Krispy Kreme’s test of selling doughnuts at McDonald’s stores has been ongoing for nearly a year now, and investors are growing curious about potential expansion.
The partnership, first announced in October, started with nine Louisville, Kentucky-based restaurants offering three doughnut varieties available for individual purchase or in packs of six. In March, the experiment was widened to roughly 160 restaurants. McDonald’s is serving as a Delivered Fresh Daily Door (DFD)—places where Krispy Kreme sends fresh doughnuts every day. Other examples include grocery stores, convenience stores, gas stations, and pharmacies. CEO Michael Tattersfield said the test has allowed Krispy Kreme to “really get deep knowledge of how the [quick-service restaurant] channel is going to actually work and what that does is just unlock opportunity from that.”
COO Joshua Charlesworth is confident Krispy Kreme could serve more stores, but that decision is up to McDonald’s. Under the pilot, the doughnut chain has learned how to deliver over longer distances while maintaining quality and service standards. By adjusting operating hours, doughnut processing and packing layouts, and delivery windows, Charlesworth said, “We can get even more from our existing hubs than we even thought was possible before.”
“It’s a great business and we’re really enjoying working with them,” Charlesworth said during Krispy Kreme’s Q2 earnings call. “One of the things to remember, though, is it just behaves like a DFD door for us—similar sales and profit margins. I mean, it’s selling a limited selection of doughnuts, but they’re the same fresh daily doughnuts we sell anywhere else. And there’s no sort of, as I mentioned, this sort of cannibalization effect.”
Tattersfield highlighted Krispy Kreme’s priority to perfect the quick-service channel in the U.S. before considering a global rollout. Once established in the U.S., replicating the strategy internationally would be straightforward since processes remain consistent.
“The DFD system that we have works around the world,” Tattersfield explained. “Those [international markets] would be natural ones once we prove it and run it in the United States. So, we’ll be very disciplined about how to do that. … The same logic would work in the DFD system where we have a route where you’re managing multiple customers along the route that could be from different channels. If it continues, it’s going to work in the markets that we’re in.”
As of July 2, there were 10,796 DFD Doors worldwide. Of that, 6,320 are in the U.S. Average sales per location increased 16 percent in Q2 year-over-year to $632 per week.
These fresh doughnut destinations contributed to $408.9 million in net revenue, which was 9 percent better than Q2 2022. Krispy Kreme has been adding display cabinets to its high-traffic grocery DFD Doors, which add up to 70 percent incremental sales. Eighty-seven cabinets have been deployed year-to-date and that total is expected to double before the end of 2023. Tattersfield called out Washington, D.C., Miami, and Charlotte as cities that’ve seen significant DFD Door growth in 2023. Each is observing a margin increase exceeding 20 percent.
In addition to McDonald’s, Krispy Kreme is experimenting with a small format shop inside Amazon Fresh grocery stores in Chicago. It also expanded its relationship with Kroger to more than 1,000 U.S. locations.
As a reminder, the chain’s growth strategy has evolved. Instead of primarily focusing on stores, Krispy Kreme now emphasizes the development of production center hubs that dispatch fresh doughnuts daily to various “points of access” or spokes. These include DFD Doors, carts, food trucks, and other retail stores. By the end of Q2, there were 12,872 global access points, with a long-term goal of reaching 75,000.
For Krispy Kreme, the McDonald’s trial is evidence that its hub-and-spoke model requires plans for extensive expansion. Presently, the capacity exists for almost 12,000 DFD Doors in the U.S. The company directly owns 225 U.S.-based production hubs, with another 45 owned by franchisees. Charlesworth projects that with a 10-15 percent hike in production hubs, facilitated by automation, the brand could add an additional 8,000 to 10,000 DFD Doors to the current 12,000.
“Our hub network was not originally designed for this kind of opportunity,” Charlesworth said. “But what we do know how to do is make a lot of doughnuts. And so, we’ve been learning how to adapt it for the future model.”
As Krispy Kreme grows, it must evaluate which hubs without spokes to close and which to integrate into the revised business model. Since the company’s Investor Day last December, 14 hubs without spokes have been closed, and 17 have been transformed. Although initially skeptical about the feasibility of these conversions due to structural layouts and economic considerations, Krispy Kreme’s evolving insights about DFD Door sales have proven the viability of such transformations.
The ideal hub is one that has a large back-of-house area, more than one production line, and better areas for logistics. Charlesworth said they shouldn’t be on “main on main” since delivery trucks are coming through all night.
The brand acknowledges that while certain retail locations might not be optimal for DFD Door deliveries, they remain invaluable community assets and will be retained.
“The Hot Light and the retail business, the experience for families and our customers going to that local doughnut shop still warrants it, particularly in the Southeast,” Charlesworth said. “That legacy of hubs without spokes will likely be with us for a long time to come. They are profitable. We’ve addressed a lot of the nonprofit ones.”
Krispy Kreme’s other business, Insomnia Cookies, is growing healthily as well. The dessert chain is ramping up development to reach 30-40 openings this year, including international expansion starting in Canada and the U.S. Insomnia also opened an innovation center in Philadelphia. In Q2, the brand opened 23 stores, putting it at 244 U.S. locations. Krispy Kreme believes there’s room for 4,000 units worldwide.