Krispy Kreme Takes a Fresh Approach to Growth

    Now public, the company wants to become the "most loved sweet treat brand in the world.”

    Finance | August 18, 2021 | Danny Klein
    Krispy Kreme.
    Krispy Kreme
    Krispy Kreme grew net revenue 43 percent to $349 million, year-over-year, in Q2.

    The story unfolding at 84-year-old Krispy Kreme is one of accessibility and a “hub-and-spoke” model that’s connecting all of it. Yet the selling point is hardly technical. Krispy Kreme ended Q2—its first as a public company in five years—with 9,575 global points of access. In the first half of 2021 alone, it added 1,300 of them, and expects to tack on 800–1,000 per year going forward.

    This did not include legacy “DSD stores,” however. It was entirely “fresh” points of access.

    The word “fresh” signaling a literal shift in the company’s trajectory.

    By the time Q2 closed, for the first time, 100 percent of Krispy Kreme’s doughnuts served in the U.S. and Canada were delivered fresh. The biggest difference from past efforts? It didn’t matter where guests purchased them.

    It’s a fundamental evolution for Krispy Kreme, and a critical step set into action ahead of its June IPO. At one juncture in 2020, a full 38 percent of Krispy Kreme’s U.S. doughnuts did not meet the fresh bill.

    READ MORE: Where Krispy Kreme ranked among the biggest chains in America last year

    And when Krispy Kreme began to discontinue its old wholesale program, the company introduced the same pricing structure offered in shops. So guests picking up Krispy Kreme fresh in retail now pay the same as their local branded store.

    “And the first thing that drives up profitability is having the higher price point and that is driving the weekly sales up. And we're thrilled to see that across all our customers,” COO and CFO Josh Charlesworth said Tuesday during a conference call.

    Average weekly sales per door jumped more than 30 percent in Q2, which reflected Krispy Kreme’s transition to fresh donuts and the price consistency that followed. If you remove the impact of the chain’s legacy wholesale business, Krispy Kreme’s U.S. and Canada segment would have recognized organic sales growth of nearly 19 percent.

    Overall, Krispy Kreme reported net revenue growth of 43 percent to $349 million and organic growth of 23 percent. On a two-year basis, organic revenues hiked 16 percent.

    The company’s transformation in recent years centers on this “Hub-and-Spoke” distribution model, which is designed to provide a route to market. Essentially, Krispy Kreme’s “Hot Light Theater Shops” and “Doughnut Factories” serve as centralized production facilities, or “hubs.” From there, the company delivers doughnuts to its fresh shops and DFD (Delivered Fresh Daily) stores, or “spokes” through an integrated network of corporate delivery routes. It’s the unlock to bringing a fresh product systemwide.

    The company invests in “fresh doughnut manufacturing hubs,” primarily its Hot Light Theater Shops, and uses those to supply additional points of access. It helps with efficiencies, the company said, since each new point of access leverages an investment already made in a manufacturing hub. The more spokes added, the more efficient Krispy Kreme becomes.

    Since the end of 2020, Krispy Kreme increased its spokes per hub in the U.S. and Canada from 37 to 45. Internationally, the number climbed from 65 to 71.

    The brand measures effectiveness of this model with a “sales per hub” statistic viewed on a trailing 12-month basis, which includes revenue generated from a hub and its associated spokes. In the U.S. and Canada, Krispy Kreme reached average sales per hub of $3.6 million in Q2, up from $3.5 million in the full year 2020 and well above the $3.2 million seen at the beginning of Krispy Kreme’s model overhaul in 2019.

    The process is a mirror play of Krispy Kreme’s international markets, where the hub-and-spoke system is far more mature. Sales per hub at the end of Q2 was $8 million (higher than $6.4 million in 2020 and lower than $8.3 million in Q2 2019).

    To put the potential in perspective, those markets continue to enjoy higher profit, with the U.K. reporting EBITDA margin in excess of 30 percent in Q2. U.S. margins clocked in at 12.2 percent. In Q2, the chain grew its adjusted EBITDA margin by 300 basis points to 15 percent, and said it's investing in additional labor and delivery routes to expand points of access through DFD and other channels.

    So the path for Krispy Kreme has a clear blueprint. The company’s aim, as noted, will be to add points of access as it converts markets into fully implemented hub-and-spoke centers. Of those 9,575 global points today (a 70 percent gain over this time last year), about 1,726 are Krispy Kreme and Insomnia Cookies branded shops and 7,849 DFD stores. Year-to-date, Krispy Kreme added 930 DFDs in the U.S., with the largest gains in Dallas, Chicago, and Houston. The total count is up to 5,000 or so. With brick-and-mortar, the chain grew by a net of 39 since the start of 2021.

    Charlesworth believes there’s potential for more than 2,900 points of access within the U.S. and Canada, as well as 2,800 more internationally. Roughly 1,700 of these are set in some of America’s biggest trade areas (New York, Los Angeles, Chicago, Philadelphia, Dallas, San Francisco, Houston, Washington, DC, Atlanta, and Boston).

    At of the end of Q2, 85 percent of the system in the U.S. and Canada, and 73 percent globally was corporate run. The company leads 48 of 50 top markets in the U.S.

    “Omnichannel” is also a strategy lever that came up often Tuesday—19 times to be exact. It’s the customer-facing manifestation of the network Krispy Kreme is building behind the curtain.

    “These growth levers are first, increasing purchase frequency by giving consumers more reason to buy sweet treats through new platforms and channels,” CEO Michael Tattersfield said. “Second, increasing availability by providing consumers with more convenient ways to buy a sweet treat. And third, increasing profitability by implementing our hub-and-spoke business model that allows us to efficiently supply our expanding points of access with high quality sweet treats.”

    Krispy Kreme’s e-commerce capability remains a critical talking point. In the first half of the year, 19 percent of the company’s global retail sales stemmed from e-commerce. Domestically, 82 percent of e-commerce delivery transactions were incremental to sales in 2020, Tattersfield said, and e-commerce transaction values have steadily increased as the brand expands offerings into catering, gifting, and dark kitchen expansion.

    Alongside growth, Krispy Kreme leaned into 80-plus years of brand equity to remain connected during an era time by physical disconnection. Year-to-date, the company generated more than 16.3 billion media impressions, largely driven by the success of its vaccine program (get a vaccine, get a free glazed donut, to the tune of more than 1.5 million doughnuts given away) and new product rollouts, Tattersfield said.

    Krispy Kreme also continues to expand its CPG arm after introducing a branded Sweet Treat line last year in 4,700 Walmart sores. It’s spread to seven new U.S. retailers since, including grocery giant Albertsons.

    While early, Tattersfield said Krispy Kreme envisions its Sweet Treat line as a scalable product that will allow it to push toward wide distribution via grocers and C-stores. It’s currently live in 6,300 U.S. locations across 17 retailers. To feed this, Krispy Kreme invested in three new production lines in Q2 across its factory network, which will boost capacity by more than 200 percent, Charlesworth said. With existing infrastructure, the effort should run Krispy Kreme shy of $2 million in capital investments. The company expects Sweet Treat to be profitable by the end of 2021.

    “We're going to be very disciplined about this—it really does matter how we build this business.” Tattersfield said. “And we see it as a really big potential because the occasion is different. It's not about the speed.”

    As of Q2, Krispy Kreme boasted a total of 413 production facilities around the world—an increase of five year-over-year. “Much of our focus is on leveraging capacity at our existing hubs by adding new points of access,” Charlesworth said. “To that end, we have increased the number of hubs with spokes in the U.S. and Canada segment to 114 from 88 one year ago, mostly by converting legacy Hot Light Theater Shops.”

    All of this is going to take a hiring push. Krispy Kreme brought on 1,700 employees in just Q2. The brand also plans to take a price hike in September to offset commodity inflation, which Tattersfield expects to take hold without much kickback from guests. “As a fresh-only doughnut business to special occasion, infrequent purchase, we have plenty of ability to bring that pricing. We know people love our dozen donuts,” he said.