Krispy Kreme’s unusual test selling doughnuts that it makes out of McDonald’s locations in October is part of a strategic plan to see if the brand can offer the same type of quality in a fast-food restaurant that it does inside grocery stores and gas stations.
And at least so far, that test appears to be working. “The McDonald’s test has shown us that we can do delivered fresh daily execution in a location like that,” Krispy Kreme President Joshua Charlesworth told investors at the ICR Conference in Orlando on Monday.
It was the first time Krispy Kreme publicly mentioned McDonald’s by name—even early in the presentation, executives simply mentioned a test at a “QSR.” It was McDonald’s that announced the test, at some locations in Louisville, Ky., back in October.
The test is an unusual one. But it’s also indicative of Krispy Kreme’s overall strategy, to spread access to as much of the country from as few of its doughnut shops as possible.
Krispy Kreme only operates about 400 traditional doughnut shops where it makes and sells doughnuts. The company under CEO Mike Tattersfield has undertaken more of an “omnichannel” strategy, where it builds a limited number of such shops but focuses on selling doughnuts through what it calls “DFD doors,” or “delivered fresh daily” doors. It delivers doughnuts to those doors daily to ensure freshness
Those are typically retail locations such as grocers and convenience stores. But with a goal of selling doughnuts out of more than 15,000 U.S. points of access, the company believes it needs to expand the possible location for those DFD doors. “We knew it was bigger than just grocery and convenience stores,” Tattersfield said. “We have to look at other places. That’s why we tested with a QSR recently.”
Krispy Kreme’s basic problem is high brand awareness and low brand availability. “Every country we’re in, we have 99% brand awareness,” Tattersfield said. The problem, he and Charlesworth said, is access. The company needs to make its doughnuts available to more people.
Not said, however, is the profitability of doughnut shops when the company builds a lot of them. Krispy Kreme grew quickly more than two decades ago by opening its large doughnut-making shops everywhere. But the brand collapsed because the demand wasn’t there to support that many shops. People get doughnuts only so often, after all.
Krispy Kreme has learned that lesson. Rather than try to build more daily visits by focusing on coffee, much as Dunkin’ did, the company accepted what it was, a doughnut shop. “This isn’t an everyday use brand,” Tattersfield said, noting that people buy the doughnuts as treats and in the dozens that they share with friends or family or coworkers.
The company still wants to have its experiential doughnut shops where consumers can get hot doughnuts, such as the location in New York’s Times Square. “That drives the brand DNA,” Tattersfield said. “The retail business will still be there. It’s the piece that gives the brand its halo.”
But the company still needs to get more people to access its brand. The DFD doors enable the company to give more people access to doughnuts. The daily deliveries that Krispy Kreme controls ensure freshness. And the additional access enables those bigger shops to sell more doughnuts, which generates stronger profits.
The McDonald’s test can help that along. But executives also stressed that it is important to ensure the quality is the same regardless of where the doughnut is made. “A Krispy Kreme employee doesn’t know where the doughnut is going to be sold when it’s made,” Tattersfield said.
“It has to work … whatever place we choose to go,” he said. “We cannot serve Walmart in a certain way and have some other place do it differently.”
Exactly what comes out of that test remains to be seen. Executives would not discuss the McDonald’s test beyond those comments. But it would not be surprising to see the chain’s glazed doughnuts in fast-food restaurants down the line.