Financing

Krispy Kreme looks to expand its doughnut-making capacity

The chain, which wants to sell its doughnuts out of more McDonald's locations, is now looking to open new shops to build capacity while it also works to improve manufacturing and logistics.
Krispy Kreme
Krispy Kreme is looking to expand its reach in the U.S. | Photo: Shutterstock.

Krispy Kreme has for the last year sold doughnuts out of McDonald’s locations in Lexington and Louisville, Ky., and surrounding areas. But it wants to sell doughnuts out of more McDonald’s locations, and is talking with the fast-food giant about an expansion, company executives told analysts on Tuesday.

Yet there remains a fundamental problem: Krispy Kreme only has the doughnut-making capacity to sell treats out of 6,000 of McDonald’s 13,500 locations.

So, the company has been working to expand that capacity. Krispy Kreme executives said Tuesday that the company has secured sites in the Twin Cities, Miami and Los Angeles as part of a bid to expand its ability to make more doughnuts. And it has identified other areas as a priority for expansion, such as New England.

Krispy Kreme’s confidence in its ability to sell more doughnuts out of ancillary locations away from its doughnut shops “is such that we have thoughtfully started making additional investments in manufacturing capacity to support it,” CEO Joshua Charlesworth told analysts, according to a transcript on the financial services site AlphaSense.

“They’re investments that we very much believe make a lot of sense for our business going forward in terms of bringing Krispy Kreme to more people in those channels,” he added.

Krispy Kreme builds large doughnut shops and sells doughnuts out of those shops as well as kiosks in grocery stores, convenience stores and other locations, including those McDonald’s restaurants. It delivers the doughnuts to those locations daily and calls them “DFD Doors.”

It has rapidly expanded the number of such locations recently. It added 1,000 such DFD doors last year alone in the U.S.

The strategy enables Krispy Kreme to generate more sales and reach more people without building a lot more doughnut shops. Sales per hub grew 8.9% in the U.S. last year, the company said.

The company’s goal is to eventually have 75,000 total points of access worldwide, up from just over 14,000 now. But, Charlesworth said, Krispy Kreme could theoretically go further. “And we are adding new customers all the time, such as Costco in international markets and McDonald’s in the U.S.,” he said.

Many of its “hubs” are underutilized, Charlesworth said, which means the company could expand its reach without opening new shops. And the company closed some of its shops that it said would not work well for its “hub-and-spoke” model.

But the company also has large swaths of the country where it has no traditional shops and needs to build them to be able to reach more locations with doughnuts.

At the same time, Krispy Kreme’s shift from a chain of doughnut shops into an omnichannel treat provider that delivers doughnuts has the company thinking about logistics.

The company said that it is working to automate the doughnut-making process. Krispy Kreme has a line in New York in which machines automatically fill, top and pack the doughnuts. “There remains the opportunity to modernize the way we make and move our doughnuts,” Charlesworth said.

Krispy Kreme is also testing the use of a third-party logistics provider to deliver its doughnuts in certain routes in Los Angeles and Washington, D.C.

“The rapid expansion of DFD means logistics is becoming more and more important,” Charlesworth said. “It’s an effort to continuously improve doughnut making and moving.”

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