McDonald's and Krispy Kreme are in talks to expand partnership
Doughnuts are sold at a Krispy Kreme store on May 05, 2021 in Chicago, Illinois. The doughnut chain reported yesterday that it plans to take the company public again.

Krispy Kreme said Thursday it's in talks to expand its partnership with McDonald's .

The two restaurant companies began testing Big Mac eaters' appetites for doughnuts more than a year ago at a handful of McDonald's Kentucky locations. By March, the pilot had expanded to roughly 160 restaurants across Louisville and Lexington, Kentucky. The bigger test was meant to assess customer demand and to understand how a larger-scale launch would affect restaurant operations.

McDonald's has been leaning into coffee — a common pairing with doughnuts — to encourage diners to visit more frequently. At the same time, the burger chain has been cutting back on its bakery items, like cinnamon rolls and blueberry muffins. And Krispy Kreme has been able to raise prices without hurting its sales because consumers are willing to splurge on affordable treats, such as fresh doughnuts.

The discussions with McDonald's have touched on Krispy Kreme's ability to deliver its doughnuts fresh and on time, what scale is needed to expand beyond Kentucky, and the commercial viability of the partnership, incoming Krispy Kreme CEO Josh Charlesworth said on the company's conference call Thursday.

He added that the company has learned consumers at fast-food restaurants behave similarly to those at Krispy Kreme's other retail locations.

"We've seen that both the loose doughnuts and the pre-packed doughnuts are well received," Charlesworth told analysts, adding that those sales bolster the overall Krispy Kreme brand.

Krispy Kreme uses a "hub and spoke" model that lets it make and distribute its treats efficiently. Production hubs, which are either stores or doughnut factories, send off freshly made doughnuts every day to retail locations such as grocery stores and gas stations.

Shares of the doughnut chain were down nearly 7% in afternoon trading as the company's third-quarter earnings and revenue fell short of Wall Street's estimates. Including Thursday's tumble, the company's stock has risen more than 20% this year, giving it a market cap of $2.10 billion.

Krispy Kreme also owns the late-night cookie chain Insomnia Cookies, although it announced in October that it's exploring strategic alternatives for that business.

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