Kristy Creme Doughnuts Harvard Case Solution & Analysis

Kristy Creme Doughnuts Case Solution

Problem Diagnosis

Kristy Creme Doughnuts had completed its initial public offering on April 5, 2000 and by the end of the first trading day of the company, the stock price had reached the level of $ 9.25 per share from $ 5.5 per share with a growth of 76%. The stock price had soared to around $ 45.66 per share and $ 37 in 2001 and 2002. The IPO had resulted in strong financial performance and growth for the company.

For instance, the company’s return on beginning equity was 21% and the earnings and revenue growth were 80% and 31% respectively in February 2002. Now the challenge for the management of the company and the CRIB World Markets Jeffrey Farmer and John Class was to forecast the growth and the financial performance of the company over the next few years. Whether Kristy Creme Doughnuts would be able to sustain its huge revenue and profitability growth and what working capital and the other types of resources would be required by the company.

The nature of the competition within the doughnut industry will have to be examined and an evaluation of the recent financial performance and the growth strategy of Kristy Creme Doughnuts Company will need to be understood. Finally, how the future growth of Kristy Creme Doughnuts Company will be financed will also be explored and strategic recommendations need to be made to the management of the company.

Case Analysis

The analysis of the doughnut industry needs to be performed in detail and for that purpose, we have applied the Porter’s Five Forces model. We begin the analysis with the industry as shown below.

Porter’s Five Forces

The analysis of the doughnut industry is as follows (Porter, 2008):

Competitive Rivalry (High +++)

The number of the competitors is high in the industry and all of them are competing for the same customers. There are a number of coffee chains such as Starbucks and Costa, which are competing to become number one in the industry, and all of them have similar market goals. The product differentiation among the competitors is limited; however, there has been fierce differentiation in terms of store ambiance, brand and the product range of each competitor (Iscariot, 2002).

The customers in this industry promote price wars because there are zero switching costs. The available prime locations for the outlets are limited in the industry and this leads to conflicts for the market share. Moreover, the competition becomes fierce because of the static market growth. All the smaller chains in this industry need to settle within less desirable locations or pay a premium to get their desired sites.

The whole industry is highly fragmented and the Kristy Creme Doughnuts faces strong competition from Dunking Donuts. There are also a number of other regional bakeries, which sell doughnuts through their retail stores, restaurants, convenience stores and supermarkets (Carver, 2010). Overall, the competitive rivalry is very high in this industry.

Bargaining Power of Suppliers (Low)

The switching costs in the industry are low and there are a large number of the suppliers to choose from. There are a large number of the businesses, which are vertically integrated with only discommoded raw ingredients. If we specifically talk about Kristy Creme Doughnuts Company, then it supplies its own machinery and mixes to the franchises (Bennett, 2009). These represent the costs of labor mostly, and therefore, the supplier power is not strong.

The company also enters into the futures and the forward purchases contracts to mitigate the risk from the commodity price fluctuations. The profitability of the company is so strong that it is subject to the commodity price changes (Bennett, 2009). The labor turnover is also high around the industry. The tenure of the employees is short and employee retention is low, which suggests that the supplier power is low for Kristy Creme Doughnuts Company because hiring and retaining new employees is quite simple.

Kristy Creme Doughnuts Harvard Case Solution & Analysis

 

Bargaining Power of Customers (Low)

There are numerous buyers in the market and they are highly fragmented. Although there are not any switching costs for the buyers but the drink and the food market is an important part of the fabric of the society. Companies like Kristy Creme Doughnuts maintain strong brand power in the retail stores through specific display kiosk, which are set up for the products of the company in each of the display stores (Carver, 2010)...............

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