Financing

It could be a while before McDonald's makes its Krispy Kreme test national

Early reports suggest the burger chain’s test of the sale of the doughnuts has been going well. But Krispy Kreme doesn’t have the capacity to serve the entire brand.
McDonald's Krispy Kreme
Krispy Kreme needs more shops to be able to supply more McDonald's locations with doughnuts. / Photo courtesy of McDonald's.

Krispy Kreme appears to be doing just fine selling doughnuts out of McDonald’s locations in Kentucky, even if they’re not quite ready to say how well that test is performing.

“It’s a great partnership,” CFO Joshua Charlesworth told investors this week, according to a transcript on the financial services site Sentieo/AlphaSense. “We love the way we’re working with them.”

But don’t expect McDonald’s to make this test a nationwide phenomenon anytime soon, for one simple reason: There aren’t enough Krispy Kreme locations to supply doughnuts to all 13,500 McDonald’s U.S. restaurants.

Krispy Kreme increasingly views itself as a “doughnut logistics” company, one that makes doughnuts out of fewer than 400 “hubs” in the U.S., then delivers them daily to “spokes,” or what it calls “DFD doors.” These can be shelves inside pharmacies or convenience stores, at Walmart or Target locations or, in the case of about 170 locations in Lexington and Louisville in Kentucky, McDonald’s restaurants.

Krispy Kreme has about 6,000 of these DFD doors and would like to expand that to 15,000 U.S. locations.

By doing this, the company believes it can sell a lot more doughnuts and make those “hubs” more profitable.

Executives believe it can work because the customer who walks into a McDonald’s is different from the one who visits a Krispy Kreme. But that doesn’t mean the McDonald’s customer can’t be talked into some doughnuts.

“They’re not going to the Target, the Walmart and McDonald’s necessarily for a doughnut,” Charlesworth said. “They’re going for something else. And while they’re there, they go, ‘wow, it’s available here, I’ll pick it up.'”

The company announced the McDonald’s test last year and it was expanded earlier this year. The idea was to determine whether the company would be able to deliver these doughnuts to a quick-service restaurant.

At this point, it’s too early to say whether that test is truly successful. “We’re only six weeks in,” Charlesworth said.

To supply the Kentucky McDonald’s locations with doughnuts, Krispy Kreme had to double production from three shops in the state and add trucks to be able to supply those restaurants with doughnuts.

There is some advantage to the McDonald’s test compared with, say, grocery stores. A supermarket wants its doughnut delivery early. “McDonald’s restaurants are able to do it at other times of day, so that’s working well,” Charlesworth said.

Still, it would take some time for Krispy Kreme to be able to ramp up doughnut production at its existing hubs.

And, as well known as Krispy Kreme is, there are still large swaths of the country that do not have one of those hubs, which limits the company’s ability to supply as many “spokes” as it would like with doughnuts. That includes McDonald’s.

To supply 15,000 locations with doughnuts, Charlesworth said, “There are still about 30 to 40 additional hubs we’re talking about to get all the way there,” he said.

As for whether Krispy Kreme would work with other quick-service restaurants—much like it offers doughnuts to rivals Walmart and Target—executives were noncommittal. “We really like the partnership with McDonald’s as it stands today,” CEO Mike Tattersfield told investors. “We’re going to continue to learn from each other and see where it grows.

“If you look outside the world, there’s plenty of other spaces and partners out there, but we’re going to focus on McDonald’s as a partner right now.”

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