Fast-food giant McDonald's (MCD -0.53%) is trying a new idea to overcome the sluggish sales and falling profits of recent quarters. In a partnership with Krispy Kreme (DNUT -3.63%), Mickey D's will resell a small selection of freshly baked donuts in a handful of stores.
Krispy Kreme donuts at your local McDonald's
From Wednesday, Oct. 26, nine McDonald's locations in greater Louisville, Kentucky will have three popular flavors delivered from local Krispy Kreme bakeries.
The test involves original glazed, chocolate iced, and raspberry-filled donuts, sold individually and in six-packs. The baked goods will be delivered daily from nearby Krispy Kreme bakeries, some of which are stand-alone facilities and others located inside the brand's donut shops.
The normal McDonald's menu in America doesn't list any donuts these days. For now, cinnamon rolls and apple fritters are as close as you'll get to a donut experience under the Golden Arches.
The company has occasionally offered its own donut-style pastries in the past, though. Glazed pull-apart donuts have made the rounds more than once, and I grew up with access to chocolate-glazed McDonuts (yes, that's the actual product name) at Swedish restaurants in the 1990s. Those are still a thing in 2022, as McDonald's continues to mold local menus to local tastes around the world.
Nice idea, but it's all in the delivery
But distributing Krispy Kreme donuts this way is a new idea, and McDonald's is excited to see how this menu expansion might work on American soil. I'm intrigued by the details of this market experiment, which seems to strike an effective balance between the needs of each partner.
First, the chosen test market in Louisville sits right between McDonald's and Krispy Kreme's headquarters in Illinois and North Carolina, respectively. The exact location isn't terribly important, but it's almost as if the companies are meeting in the middle, as explicitly as possible.
Greater Louisville has about 30 McDonald's locations and the test incorporates about one-third of them. This limited scope gives McDonald's a natural control group of donut-less locations serving roughly the same target market. It's a win for the scientific method.
As the smaller partner, Krispy Kreme only has four storefronts in Louisville. However, that number doesn't tell the whole story. The company already distributes its goods to lots of third-party stores. The delivered fresh daily (DFD) program reached more than 5,500 domestic so-called DFD doors in the second quarter, up from 5,200 in the previous report and 5,070 a year earlier.
Nine more delivery points to McDonald's locations won't stress this battle-tested system, but it's a different story if this experiment uncovers a profitable partnership opportunity. A nationwide rollout could add 13,000 DFD doors overnight, more than tripling Krispy Kreme's market reach in a hurry. Hooking up with a much larger distribution partner like McDonald's on a massive scale would be a real stress test, and also a big win for Krispy Kreme.
Will this test make a difference?
Investors should let McDonald's and Krispy Kreme run the test and count those chickens when they're properly hatched, of course. I imagine that the launch will bring long lines to participating McDonald's locations at first, but the menu expansion will be successful only if that increased traffic hangs around for a long time. The only way to really know how sticky this boost might be among fickle consumer tastes is to run the trial.
This partnership could be a game-changer for Krispy Kreme if all goes well. However, the company is already posting healthy top-line growth and improving bottom-line results. McDonald's, on the other hand, is experiencing revenue shrinkage and falling earnings for the first time in two years.
So this experiment is important to both partners, but for very different reasons. McDonald's should be more interested in a quick fix to recent weaknesses here. At the other side of the table, Krispy Kreme is kicking the tires of a potentially massive business booster, but this company isn't desperate for an instant win.