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Krispy Kreme’s doughnut products belongs in the bread and roll market of the retail food industry. This market grew by 3.6% in 2003, and reached a value of $18.8 billion, in the United States alone. The market is expected to increase to $21.9 billion by 2008, an increase of 16.4%.

The industrial-white sector, which includes doughnuts, makes up the primary revenue source for the market, accounting for 51% of the market’s value (“Bread & Rolls”). The market is a mature to declining market. Pricing remains low due to competition, but focus is on loyal niche consumers, especially for Krispy Kreme which has received almost cult status in many areas.

Promotion of Krispy Kreme’s product focuses on its unique taste as its main differentiation, as well as their ‘hot light’ that signals to customers that their Original Glazed doughnuts just came right out of the oven (“Original Glazed”).

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

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

In addition, Krispy Kreme has 30.6% of the US market share. This is further complimented by the company’s healthy balance sheet and cash flow. Their “debt-to-capital stands at 6.1% and models suggests that the company can post a five-year 25% EPS CAGR without taking on any more debt. The company has bought back a number of franchise systems, however, which has increased debt from $8.5 million in FY02 to $136.1 million in FY04” (“Krispy Kreme Doughnuts”).

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

Shareholders or owners of company stock wish for the company to maximize its revenue and share these profits with its owners. Debt holders wish the company to pay off its debts first. At present, according to the Investor Relations section of its website: “Krispy Kreme does not pay a cash dividend,” because of its poor earning performance and debt. (“Investor F& Q,” 2006, Investor Relations: Krispy Kreme Official Website)Market evidence supports the assessment that Krispy Kreme’s strengths exceed its weaknesses. However, there are weaknesses that need to be addressed. These include the fact that in an increasingly health conscious market, Krispy Kreme is offering no healthy alternatives to their high calorie product. In terms of advertising, the company relies solely on word of mouth and name recognition, and spends none of its revenue on formal advertising in any media. Furthermore Krispy Kreme does not include delivery service, thus failing to capitalize on a vast potential market and also the opportunity to gain new customers.

Net income for fourth quarter fiscal 2004 increased 45.3% to $16.4 million compared with $11.3 million in the fourth quarter last year, before the $9.1 million pre-tax arbitration award discussed in the Company’s 8-K filing dated February 10, 2003. Diluted earnings per share for the quarter increased to $0.26 compared with $0.19 last year, before the arbitration award (“Krispy Kreme Announces”).

The corporate owned stores hold the most profit for Krispy Kreme. “Sales from company stores advanced 36.0% to $124.7 million; KKM&D sales increased 31.5% to $52.2 million; franchise operations grew 18.3% to $6.3 million and Montana Mills revenues were $2.3 million” (“Krispy Kreme Announces”).

To understand Krispy Kreme’s position in the industry, their strengths, weaknesses, opportunities, and threats will be overviewed.

Strengths:

Krispy Kreme’s strengths include a variety of factors. First, the organization has a strong brand following, in the industry. In addition, the unique taste and texture of their product is a considerable strength. Their product has a diverse demographic appeal, which has allowed them to enter a diverse array of markets. The organization enjoys the assistance of experienced franchisees that have been instrumental in the growth of the organization to date. And, thanks to its internal structure, Krispy Kreme has the capacity of producing high volumes of product, and enjoys the economies of scale due to this fact.

Weaknesses:

There are some weaknesses that have negatively impacted Krispy Kreme. They have a limited product selection. Their product line-up includes doughnuts and beverages, and as such, a decline in either significantly impacts the organization. Add to this the fact that the average pricing for Krispy Kreme doughnuts is at the moderate end of the scale, for the industry, and this becomes an even greater weakness with weak economies where consumers traditionally turn towards lower priced products.

By increasing the number of corporate owned stores, it is anticipated that Krispy Kreme’s profits will increase. Expansion into foreign markets, once established, also should expect to see increased revenue generation and increased profitability. By diversifying, it is anticipated that not all acquisitions will fit well with the Krispy Kreme organization and may need to be liquidated, but eventually, they should be able to build a portfolio of complimentary businesses that serve the organization well.

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

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