Competitive Advantage O Donut example essay topic

Krispy Kreme first traded its Shares in the NASDAQ market on April 5, 2000. Under the ticker symbol KID Krispy Kreme started trading on the NYSE on May 17, 2001. Krispy Kreme offers 3,450,000 shares for the public to grasp. Financial Outlook When reviewing the financial analysis of Krispy Kreme Doughnuts, Inc we have grown by leaps and bounds in the pass five years.

Management has cut expenses considerably, by reinvesting in the business and opening the door to franchisees. In analyzing the financial strengths of the company and how the functional strategic technique management has chosen to generate profits from operations we would like to show how rewarding that has been. Systemwide sales for Krispy Kreme between 1998 and 2002 have increased on average 23.5%, which is a indication of the demand for the product. Company revenues for that time period increased on average 20%, and net income increased on average an outstanding 42% for the same time period (see chart 1, 2, 3). This only indicated how well the Companies strategy is working and the magnitude of the product. Krispy Kreme current quick ratio as of year ending February 2, 2003 was 1.96, which is the current assets minus inventory divided by current liabilities.

This indicates the firms liquidity, the ability to pay it short-term debt from current assets, which gives us a competitive advantage in the industry. To show the profitability of the firm lets take a look at the net profit margin. This shows the after-tax profit generated from each sale. For the same time period Krispy Kreme has a profit margin of 4%. Also indicating the profitability of the company is the return on investment (ROI) and return on equity (ROE). We measure the quality of our management and how efficient the firm is run by ROI, the net profit after tax divided by total assets.

This also shows that good sound investments are made to aid in the growth of the firm, we are holding our own at 4%. ROE gives our shareholders an ideal of how the company is growing. Our shareholders are the life of Krispy Kreme, they are what keep us going, and for the period ending 2/2003 the ROE was 2% this is computed by taking the net profit after taxes divided by the shareholders equity. Listed below is a liquidity and profitability chart indicating our progress over the past five years which is a sound bases for forecasting an average increase of 3% over the next two years. This would make way for new innovations in our product line. SUMMARY OF FINANCIALS Key ratios YEAR ENDED 1/31/99 1/30/00 1/28/01 2/3/02 2/2/03 Current Ratio 1.33 1.14 1.08 1.94 2.36 Quick Ratio 0.94 1.05 0.76 1.63 1.96 Cash Ratio 0.17 0.11 0.32 0.42 0.54 Net Profit Margin 2% 3% 5% 7% 4% ROI 3% 6% 9% 1% 4% ROE 6.80% 1.20% 1.20% 1.40% 2% Krispy Kreme Weighted Competitive Strength Assessment Weight Krispy Kreme Dunkin' Donuts LaMar's Donuts Tim Horton's Key Success Factor / Strength Measure Quality / Product performance 0.20 8/1.6 8/1.6 8/1.7 8/1.8 Reputation / Image 0.10 8/0.8 8/0.8 6/0.6 8/0.8 Manufacturing capability 0.05 8/0.4 8/0.4 6/0.35 8/0.4 Technological skills 0.05 6/0.3 7/0.35 6/0.3 7/0.35 Networking / Distribution capability 0.05 8/0.4 8/0.4 6/0.3 8/0.4 Product innovation 0.10 6/0.6 7/0.7 6/0.6 8/0.8 Financial resources 0.10 8/0.8 8/1.6 8/1.7 8/1.8 Advertising 0.05 7/0.35 9/0.45 6/0.3 10/0.5 Relative cost position 0.20 7/1.4 7/1.4 7/1.5 7/1.6 Customer service 0.10 8/0.8 7/0.7 7/0.7 8/0.8 Sum of weights 1.00 Weighted overall strength rating 7.55 8.4 8.05 9.25 SWOT Analysis Strengths: o Affordability of products o Well established and long running company o Long term company values that have remained virtually unchanged since company inception o Loyal customer base o Nationally known brand of donuts o Hot, fresh donuts daily offer competitive advantage o Donut-making "theatres" o Strong Community relationships o "One-of-a-kind taste" Weaknesses: o Limited menu items o Markets are leaning towards healthier food products o Heavy competition o Lack of advertising Opportunities: o Expansion into premium coffee lines o Diversification of product offerings o Co-Branding opportunities o Expansion into a more global marketplace o Web based sales of Krispy Kreme merchandise Threats: o Stiff competition from several similar companies o Healthier product alternatives available Porter's 5 Forces Supplier Power- Supplier's power is very limited in this industry due to the sheer number of possible suppliers of ingredients that are easily obtained.

Supplier power is also limited by the fact that Krispy Kreme's mixing facilities have been centralized. Buyer Power- Buyer's have abundant power in the donut industry. There are many options available to the buyer. They can make their own donuts or pick and choose from a wide range of donut stores.

In order to draw customers away from the other options Krispy Kreme must use methods such as the donut theatre to lure these buyers. Barriers to Entry- There appear to be very few barriers to entry into the donut industry. When you are specializing in one simple product such as a donut, equipment is minimal and knowledge to produce donuts is easily gained. Anyone who has cooked at home can quickly learn to cook donuts. Threat of Substitutes- There will always be substitutes for donuts and the lean towards healthier living creates a vast range of substitutes. An example would be bagel or muffin chains offering a healthier alternative to donuts.

Krispy Kreme must be aware of these alternatives and be prepared to adjust their product line to accommodate or lure potential customers. Rivalry- There has been and may always be a large amount of rivalry between competing donut producers. The range of producers is vast, from small private bakeries to larger chains such as Dunkin' Donuts. Donuts are easily produced from relatively inexpensive ingredients. This creates competition and rivalry and Krispy Kreme should be look at expanding its product lines into new markets.

Financial Krispy Kreme's total revenue has grown at a compound average rate 17.4% since 1995. The overall percentage increase in revenues over the seven year period from $115 million to $300.7 million is 161.5%. Net income has increased steadily. Net income jumped from $4.6 million to $14.7 million between 1995 and 2001 for a CAGR of 21.3%. System wide sales are up from $146.7 million to $448.1 million for a CAGR of 20.5%. Operating profit margins have also steadily risen from 12% in 1997 to 30% in 2001.

This indicates that Krispy Kreme's profit margins are excellent and still on the rise. Average weekly and annual sales comparison show that between 1995 and 2001 the CAGR in annual sales for company owned stores was approximately 7.4% and the CAGR in annual sales for franchised stores was 11.8%. While there is still room for improvement these financial performance results are good.