Shares of donut brand Krispy Kreme(NASDAQ: DNUT) soared on Tuesday after the company announced a major partnership with fast-food giant McDonald's(NYSE: MCD). As of 10 a.m. ET, Krispy Kreme stock was up 18%. For its part, McDonald's stock was little changed.
Coming to a McDonald's near you
Way back in October 2022, Krispy Kreme and McDonald's started an experiment with donuts delivered to and sold at McDonald's locations. Then in February 2023, the experiment was expanded to 160 McDonald's locations. Now more than a year after the expansion of its experiment, the two companies are ready to take the partnership across the country.
McDonald's had roughly 13,500 U.S. locations as of the end of 2023. Donut lovers will start seeing Krispy Kreme in these locations in the second half of this year. However, due to the size of McDonald's, it will take time to fully roll out. Management for Krispy Kreme says it won't be available everywhere until 2026.
Will this actually work?
Krispy Kreme has struggled to scale its business in the past but this partnership with McDonald's may be a smart solution to the problem. The company is trying to increase points of access to its fresh donuts by leveraging existing infrastructure. In other words, it wants to scale centralized donut production and deliver to surrounding access points.
Compared to its past attempts at opening more donut shops, this appears to be a more efficient model for Krispy Kreme.
One thing's for sure, Krispy Kreme doesn't have much room for error as it tries to grow. The company had an operating margin of less than 1% in 2023, which was low but near its long-term average. This is simply a low-profit business and a small misstep can consequently result in losses.
That said, Krispy Kreme's partnership with McDonald's does look promising. And since the rollout will be slow, investors will have plenty of time to assess whether it's having the intended profitable outcome.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
