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An economic analysis of Krispy Kreme Doughnuts Company Research Paper


Abstract

Krispy Kreme Doughnuts Company operates in retailing and wholesaling of packaged sweets and doughnuts. The company owns shares and certain franchises called the Krispy Kreme Doughnuts Stores. The franchises engage in massive production and sale of food and drinks. The business operates 530 stores across the world. It does business in the United States of America, United Kingdom, Australia, Mexico and Indonesia among other states (Peach Report 2009).

The headquarters of the organization features in Wiston-Salen in North Carolina, in the US (Krispy, 2010). This paper analyses the macroeconomic environment of Krispy Kreme Doughnuts in order to understand the financial and accounting implications of the business. The study provides a critical analysis and application of economic approaches and accounting structures to present critical microeconomic facts and other issues regarding the organization (Mastrull, 2010).

What the firm does

Krispy Kreme Doughnuts started operating in July 13, 1937 in Winston-Salem, in North Carolina (Mastrull, 2010). The founder of the company was Vernon Rudolph. The organization trades in more than 20 categories of doughnuts. The business also integrates the former business label of Hot Original Glazed and 9 additional categories.

Every store of the business contains a doughnut industry with the capacity to manufacture about 5,000 to over 11,000 dozens of doughnuts on a daily basis. The company makes and sells baked products and memorabilia. It deals with items like hats and sweatshirts. In 2006, the business had about 276 stores in the world. These units featured in 37 states in the United States, Australia and Canada.

The company registers profits by engaging in unique methods of direct distribution of commodities. The success of the company in the industry can be attributed to its sound advertisement strategies. The business achieves this aspect through effective marketing and economic decisions that arise from appropriate external analyses and understanding of the business environment (McGuigan, 2010).

An assessment of the fast food sector in the United States reveals that Krispy Kreme Doughnuts has been one of the leading businesses in the sector since the year 1970. However, this paper observes that there has been intense competition in the sector of fast food industries with the emergence of other leading chains across America and the vast European market. The sector is almost becoming “saturated” with the increase in fast food restaurants.

The Krispy Kreme Doughnuts Company has been operating in the market for over 70 years. During this time, it has expanded to become a global brand in the fast food industry. This aspect relates to several crucial transformations that the organization has initiated since the mid 1990s and early 2000s.

The business has encountered challenges along its course including questionable accounting records and overexpansion. However, the business has a new management in place that has begun rebuilding the image of Krispy Kreme Doughnuts into a reputable business.

Impact of supply and demand in recent years

Supply and demand factors have led to continuous shifting of the company’s revenue streams. This aspect is because changes in the supply and demand affect the overall sales of the business. Recently, the overall expenses incurred by organizations during the opening of new outfits surpassed the minimal collections from low performing stores.

The company engaged in the process of closure of its branches and deferred its expansion plans to new markets. The company’s finances have undergone intensive scrutiny. The company registered net profits of $463 million in 2006 which was a reduction of 16.8% from the previous fiscal period. The organization incurred losses of $42 million. This amount was less than that of $136 million loss in 2005.

Various components dictate the forces of demand and supply. These constituents include costs of commodities, purchasing power of clients, numerical strength of consumers, processing liabilities, number of retailers, technological expenses and tastes and preferences of buyers. These demand and supply components may be responsible for changes in the Krispy Kreme Doughnuts Company (Thomas, 2010).

Graph: Recent changes in costs and revenues of the Krispy Kreme Doughnuts Company

Recent changes in costs and revenues of the Krispy Kreme Doughnuts Company.

Price elasticity of demand for the products

Price elasticity of demand can be defined as a measure of the degree in which the quantity of demand of good changes with alteration in the price of a commodity. An assessment of the price elasticity of demand relates to the comparison between the modification in the price of the commodity and the corresponding adjustment in the quantity of the required good.

In case Krispy Kreme increased the price of sweets or beverages, it would prompt a decrease in the demand of its commodities. However, other factors may adjust the supply and demand scenario. For example, if the company increased its price, the competitors would take a decision to decrease their prices to attract clients and make more sales than Krispy Kreme.

This fact would provide the competitors with a competitive edge over Krispy Kreme in the market. This report asserts the fact that when prices increase, the need for goods may decrease along the demand curve. The modification would justify the variation of costs and quantity in contradicting graphical frameworks. The Krispy Kreme Doughnuts Company has an elastic demand. Certain clients may be addicted to the company’s beverages or sweets. However, the products may be more of luxuries than necessities.

The demand for Krispy Kreme’s doughnuts may reduce if its prices rise. This notion relates to the mass market competitors in the fast food industry that provide similar or substitute products at corresponding cheap prices. Examples of business rivals of the Krispy Kreme Doughnuts Company include McDonalds, Starbucks Coffee and Dunkin’s Donuts (Rusch, 2011).

The financial crisis in the United States and across the globe has led to a significant decline in the income of consumers. The decreasing purchasing power of customers may have a negative effect in the quest for commodities. This concept may cause a shift in the demand curve.

The Krispy Kreme Doughnuts Company’s products relate to the aspects of price and quality. Consumers may compare their needs and wants. Needs must be met by the clients and can hence be categorized under inelastic demands. Needs must be fulfilled regardless of price variations of commodities. Necessities may be classified under elastic demands because they can be likened to luxuries. The products of Krispy Kreme Doughnuts Company have an elastic demand (Peach Report, 2009).

Costs of production for the firm

This assessment presents different costs that the Krispy Kreme Doughnuts Company incurs in its production process. The costs include the expenditures of inputs. These aspects may be the levies required for the inputs that create the commodities. The other fees comprise of the cost of advertising, labour, delivery, staff compensation, transport and machinery and store operating charges. The charges feature in the table below:

Costs of production for the firm.

Primary competitive advantages

Krispy Kreme Doughnuts Company is capable of organizing its strategy and enforcement of its brand prospects. This concept may be a crucial competitive advantage. The company can link its priorities to its business strategy.

The plan may involve value addition of its products. Krispy Kreme Doughnuts has a strong brand that can act as a basis for developing mechanisms for enhancing appreciation and protection of its market brand. The company may penetrate other areas where it is not performing well. It can offer salient channels of promoting sales through networking and online interactions.

The organization’s popular name is a veritable strength that distinguishes it from other competing firms. Krispy Kreme Doughnuts is one of the “household names” in the fast food industry. Most people can easily recognize a Krispy Kreme doughnut. The clients may easily remember the company’s products because it is easy to pronounce its brand name. The business has an efficient way of manufacturing its products in mass quantities.

This fact enables the company to benefit from the economies of scale. For instance, Krispy Kreme’s technology can manufacture about 280 dozen doughnuts in an hour. In addition, the doughnuts are usually uniform and in large quantities. A “glazed” Krispy Kreme doughnut bought in San Francisco can be equated to another purchased in Rocky Mount, North Carolina (Michelman, 2007).

This report supports the view that it is easy for clients to recognize a product from the Krispy Kreme Doughnut Company globally. The business also develops a positive attitude towards clients. This view provides the company with a suitable reputation from its customers. The staff of the organization work hard to develop a competitive client service by according clients deserved respect. This competitive advantage differentiates the company from its business rivals (Michelman, 2007).

The organization has a rich experience in the fast food industry due to its market dominance over time. In addition, the Krispy Kreme Doughnut Company combines this experience with relevant marketing methods that capture the attention of customers. The company engages in the oral word advertising strategy before embarking on other interventions like use of memorabilia to attract clients.

The other essential competitive edge for the business involves upgrading its extranet services to a standardized browser interface. The organization may utilize resources necessary for users in its structures while at the same time safeguarding crucial data from its competitors. This strategy is significant for the transformation of the business.

The company may transmit crucial data to its clients and workers in a speedy manner. The design also allows the company to operate effectively and remain above its rivals in the sector. It averts expenses related to technology possession for the business. The firm can send emails to clients on a regular basis, transmit newsletters and interact with its customers. This scheme eliminates the extra costs of printing and distribution of the information.

Barriers for firms in the industry

This paper confirms the view of McGuigan (2010) that it is difficult to create and sustain a new business brand in the restaurant sector. However, the hindrances associated with the food industry for companies can be overcome.

Thomas (2010) suggests few hindrances for investments in the sector for organizations. Michelman (2007) notes that it may be easy to start a small scale restaurant designed to capture local markets. Several small scale restaurants may be able sustain themselves in the market due to few hindrances related to entry into the market.

The organizations excel due to the high potential of accruing profits in the sector. The restaurants may refrain from conducting business due to the envisaged level of threats. They experience extensive competition within the restaurant industry. The firms also encounter high prospects of failure in the market. In addition, this paper observes impediments to the rate of investments in the food industry due to business rivalry and monopoly from established players.

For instance, key business investors like Wendy’s and McDonald’s make huge sales at the expense of smaller investors. Companies like Burger King incorporate competitive market penetration mechanisms to promote their progress in the market. This report asserts that it is difficult to begin a new business in this sector due to the presence of powerful competitors.

Certain organizations buy smaller companies to reinforce their market dominance and mitigate competition. This point may be an indicator of a vertical relationship among the business players. The Krispy Kreme Doughnut Company employs a commercial format authorization where the firm provides the structure for operating the business.

Company’s product substitutes

This study suggests diverse substitutes and complements for Krispy Kreme Doughnut Company’s products. Clients normally look for quality doughnuts at reasonable prices. These clients have similar consumer behaviours to those in other industries. They show high sensitivity to price variations and have low switching costs. The company’s substitute goods have a significant impact on the firm.

The organization contends with the difficulty of a rise in the demand for its competitors’ products like bagels that become more popular than doughnuts. This fact is an upcoming trend that is diverting the demand of clients from doughnuts. Several companies engage in the sale and distribution of bagels. The businesses comprise of Einstein Brothers and Bruegger’s. Panera featured as the second-fastest developing restaurant chain in 2006. A number of its product offerings include sugary bagels and sweets.

These products provide direct competition to doughnuts. In addition, the standard bagel has more calories than the doughnut. Panera’s products also have the most “calorie-laden” bagels in the fast food sector. These substitutes offer intense competition to the Krispy Kreme Company. Groceries may constitute additional substitute goods for the Krispy Kreme Company.

The quality of food prepared for household consumption is still high in the market. This paper advances the fact that more than half of the expenses incurred by households relate to foodstuffs. Home food continues to become popular with a majority of clients. A rise in the cost of gasoline increases the sale of home food in restaurants and hence clients prefer buying it from the joints instead of preparing it at home.

Alternatives can include unique types of bagels and baked food supplied to distribution units. These substitute products also threaten to diminish the revenue power of Krispy Kreme Doughnuts Company. Branded bagels and other baked goods have more power in the food industry than doughnuts. The increase in the popularity of the bagels may be risky to the Krispy Kreme Company. Additional alternatives may constitute milk and types of juices.

Company’s market share

The Krispy Kreme Doughnuts Company operates within a diverse sector of fast food restaurants. The company operates in the quick service restaurant portion (QSR) (Kowalski, 2009). The business competes in two separate markets. The first comprises of the restaurant industry.

Food, casual and complete services comprise of the three categories of market targets. The variations among the three classes of markets can be attributed to the value and environment. The firm’s limited menu and store “décor” indicates its position in the fast food industry. However, the quality of the doughnuts can be linked to the value of food. The food sector has performed competitively during the past year.

This aspect is despite the presence of financial difficulties in the market. Key business rivals of the Krispy Kreme Doughnuts Company include Dunkin’ Donuts and Tim Hortons. Dunkin’ Donuts owns about 5600 branches across the world. The branches feature in 39 countries. Tim Hortons owns 337 stores in the United States. However, the company’s Canadian presence is more significant than in other regions.

Tim Hortons owns close to 2,713 stores, more than even McDonald’s in Canada. Krispy Kreme’s business rivals may attain a competitive edge over the company in future because of their unique food products. Dunkin’ Donuts’ unique innovation of a coffee drink has boosted the organization’s market rating against its business rivals. Today, the business may be among the best in the sector for its doughnut products.

The coffee division of fast food and casual restaurants is a significant one. About 17% of Krispy Kreme’s sales may be necessitated by the company’s beverages. This aspect may be relatively lower than the sector’s average. The Krispy Kreme Doughnuts Company trades in a unique coffee brand that gives the business a competitive edge over its market competitors. This aspect boosts the financial margins of coffee higher than the margins accrued on doughnuts (Krispy, 2010).

Market structure

The market structure that best describes the conditions of Krispy Kreme Doughnuts Company is perfect competition. This concept is a market design that has several buyers and sellers of one product. This study observes several operators in the restaurant industry.

These include, McDonalds, Starbucks, Costa Coffee, Café Nero, Greggs, Millies Cookies, and Café Ritazza. These companies are price takers because they do not sell their products above the prices of their competitors. The constituents of demand and supply dictate the cost in an equilibrium context. In addition, this paper affirms perfect knowledge about the market in this structure.

Strategies for Krispy Kreme Doughnuts Company

A number of the strategies that Krispy Kreme Doughnuts should adopt in the future may include expansion into unexplored markets like Japan. The company should consider opening new stores in Japan and densely populated regions like China. These countries may provide an appropriate new market to boost the sales of the company. The business should maintain its two thirds franchise ratio as it seeks expansion into new markets abroad.

In addition, the organization should pursue a re-evaluation of domestic markets to identify the weak links. The emblem of the business must be conspicuous on the covers of doughnuts and the shops themselves. This aspect can improve the brand of the business. The organization should also improve its kiosks’ aesthetics. This concept can give the company a new look to attract prospective clients. The business should transform its menu to include healthy foods and operate in compliance with healthy standards.

This notion may increase the consumer base by attracting people who consider to leading healthy lifestyles by consuming home food. In addition, the business should sustain links with the community and use modern advertising approaches. It must improve its communal obligations especially charitable initiatives. The enforcement of these strategies may oversee a positive transformation for Krispy Kreme Doughnuts in the food industry across the world.

References

Kowalski, R. (2009). Starbucks Wars: How McDonald’s and Starbucks Defined Their Industry. Web.

Krispy, K.(2010). Annual Report. Web.

Mastrull, P. (2010). . Web.

McGuigan, P.(2010). . Web.

Michelman, P. (2007). . Web.

Peach Report .(2009). How Krispy Kreme brought doughnuts to the UK. Web.

Rusch, R. (2011). Krispy Kreme on the rise. Web.

Thomas, J. (2010). How one rival doughnut franchise is cashing in on Krispy Kreme closures. Web.

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IvyPanda. (2020, January 13). An economic analysis of Krispy Kreme Doughnuts Company. Retrieved from https://ivypanda.com/essays/an-economic-analysis-of-krispy-kreme-doughnuts-company/

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"An economic analysis of Krispy Kreme Doughnuts Company." IvyPanda, 13 Jan. 2020, ivypanda.com/essays/an-economic-analysis-of-krispy-kreme-doughnuts-company/.

1. IvyPanda. "An economic analysis of Krispy Kreme Doughnuts Company." January 13, 2020. https://ivypanda.com/essays/an-economic-analysis-of-krispy-kreme-doughnuts-company/.


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IvyPanda. "An economic analysis of Krispy Kreme Doughnuts Company." January 13, 2020. https://ivypanda.com/essays/an-economic-analysis-of-krispy-kreme-doughnuts-company/.

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IvyPanda. 2020. "An economic analysis of Krispy Kreme Doughnuts Company." January 13, 2020. https://ivypanda.com/essays/an-economic-analysis-of-krispy-kreme-doughnuts-company/.

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IvyPanda. (2020) 'An economic analysis of Krispy Kreme Doughnuts Company'. 13 January.

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