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Financing

Krispy Kreme finds success with fresh doughnuts

The newly public chain is generating more sales per location, thanks to more frequent deliveries of doughnuts through its “hub-and-spoke” system.
Photograph: Shutterstock

Krispy Kreme is finding that consumers prefer their doughnuts fresh.

The Charlotte-based company, which returned to the public markets over the summer, told investors on Tuesday that they are generating more sales everywhere they sell their doughnuts. Average weekly sales per access point increased 30% in the second quarter, executives said.

The reason, executives explained, was the freshness of the product. Krispy Kreme has been evolving into a “hub-and-spoke” model, where its doughnuts are made in its classic doughnut theater shops that act as “hubs.” Those doughnuts are delivered to “spokes,” or the points-of-access outside of those shops where the doughnuts are sold. The company calls them “DFD shops,” or delivered fresh daily shops.

The company said that doughnuts are now delivered fresh daily to all its DFD shops, which allow Krispy Kreme to charge the same prices while meeting consumer demand for higher-quality products regardless of where they buy them from.

“A year ago, 38% of our doughnuts were not fresh daily,” Joshua Charlesworth, Krispy Kreme’s CFO, told investors on Tuesday, according to a transcript on the financial services site Sentieo. “Now it’s 100%. We now sell them always at the same price point as you would get in a Krispy Kreme doughnut shop.”

Krispy Kreme has long operated with a model that employed large shops where customers see their doughnuts get made and can get them fresh when available. The company has then sold these doughnuts out of grocery stores and convenience retailers, thus expanding each individual store’s reach. Yet that model hasn’t quite worked in the U.S., where its doughnuts weren’t always fresh in these other locations.  

That affected consumer perception of the chain and hurt sales at these other locations over time. “That ability to be doing it fresh really matters for us as a system,” CEO Mike Tattersfield said. “Quality really matters. And you’ll be able to get the right pricing structure, where customers will now say, ‘It’s Krispy Kreme. If I want a hot doughnut, I get it at a theater. If not, I get it where I want it.’”

Krispy Kreme has effectively used its hub-and-spoke model in international markets. In international markets, the chain generated about $8 million “sales per hub” over the past 12 months, compared with $3.6 million in the U.S.

Those markets have higher profits. In the U.K., for instance, EBITDA margin—or earnings before interest, taxes, depreciation and amortization—exceeded 30% last quarter. In the U.S. its margins were 12.2%.

U.S. margins declined from the same period a year ago, when more sales were generated through the drive-thru and digital strategies, which improved efficiency. Executives, however, noted that the 15% EBITDA margin generated a year ago was “the highest the company had seen in years.”

Labor costs have soared since then, however. Krispy Kreme has been adding more points-of-access in the U.S. and is hiring more people to staff them and bring doughnuts to its locations. The company hired 1,700 people last quarter alone.

That has been a challenge during a time when labor is difficult to come by. “The implementation costs are real,” Charlesworth said. “Hiring people, adding drivers, adding routes right now in this tight labor market means we have to have people working overtime, that we’re training more people than ever before.”

Still, “once that settles,” the new labor management system the company invested in “will really start to help us leverage the efficiency” in cities where it’s adding its “DFD doors.”

The company now has 5,000 such doors in the U.S., and executives said they could add another 2,800 to 3,000. Even as the chain builds more of its “hubs,” however, it won’t put its doughnuts in every grocery store in the U.S. “Scarcity is important to Krispy Kreme,” Tattersfield said. “It’s not every grocer. And even the grocers that we pick, it’s not every one of their shops. That’s how you keep the brand special.”

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