Financing

Krispy Kreme ponders expansion amid a successful McDonald's test

Six months after it started selling doughnuts at 160 McDonald’s restaurants in Kentucky, Krispy Kreme said the test is proving to be valuable. But it needs more production capacity.
Krispy Kreme McDonald's
Krispy Kreme needs to open more doughnut-making hubs to meet its expansion goals. | Photo: Shutterstock.

Krispy Kreme’s test of the sale of doughnuts inside 160 McDonald’s locations in Kentucky is going well six months into it. The company has learned that it can, indeed, service fast-food restaurants with doughnuts, much as it does with shelves and kiosks inside grocery stores and gas stations.

The sales are incremental, company executives said Thursday, and better yet the locations have drive-thrus. “We’re confident we could serve more McDonald’s stores,” Krispy Kreme CFO Josh Charlesworth told investors, according to a transcript on the financial services site Sentieo/AlphaSense. “But it’s obviously up to them. We look forward to hearing from them about how they think the test is going.”

Indeed, the test itself could prove Krispy Kreme’s limitations, even if McDonald’s wants to expand that test nationally. The doughnut chain has only so many shops, or hubs, where it makes doughnuts to deliver daily to what it calls “DFD doors,” or points of access where a limited selection of doughnuts are sold. There are entire markets in the U.S. without access to Krispy Kreme at all, meaning even if McDonald’s wanted a national rollout, the brand could not fulfill it.

And that has Krispy Kreme thinking of expansion. Even without considering the McDonald’s test, the chain wants to be able to sell its doughnuts in a lot more locations. And that requires more doughnut-making capacity in more parts of the country.

“It behooves us to start looking ahead to how we service more and more DFD doors,” Charlesworth said. “It’s clear with the growth rate we have, whether it’s in QSR or other channels in grocery, convenience and more recently club and other opportunities, we need to start planning ahead for greater expansion.”

He said that the company could get more out of its existing hubs, in part by changing operating hours, doughnut processing and packing layouts and delivery windows.

Krispy Kreme has 225 hubs in the U.S., along with 45 franchisee-owned locations that could be part of its production process. Its existing hubs deliver doughnuts daily to about 6,000 DFD doors. But Charlesworth believes its existing hubs could double that number.

Even then, McDonald’s has 13,500 locations.

Charlesworth said that the company could add another 8,000 to 10,000 DFD doors over the years with just a 10% to 15% increase in the number of hubs.

He also suggested that the company is learning how to operate hubs more like the production facilities they’re becoming. “We’re learning how to make production hubs, purpose-built, with automation, with more production lines to meet this kind of demand,” Charlesworth said. “So it’s an exciting time to be thinking ahead and thinking about a hub and network of the future, rather than worrying about optimizing the hub and spoke network of the past.”

That said, Krispy Kreme said that its McDonald’s test is providing some valuable lessons on how to service a quick-service restaurant location, an important consideration as the chain thinks about making its doughnuts available for sale at more such locations around the world.

The company said that there is no cannibalization from existing locations and noted that it is learning to deliver over longer distances. “It’s proving a valuable test,” Charlesworth said. “They’ve been super collaborative.”

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