Porter’s five forces industry analysis for Krispy Kreme

Saturday, January 29th, 2011 at 9:00 am

What is Porter’s Five Forces? Well I doubt there is any need to explain one of the most famous strategic tools around but just in case, it is a tool to analyse the external industry to find the root causes of profitability.

Again seeing an example is useful and below is a five forces analysis of Krispy Kreme.

Rivalry among existing competitors (High +++)

  • High concentration of rivals e.g. Starbucks and local chains
  • Static market growth
  • High fixed costs
  • Perishable products (food and drink)

A large number of competitors in the industry are all competing for the same customers. Coffee chains (e.g. Costa, Starbucks) are all competing to be number one in the market and have similar corporate goals.

While product differentiation is limited, there is fierce differentiation by product range, brand and store ambience (e.g. seating). There are zero switching costs for customers, which promotes price wars.

Market growth is static, which promotes fierce fighting for market share, and there is saturation of competition due to the limited number of prime locations available for outlets. Smaller chains have to pay a premium for prime sites or settle for less desirable locations.

Threat of new entrants (Medium +)

  • Large capital requirements required to build chain of stores
  • Favourable locations are already occupied
  • Economies of scale in distribution and raw ingredients (lower per unit costs due to the experience curve)
  • Product and brand differentiation

Capital requirements for individual stores are low, however new entrants wishing to compete on a like basis with national store networks, distribution channels, brand equity development and advertising, face large capital requirements to gain market share. This is reflected in the large number of individual outlets compared with the small number of large, proven top specialty eateries.

The UK commercial property market is landlord-driven and controlled; premium locations in the UK are scarce and command high prices with most of the favourable locations within town centres, airports and train stations already being occupied by existing competitors.

Threat of substitutes (Medium +)

  • Large choice of alternatives with similar products e.g. energy drinks, cakes, biscuits, ice-cream, chocolate
  • No switching costs

Although a consumer can choose from multiple substitutes (e.g. desserts, pastries or drinks), speciality eateries compete based on convenience and opportunity. Most people buy from speciality eateries when travelling, shopping or meeting people. This is evidenced by the location of the eateries, which is concentrated around high footfall locations such as train stations, business districts and shopping centres. For a consumer this becomes a competitive choice rather than a substitute choice (e.g. do I buy a coffee from Starbucks or Costa).

Other substitutes come from full menu eateries such as restaurants and fast-food outlets with a smaller threat from supermarkets.

Bargaining power of suppliers (Low)

  • Vertically integrated businesses with only commoditised raw ingredients
  • Large number of suppliers to choose from and low switching costs

Bargaining power of buyers (Low)

  • Buyers are fragmented and numerous
  • Although there are no switching costs for the buyer the food and drink market is part of the fabric of society

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This entry was posted on Saturday, January 29th, 2011 at 9:00 am and is filed under Featured, General.
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