Employees at McDonald’s headquarters in Chicago can get free Krispy Kreme glazed doughnuts with their morning coffee. As of last week, those doughnuts were still available.
That is good news for those folks eager to see what a McDonald’s-Krispy Kreme partnership could look like. The doughnut chain has put the expansion of that partnership on hold, long enough to figure out how to expand that partnership profitably.
The delay has called into question the long-term viability of the partnership, and the general expectation has been that it would ultimately dissolve. But the doughnuts are still there, so the partnership isn’t dead.
But the delay in that deal highlights a primary challenge for Krispy Kreme, one that has existed for decades, across varying management teams and ownership situations and even business models: There is only so much demand for doughnuts.
A quarter-century ago—and I still can’t believe it’s been that long—Krispy Kreme burst onto the national scene with huge lines of customers in New York City and other locations, all to get a taste of the chain’s freshly-made hot doughnuts.
But the lines would last only so long. Eventually the company couldn’t generate enough revenue to support the massive doughnut palaces it was building. Many of those locations closed and the brand retreated. When the Minneapolis area location opens later this year, it will be its first there in some 20 years.
JAB Holdings took the company private in 2016, and in subsequent years it evolved its business into an omnichannel doughnut maker. Its shops operated like small manufacturing plants, with doughnuts delivered daily to kiosks at retailers and other locations, which the company calls “DFD Doors.”
The problem this time, much like 20 years ago, is doughnut demand. Or at least there is not enough demand to justify a costly business.
By delivering doughnuts to kiosks, Krispy Kreme has evolved itself into a logistics company that employs drivers and owns trucks and schedules deliveries. The daily deliveries are necessary, because the chain does not want its doughnuts on the shelf for any longer than that, much in the way bagel shops or bakeries will sell day-old product at a discount. But it’s also an expensive business.
That was fine when consumers were spending and eating doughnuts. From 2019 to 2024, Krispy Kreme’s system sales in the U.S. grew 27%. They grew 32% globally. An average Krispy Kreme shop generated more than $2 million in revenue last year, presumably because of all those doughnut deliveries.
Last year, the company had a full-year, EBITDA margin of 11.6%--or earnings before interest, taxes, depreciation and amortization—which was on par with companies like El Pollo Loco or First Watch Restaurant Group.
But sales plunged this year and suddenly those margins evaporated. Its EBITDA margin was just 6.4% of sales in the first quarter. Much of that was driven by sales weakness.
That’s a serious problem for Krispy Kreme, which needs an enormous amount of debt to fund its expansion. The company has $935 million in long-term debt.
All of which means that Krispy Kreme in relatively short order had to shift from expansion mode to cost-cutting and profitability mode. And we once again find ourselves wondering whether the chain can sell enough doughnuts to justify its business model.
Investors are certainly asking. The company is trading below $3 per share. It has lost three-quarters of its valuation this year and 84% since its 2021 IPO.
A single doughnut shop can do good business and a few of them in a market can do quite well. But doughnut chains have always struggled to make it work on a national level, certainly enough to satiate investors’ appetites. Thus, chains like Dunkin’ or the Canadian brand Tim Hortons devote a lot of their attention to coffee, because a consumer will come in a lot more often for a beverage than for a glazed doughnut.
Krispy Kreme was never able to make that pivot. And it has a secondary problem in that its doughnuts taste best when they’re fresh out of the fryer, meaning the company cannot easily shift to an offsite doughnut production model like the others.
The company cannot quite generate enough sales to make a traditional doughnut shop chain work, at least enough to justify a big national chain, so it must sell its doughnuts off-site. Thus, it became the logistics company.
It had long justified that model by arguing its top problem was a lack of access to its doughnuts. Yet now it’s cutting DFD doors because they don’t generate enough sales to make a profit. Access is only so much of a problem, apparently.
The McDonald’s partnership was supposed to represent a glorious return of the brand to a full national stage. Instead, it has only generated more questions.