Financing

McDonald's and Krispy Kreme may expand their partnership

The burger giant has been selling Krispy Kreme doughnuts out of its Kentucky restaurants for months. Now they’re apparently talking about an expansion.
McDonald's Krispy Kreme
McDonald's and Krispy Kreme are in "advanced discussions" about an expansion of their partnership. | Photo courtesy of McDonald's

McDonald’s and Krispy Kreme’s doughnut-selling partnership is apparently going well enough that the two companies might expand it.

The Charlotte-based doughnut chain is in “advanced discussions” with McDonald’s to expand the agreement, Krispy Kreme executives told analysts on Thursday.

“While nothing has been finalized, we are excited about our continued partnership with McDonald’s, and we are in advanced discussions about expanding the relationship,” Josh Charlesworth, incoming CEO of Krispy Kreme, told analysts on the company’s third quarter earnings call, according to a transcript on the financial services site AlphaSense.

McDonald’s started testing selling Krispy Kreme doughnuts out of nine locations in Louisville, Ky., just more than a year ago. That test was expanded to 160 locations earlier this year. Krispy Kreme makes the doughnuts at its large “hub” shops and delivers them daily to the McDonald’s locations, where they are sold.

Krispy Kreme in August said the test was successful, and executives said that the effort proved it could sell the doughnuts at a quick-service restaurant.

For McDonald’s, the test gives the company something it can sell with relatively minimal effort. Krispy Kreme, meanwhile, is intent on selling its doughnuts in thousands of ancillary locations across the country, which it calls “DFD doors,” or delivered fresh daily doors. The company delivers the doughnuts to the locations itself.

Krispy Kreme has 6,500 such locations in the U.S. and believes it can sell to 12,000 with its existing capacity of “hubs,” or large doughnut shops where it makes its doughnuts.

Still, there are some concerns about Krispy Kreme’s ability to service all 13,500 McDonald’s U.S. locations with doughnuts, given that the doughnut chain does not have stores in some markets. There are no Krispy Kreme locations in nine states, for instance.

And indeed, scale is one of the questions Krispy Kreme is discussing with McDonald’s. “The nature of a lot of discussions with McDonald’s right now, ongoing analysis and discussion with them, (covers) the operational execution, making sure that doughnuts always arrive on time, right quality,” Charlesworth said. “Understanding then indeed the requirements that would be needed to scale beyond Kentucky and, of course, commercial viability of the whole thing.”

Charlesworth added that the company has “confidence” in its opportunity to sell doughnuts out of more locations in the U.S.

He said the company is considering making investments to improve its manufacturing capacity so it can sell in more of these locations.

Executives specifically mentioned adding capacity in places such as Minnesota and Upstate New York, as well as other markets where the company is near full capacity, such as California and New York.

Charlesworth also said that Krispy Kreme sells its doughnuts inside fast-food restaurants much like it does inside a convenience store. “We’re able to provide a fresh doughnut experience,” he said. He said that both prepackaged doughnuts and those sold individually “are well received.”

Maybe more to the point, from Krispy Kreme’s perspective, “we don’t see any sort of cannibalization of our base business or in other DFD doors or in our retail locations,” Charlesworth said.

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