Krispy Kreme no longer really thinks of itself as a chain of doughnut shops. “It’s about an omnichannel business,” CEO Mike Tattersfield said at the ICR Conference earlier this month. “It’s focused on doughnuts. The biggest opportunity is really building access to them.
“We’re really a CPG company with interesting, experiential doughnut shops.”
That model uses its large, experiential doughnut shops as hubs that supply smaller shops and kiosks inside grocery stores and gas stations with a more frequent supply of doughnuts.
That’s not much different from what other chains do, except those shops generally haven’t put their doughnut-making on display, nor did most of them use a large neon “hot doughnuts now” sign as a major selling point.
And it is an evolution of the chain’s long-term vision. When the chain first went public in 2000, it was built around those experiential doughnut shops, which had generated remarkably long lines of enthusiastic customers. Yet, it turned out, there was only so much demand for hot doughnuts. The demand could not support the cost of construction and the brand struggled as a result, ultimately pulling out of many of its markets.
During those years, Krispy Kreme also sent doughnuts from those shops into many other locations. The problem, it turned out, was that they weren’t sent to those alternative locations often enough. Quality suffered. Customers wouldn’t pay that much for the doughnuts and the brand’s reputation went down with it.
“We used to have, up until 2020, a discounted, poorer quality wholesale business,” Tattersfield said. “Sometimes, the doughnuts were five or six days old.”
But Krispy Kreme managed to survive, in part because of strong growth in international markets. JAB Holdings took the brand private in 2016. The company shifted its model under Tattersfield, bought Insomnia Cookies, and went public again last year—though, much like most 2021 IPOs, it has yet to catch on with investors.
Krispy Kreme is acquiring shops from franchisees and delivering doughnuts daily to its ancillary locations. The company has taken control of its 10 biggest domestic markets and says it is driving both sales and profits by doing so.
Because it delivers doughnuts to these locations daily, the company says it can charge more for them and consumers are apparently willing to pay the higher prices. The more of those doughnuts it can sell from these ancillary locations—including small “fresh shops” and kiosks it calls “delivered fresh daily” locations—the more profits it can make per its doughnut-making locations.
The company has just 381 of these “Hot Light Theater” shops, plus another 40 “doughnut factories” in some global markets. But its doughnuts can be found in another 9,100 places worldwide, the vast majority of which are those kiosks.
The “hub-and-spoke” model is more developed in its international locations. In the third quarter of last year, for instance, Krispy Kreme generated $8.6 million in sales per individual hub outside the U.S. By comparison, its domestic hubs generated $3.8 million per location.
Unsurprisingly, those international hubs generate higher margins. Earnings before interest, taxes, depreciation and amortization (EBITDA) margins adjusted for one-time events were 25% through the third quarter in international markets. In the U.S. and Canada those margins were just 11%. But Krispy Kreme thinks those margins will grow to 15% by 2024.
“When you increase sales and reach, that increases profitability,” CFO Josh Charlesworth said. “The hubs have fixed costs for builds, rents and even labor. We’re improving the profitability of the hub and thus the whole system.”
Krispy Kreme controls the distribution model. When the company brings doughnuts to one of its ancillary locations, the old doughnuts are removed to ensure freshness. The old doughnuts are used for animal feed, incidentally.
The shift is already paying dividends in the U.S. The company sells its doughnuts in fewer doors now than it did in 2019 in the U.S.—when its products were in more than 7,000 total locations. By last year they were down to 5,200, but all of them were locations to which the doughnuts were delivered daily. But sales “per door” increased 60%.
The company’s goal now is to get the doughnuts into more locations. The company is looking to expand into new markets and believes that it can get its doughnuts ultimately into 50,000 total points-of-access, including shops and kiosks, up four-fold from where it is now. But, Tattersfield reminded, it will maintain some degree of exclusivity.
“There are about 1.3 million grocers,” he said. “We’re not going to say we have 1.3 million points of access. Our brand will be special.”
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