Krispy Kreme Donuts Inc. The Donut Industry The donut industry in the United States was a $5 billion to $6 billion market in 2003-2004 with a robust growth rate of 13 %. Specialty donut shops were the fastest-growing restaurant category in 2002-2003, with sales increasing 9 percent to about $3.6 billion. Expansion opportunity in North America and globally is desirable. Donuts appeal to many people of all ages and demographics. The growing obesity rate and concern for healthy living trigger a shift in shopper demand towards a more health-conscious diet. The donut industry consists of some major competitors which are Dunkin' Donuts ($2.7 billion), Tim Hortons ($651 million), Krispy Kreme Donuts Inc. (KKD) ($665 million), Winchell's Donut House and a large number of smaller, independent donut shops, including neighborhood bakeries/donut shops and bakery departments in supermarkets. (See Figure 1) Major players in this industry rely heavily on franchising and royalties paid to parent companies. Most companies are resellers that sell directly to end users. Some, for example KKD, also use other channels to distribute their products. Price competition between rivals is close to zero, industry players are very competitive when it comes to product differentiation. Product offerings to meet consumer demands include a variety of coffees, juices, muffins, bagels, cookies, cream cheese sandwiches, soups and other miscellaneous items. The Competitive Environment: Competitive Success Rivalry between competing sellers can be classified as strong. Competing sellers consistently offer a broader product selection to dissuade competition, such as Dunkin' Donuts' introduction of bagels and cream cheese sandwiches to protect itself from pressure from Starbucks, the expansion of its lunch menu by of Tim Hortons and KKD's acquisition of Digital Java. able to compete in the coffee segment. The threat of new entrants is moderately strong. Incumbents do not strongly contest the entry of new players, but existing members of the industry are constantly seeking to expand their geographic reach and offer a broad assortment of products. Brand awareness and customer loyalty are high and very important in this industry. Donut substitutes are readily available, including other baked goods such as bagels, muffins, healthier food alternatives such as sandwiches, yogurt, fruit and other comfort foods such as ice cream and chocolates. . The cost of change for consumers is low. The bargaining power of suppliers is very low. The main players are vertically integrated, for example KKD produces its own equipment while others collaborate with suppliers.