-28-Testimony_Senate.pdfU.S. Department of Commerce.(nd). Table 1.1.2. Contributions to Percent Change in Real GrossDomestic Product. Bureau of Economic Analysis. Retrieved on June 7th, 2010 fromhttp://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2000&LastYear=2010&3Place=N&Update=Update&JavaBox=no#MidU.S. Census Bureau. (2008). E-Commerce Stats. E-Stats. Retrieved on June 6, 2010 fromhttp://www.census.gov/econ/estats/2008/2008reportfinal.pdfDatatran Media. (2010). 4th Annual Media and Marketing Survey. Retrieved on June 6, 2010from http://www.datranmediasurvey2010.com/start.php?showtype=page-1Entner, R. (2010, March 26). Smartphones to Overtake Feature Phones in U.S. by 2011. NielsenWire. Retrieved on June 6, 2010 fromhttp://blog.nielsen.com/nielsenwire/consumer/smartphones-to-overtake-feature-phones-in-u-s-by-2011/Mahalik, N. (2010, March). Advances in Food Processing and Packaging Automation. Trends inFood Science & Technology, V21, 3. Retrieved June 6, 2010 from ScienceDirectNielsen Wire. (2009, July 7). Global Advertising: Consumers Trust Real Friends and VirtualStrangers the Most. Retrieved on June 6, 2010.http://blog.nielsen.com/nielsenwire/consumer/global-advertising-consumers-trust-real-friends-and-virtual-strangers-the-most/Pew Research Center (2010). Millinials; confident, connected, and open to change. Retrievedfromhttp://pewsocialtrends.org/assets/pdf/millennials-confident-connected-open-to-change.pdf
47Stambor, Z. (2010, January 4). 37% of smartphone owners purchased merchandise via theirphones in 2009. Internet Retailer. Retrieved on June 6, 2010 fromhttp://www.internetretailer.com/2010/01/04/37-of-smartphone-owners-purchased-merchandise-via-their-phonesStandard &Poors Net Advantage (2010). Krispy Kreme Competitors. Retrieved fromhttp://www.netadvantage.standardandpoors.com.ezproxy.oru.edu:2048/NASApp/NetAdvantage/cp/showDailyNews.doYahoo Finance (2010). Direct Competitor Analysis. Retrieved fromhttp://finance.yahoo.com/q/co?s=kkd