Krispy Kreme acquired Insomnia Cookies five years ago to strengthen its e-commerce platform and light a fire under the chain’s growth opportunities, said CEO Mike Tattersfield.
Consider that mission accomplished. Digital orders now represent nearly 20 percent of consolidated retail sales. Along the way, Insomnia’s expansion has exploded, moving from 135 shops at the time of purchase to 247 as of October 1. Earlier this year, Krispy Kreme said the dessert chain had whitespace for more than 4,000 locations. To get there, the goal was to reach 100 new openings per year, and not just within the U.S. In 2023, Insomnia reached the U.K. and Canada for the first time.
Insomnia’s margins improved sequentially in Q3 thanks to pricing actions. The brand’s revenue grew 24 percent in Q4 2022, driven by double-digit same-store sales and “very high” productivity from openings, executives said. The chain’s AUV increased to $850,000, an 8 percent rise versus 2021. Revenue should reach $230 million in 2023.
Krispy Kreme is now looking to sell the cookie concept because it wants to put all resources into producing, selling, and distributing fresh doughnuts daily. It’s a hub-and-spoke model strategy that launched a few years ago. The new philosophy is working wonders, with organic revenue growing 9.6 percent to $400.3 million in Q3, net revenue rising 7.9 percent to $407.4 million, adjusted EBITDA rising 13.5 percent to $43.7 million, and adjusted EBITDA margin accelerating to 10.7 percent.
As Tattersfield put it, “Krispy Kreme has a tremendous growth story in front of us.” The doughnut company also wants to put Insomnia in the hands of another operator that will give it the best chance to grow.
“Look, No. 1 we’re super pleased with the business performance as it continues to grow and the profitability is improving sequentially,” CFO Jeremiah Ashukian said during Krispy Kreme’s Q3 earnings call. “There also continues to be a lot of opportunities for growth expansion both in the U.S. and internationally as we’re seeing great engagement early on in both Canada and the U.K. in the early stages.”
Ashukian said the chain is “super pleased with the strong level of interest” it’s seen from “very high-quality parties.” The acquisition, when that comes, is expected to “generate a strong return on investment in the business that we made and realize value for our shareholders,” the CFO noted.
“We expect it to have a 100-basis-point to 200-basis-point overall impact on the total growth of the business,” the executive added. “But we feel like the Krispy Kreme business has proven it can accelerate and therefore offset some of that.”
Proceeds from an Insomnia sale would be used to fund Krispy Kreme’s growth agenda and strengthen the company’s financial positioning.
That growth agenda calls for 75,000 points of access around the world. As a reminder, “points of access” are defined as any location where a fresh doughnut or cookie could be purchased. Krispy Kreme’s model moved away from growth around retail shops and toward production center hubs that distribute fresh doughnuts every day to spokes, otherwise known as points of access. Those locales include grocery stores, gas stations, carts, food trucks, and smaller retail stores. In Q3, the brand opened 1,691 points of access to reach 13,394 overall.
“We have made so much progress in leveraging the power of the Krispy Kreme brand under Mike’s leadership, now selling over 1.6 billion fresh doughnuts a year in over 13,000 points of access around the world,” said soon-to-be CEO Joshua Charlesworth. “And yet, we have so much further to go. Our existing points of access represent less than 1 percent of the places a customer could in theory buy Krispy Kreme doughnuts, and our purchase frequency is less than three times a year despite the many occasions and celebrations where our consumers can and do enjoy our doughnuts. We’ve laid out a great strategy, and we will remain focused on maximizing our global growth opportunity, leveraging our profitable omnichannel fresh doughnut business.”
One major point of access is McDonald’s restaurants, a partnership that began last year in the Louisville market. The test expanded to 160 restaurants in March. Doughnuts are available via third-party delivery and the mobile app, in addition to in-store and drive-thru. Original Glazed, Chocolate Iced with Sprinkles, and Raspberry Filled are sold all day, individually or in packs of six.
Charlesworth, who will become Krispy Kreme’s CEO starting January 1, said the brand is discussing a potential expanded partnership with the burger giant.
“The learning has been very interesting through the pilot that we’ve done with them throughout the year in Kentucky,” Charlesworth said. “And that is the nature of a lot of the discussions with McDonald’s right now—ongoing analysis and discussion with them, covering the operational execution, making sure the doughnuts are always arriving at the right time, right quality.”
The success of this relationship gives Krispy Kreme confidence in its expansion of manufacturing capacity in the U.S. As of October 1, the chain had 7,047 domestic points of access, and it could add about 6,000 more from existing production hubs with minimal investment. But the company wants to go beyond that by constructing 10 to 15 percent more hubs to bring another 8,000 points of access. That works out to roughly 25-35 new hubs over the next few years at a price tag of about $3 million to $6 million per hub. These would come in underserved markets like New England, Upstate New York, or Minnesota. Charlesworth said expansion is also possible in saturated DMAs in California and Florida. These new hubs would have additional doughnut-making lines and larger load-out logistics areas.
Krispy Kreme earned $4.8 million in sales per hub in Q3, up 9.1 percent year-over-year and 2.1 percent quarter-over-quarter.
“We’re able to provide a fresh doughnut experience,” Charlesworth said. “The portfolio is relatively limited, but that doesn’t mean it couldn’t be added to over time. We’ve seen that both the loose doughnuts and the pre-packed doughnuts are well-received. And so from our point of view it’s behaving very well and substantiates the brand as we scale it.”
The U.S.’s net revenue increased 5.4 percent to $260.2 million in the third quarter. Delivered Fresh Daily Doors average sales per location per week (grocery stores, gas stations, restaurants, etc.) increased 11.6 percent to $613 per week, with an additional 786 doors in the quarter. Adjusted EBITDA increased 8.8 percent to $22.3 million, with adjusted EBITDA margin expansion of 30 basis points to 8.6 percent. This was primarily driven by the productivity benefits of the expansion of Krispy Kreme’s hub-and-spoke model.