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Porter’s Five Forces Analysis of Krispy Kreme
Introduce
Krispy Kreme Company, which Vernon Rudolph founded in 1937 as a family business, is

currently a renowned international chain of doughnut stores (Ireland et al. 105). The company’s

stock hit its peak in 2003 where it was traded at $49.37 before it started sliding through most of

the 2005 (Sutorius, Jordan, and Benjamin 5). Krispy Kreme experienced major closings of

Canadian stores, New York, and even southwest and all these were prompted by the 2005 and

2006 bankruptcy. It is interesting that the company stilled managed to produce 5.5 million

doughnuts per day and about 2 billion a year in 2007 (Ireland et al. 105). Krispy Kreme has also

managed to open more than 235 stores in the United States in about 43 states (Sutorius, Jordan,

and Benjamin 5). Restaurant industry where the company operates has performed considerably

well in the past years. The two primary competitors of Krispy Kreme include Tim Hortons and

Dunkin' Donuts. To understand the company’s cause of profitability, analyses restaurant industry

using Porter’s Five Forces.

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

various mitigation factors that are related to the five forces. The strategy determines the intensity

of competition and the general attractiveness of a given industry (Hill and Gareth 45).

Consequently, it can be used to identify the competitive position of Krispy Kreme within the Fast

food restaurants industry (QSR).

Potential Entrants
The first force is the new entrants, which looks at the possibilities of the new firms

joining the industry. Entry level in the restaurant industry is relatively weak as sustaining new

business in an industry in its maturity stage is difficult (Fish et al. 7). For instance, the three top
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players, Krispy Kreme, Tim Hortons and Dunkin’ Donuts, have already developed and enjoys

significant economies of scale that give them a cost advantage over possible entrants (Sutorius,

Jordan, and Benjamin 6). Consequently, the threat of new entrants into the industry is weak.

Already established companies such as Krispy Kreme are capable of lowering their prices to a

level that new firms cannot maintain due to their high economies of scale.
A weak potential entrant from a global perspective is advantageous to the firms already in

the industry. For instance, it implies that the market share will remain unchanged, which does not

change the profitability of the industry. In fact, the few established firms in the Fast food

restaurants industry will only fight on their own without any additional business. Since the

market share will have a minimal effect due to the weak potential entry, the company's

profitability will not be affected much.

Threats of Substitute Products
Customers of Krispy Kreme are interested in quality doughnuts at considerably lower

prices. The company's customers have low switching costs and are very sensitive to price.

Therefore, substitute products have a significant influence on the firms operating in this industry.

It makes threats of substitute goods to be relatively strong.

The increase in the global substitute and complement goods such as groceries and food

prepared at home has a significant impact on the industry (Sutorius, Jordan, and Benjamin 11).

For instance, increase in the prices of gas globally increases the rate at which people prepare

meals at home, as everyone is interested in cutting transportation costs to restaurants.

Furthermore, chain supermarkets and even local groceries around the world have bakeries where

substitute doughnuts are produced, which is a significant threat to Krispy Kreme sales.
When customers are, sensitive to price and have low switching costs, the availability of

substitute products reduces sales of the Krispy Kreme and a reduced sale leads to reduced

profitability. The industry has a large choice of alternatives that are similar to the products

offered by the existing firms. Some of these commodities include cakes, chocolate, biscuits, and
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energy drinks among many others. Since there are almost zero switching costs, a slight increase

in the price of doughnuts or reduced quality can quickly push customers into buying the

alternative products, which will significantly affect the profitability of the firm and the industry.

Power of Suppliers
Supplier power is weak, as it is Krispy Kreme that supplies machinery and mixes to its

franchise. The industry has a significant number of suppliers that firms can choose at low

switching costs. Krispy Kreme is equally applying the forward purchases contracts as well as

future contracts with the aim of reducing risks such as price fluctuations on the commodity. The

restaurant industry has high laborer turnover, which is an indication that employee retention

significantly low and the tenure short (Sutorius, Jordan, and Benjamin 11). However, replacing

and hiring of new laborers is simple, which shows that Krispy Kreme is experiencing a low

supplier power.
The profitability of Krispy Kreme depends on the changes in the price of the commodity.

Global price shocks that may result from natural disasters are capable of interfering with the

supplier of essential raw materials required by the company. Consequently, it may reduce the

production level, which will create shortage due to low supply of doughnuts.
The fact that the industry has a weak power of suppliers makes the profitability of the

industry relatively stable. Suppliers are not capable of increasing cost of supplying materials to

the industry, which has the potentials of increasing Krispy Kreme’s cost of production (Ireland et

al. 114). Stability of production costs that result from the stable cost of materials helps in

stabilizing the profitability of the company.

Power of Buyers
Krispy Kreme sells its doughnuts in its stores as well as to retailers for resale. Most of the

retailer’s stores have a specific kiosk for the company's products, which makes the company

compelling concerning branding. Retailers such as Wal-Mart have the power of sharing the profit

margins out of these vendors due to their market power that is capable of hurting the company
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should the products be excluded from their shelves. However, consumers are capable of

leveraging market power to pressurize firms into offering goods and services at a significantly

smaller profit margin (Ireland et al. 114). For instance, consumers prefer diversity and are

increasingly becoming conscious about their health. Consumption of “sweets” such as doughnuts

is becoming less preferred. Since they equally have low switching costs, buyers are always

enticed to excise that right to switch. Consequently, there is substantial bargaining power from

the customer's perspective.

Changes in consumer preferences worldwide have a significant effect on the power of

buyers. For instance, the consciousness of living a healthy life is becoming a global thing, which

consequently causes a threat to the fast food restaurants. It lowers switching costs of the buyers,

which makes it easier for them to leave the Krispy Kreme products.
The profitability of the industry is likely to be affected when most buyers have the power

to switch from doughnuts to other “healthier” products that do not have sugar. When customers

decide to buy different products, the industrial sales goes down. Decreased sales mean lower

revenue, which translates to low profitability.

Internal Rivalry
It is important to note that Krispy Kreme operates in two markets, which include a

restaurant and fast food. In the industry, the company has direct competitors such as Dunkin’

Donuts, Starbucks Company, and Tim Hortons (Fish et al. 8). The number and size of the direct

as well as indirect competitors is an indication of an intense rivalry in this industry.

The competition, whether direct or indirect, from a foreign market, intensifies

competition in the restaurant industry across the world. The increased competitive strength of

these firms gives them the power to compete in the same strength as Krispy Kreme, which makes

competitive rivalry in the industry even much stronger. In fact, with increased competitive

strength of the competitor, more market share is lost, which reduces the profitability of the

industry. For instance, many or much stronger firms are sharing the same market.
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Conclusion and Recommendation

From the porter’s five forces analysis, Krispy Kreme Company is not facing a significant

threat from possible entrants as they have already large economies of scale (Hill and Gareth 46).

Consequently, the firms still capable of maintaining their market share. So many products and

supplements exist, which poses a significant threat to industrial sales. Thus, the company should

open many stores in congested areas such along the traffic areas to boost sales. The company

should practice a high level of differentiation of its products to provide a wider variety for its

consumers to prevent switching to products offered by competitors. Through differentiated

products, Krispy Kreme will be capable of reducing the power of buyers, which is also a

challenge the company is facing. The power of suppliers remains weak, but the company must

work towards enhancing its relationship with suppliers to ensure a smooth flow of materials to

avoid possible disruption of production. Finally, to deal with the rivalry within the industry,

Krispy Kreme must make sure that its products are highly differentiated and unique in both

quality and price. That way, it will be able to remain competitive despite the high rivalry level in

the industry.

References
Fish Tim, White Brad, Christina, Vance, Stephanie Bogan, Anthony Vatterott. “KKD Case

Analysis.” Krispy Kreme Doughnuts. 2009. Print.

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Hill, Charles W. L, and Gareth R. Jones. Strategic Management: An Integrated Approach.

Boston: Houghton Mifflin, 2008. Print.

Ireland, R D, Robert E. Hoskisson, and Michael A. Hitt. Understanding Business Strategy:

Concepts and Cases. Mason, OH: Southwestern Cengage Learning, 2008. Print.
Ireland, R. Duane, R. E. Hoskisson, and M. A. Hitt. "Strategic Management: Concepts:

Competitiveness and Globalization." Cengage Learning, 2010. Print.

Sutorius Brian, Jordan Kunz, Benjamin White. “Strategic Report for Krispy Kreme Doughnuts,

Inc.” Gotham Global. 2007. Print.