Sunday, June 21, 2009

Krispy Kreme Agressive Expansion Outside US

Krispy Kreme was first founded by Vernon Rudolph in 1937. Since then, it went through a period of blistering expansion albeit facing some financial and operational difficulties in mid 2000s. The first store opened outside North America was in Sydney, Australia in 2003. Besides that, there are also franchise owned stores in UK, South Korea, Hong Kong, Indonesia, Philippines, Japan, Qatar, Saudi Arabia and the most recent one in Malaysia

Possible reasons to expand outside US:

(1) Increase supernormal profits. This is the most fundamental argument and it is also the reason businesses are set up for. Probably the management in North Carolina felt that there is not much space for further growth since most market has been tapped into. The argument sounds since they have been operating close at home for nearly 70 years. Their strongest market is within the Southeast. They even took a bold move to set up stores in Massachusetts, the backyard of its rival, Dunkin Donuts in 2003. Now it will have to choose to go international, since profits usually increase with the size of operation

(2) High income growth. Just before the credit crunch crisis, many countries in East Asia were experiencing a period of economic boom. This led to the creation of many middle income earners with higher appetite to spend outdoor, thus presenting a window of opportunity for Krispy Kreme to capture the market segment. In Japan, between the period of 2006 and 2007, we witnessed a fight-back of Japanese economy, although fragile but still a big market. Last but not least, the bull-run in oil prices have had a significant multiplier effects onto most Gulf Nation’s economy. Rise in income means rise in standard of living. People will want to consume more and desire for variation in goods.

(3) Strong competition in US. Although Krispy Kreme (KK) successfully enlarged its market share in US, still it is no match for Dunkin Donuts (DD). It loses out in many ways. First, its product is not well diversified unlike DD which serves bagels, breakfast sandwiches and now increasingly specialise in coffee. Many claim that its coffee is even better than those served in Starbucks. As such, it gained notorious reputation from industry observers as “coffee shop disguised as doughnut shop”. Besides, one would most likely purchase DD's coffee along with its doughnut (complement goods) though the taste is inferior to KK. It may not be economical to travel to KK to get the doughnut separately

Second, DD invaded the South with a different sort of doughnut which is thicker and cakier than the traditional Southern treat which is lighter and sugar-glazed. The attempt to break KK customers’ loyalty seems to work. Last but not least, DD’s research team had successfully cracked a code in doughnut production. Now it is almost trans-fat free and yet its original taste is preserved, something that Americans desire for in the light of increasing health awareness. Unfortunately, KK made the discovery a little too late

(4) Minimise losses. KK faced a series of financial and operational difficulties earlier. Its share price and profits skyrocketed after listing in 2000 but crashed in 2004 after its shareholders filed a lawsuit. Its reputation also tarnished with investigations alleging it engaged in faulty accounting. Nosediving share performance will make it hard for them to raise sufficient capital for investment in US. With limited capital, therefore it only makes sense it they choose to operate in a low-cost economy. Besides, it can also help KK to offset its financial losses in home country

(5) Create brand awareness. To be honest, I’m not a great fan of doughnut due to health-consciousness. As far as I’m concern, I have seen Dunkin Donuts all over here in Malaysia, from pump station to even hypermarket. But, I just got to know about the existence of Krispy Kreme lately, when its first store was opened in April and I heard that it went well with the locals here. Those who work nearby now frequent it daily after having their first-bite on the original glazed

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