Krispy Kreme still testing 'the rigor' of its McDonald's partnership across regions: CEO

Krispy Kreme CEO Mike Tattersfield joins the Yahoo Finance Live show to discuss the performance of Krispy Kreme stock on Q1 beat, consumer demand, the company's long-term growth strategy, and its partnership with McDonald's.

Video transcript

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SEANA SMITH: Krispy Kreme reporting earnings before the bell this morning, beating on both the top and bottom lines. The company also reiterating its full-year guidance, yet shares trading slightly lower, off just about a tenth of a percent. We want to break it all down with Krispy Kreme CEO Mike Tattersfield. We also have Brooke DiPalma joining the conversation.

Mike, it's great to see you here. So strong quarter here from Krispy Kreme. You beat what the Street was looking for. What's driving the momentum that you're seeing in your business?

MIKE TATTERSFIELD: Yeah. I mean, I appreciate having back on, so good afternoon. How-- I hope you're all doing well. I think the main driver is what's been consistent since we transformed the company. It's really those 400 producing doughnut shops as we really expand getting fresh doughnut distribution into what we call points of access-- so the grocery trade, the convenience shop trade, starting in the club trade as well. And we do that in 31 countries. We just opened up a 32nd in Chile. So it's just-- you combine that, and then you can bring the premiumization of the doughnuts. And you bring that category where our biggest opportunity is, which is access. Get it to where customers are.

BROOKE DIPALMA: And you did raise prices here in the US, as well as in the UK. Are you seeing any resistance there, or are customers trading down?

MIKE TATTERSFIELD: So we're a low-frequency business. People come and shop at us about three times a year. It's primarily a dozens business. A lot of our customers use us for gifting, and all the dozens, about 80% are shared. So on average, it's still about a little over a dollar a doughnut per dozen, right? So that opportunity is there. When we premiumize and bring in, whether a Biscoff cookie that we brought in in January, you have a Hershey's partnership which we did across the globe. We really see a low elasticity on price. We can-- we have pricing power, but we're really thoughtful about it. We want to always remain, you know, a sweet, indulgent treat that's affordable.

SEANA SMITH: Mike, are you seeing those pricing pressures, though, ease at all on the back end of things, the pricing that you guys have going into your goods?

MIKE TATTERSFIELD: So in terms of, you know, the commodities or inflation, it's still mid double digits. We're hedged this year. We're starting to see some of that starting to slow down on the back end of the year. Sugar's still up pretty high, probably at some of its historical highs lately. So there's a challenge there, but wheat and, you know, our other ingredients also are palm oil. So those are starting to come down slightly. So on average, those three make up 10% of our retail sales, so we can manage it.

But again, we continue to look at how we get access to the customer. That's the thing that they don't get. Krispy Kreme is just-- it's tough for them to get it. So when you start to get to 12,000 locations over that in 32 countries and you do it fresh every day, for a lot of them, that's the first time they get access to Krispy Kreme.

BROOKE DIPALMA: And one way is you're looking to bring Krispy Kreme doughnuts to customers is with your partnership, rather a test with McDonald's. What goals are you looking to meet in order to say, hey, this test is successful, and we're going to roll it out nationally and globally?

MIKE TATTERSFIELD: Yeah. So, I mean, when-- when we started this, going fresh, right, we were looking at, what are the right channels we should be looking at? Clearly, the grocer and the convenience opportunity was there. And that's where we really started to push the business towards. We've been looking at club, the drug store business as well, and, most recently, into QSR. And what it has to do is actually work with what our Delivered Fresh Daily program does as a channel, right? So it's got to work with the other channels, so you can actually make the doughnuts fresh and then have a route system. You can drop them off.

And so when we tested with McDonald's in the latter part of last year, in a nine-store test, we could see that those-- the rigor and the drop and the quality matched. And then we moved on to the markets of Louisville and Lexington, which we've been in for six weeks. I was just also recently in the market. And it's really about seeing, you know, as a merchant, are you getting the right pack size, is the freshness there, are we delivering on time, what are the KPIs, and going through a pretty rigorous process because channels and customers are going to have different-- you know, those customers are going to have different need states.

Someone that's coming through in a drive-through that's looking for a coffee is probably going to do an individual serve. We really focus on dozens. So it's, how do we make sure that that works? And really getting the rigor of that tested gives us a lot of confidence that we can do it in the QSR industry. We are just doing this right now with McDonald's and learn-- both of us are learning. So we'll see where it goes. But we're pretty pleased with where we are right now.

BROOKE DIPALMA: And Mike, this morning, you called it a doughnut logistics company. A lot of people thought that was pretty interesting. But I mean, your doughnuts are now in Walmart. You're in Publix. You're testing at Target and Albertsons, all fresh delivery daily. And so essentially, when you look at that model, how do you make sure that you're ultimately making a profit at the end of the day?

MIKE TATTERSFIELD: So again, we look from this hub-and-spoke system, right? So our producing doughnut shops, right, they can go through the-- you know, they'll produce it at the shop. It can then be shipped through. You know, one channel could be the grocer channel. Then the route could also drop off a convenience. So we look at the profitability of the route. The doughnut maker that morning does not know where the doughnut's going. It could also be going through delivery and e-common-- e-commerce.

So when you look across it, that's how you can see the profitability of the business. If you look at where the margins have improved, particularly in the US in the last quarter, a lot of that is because, again, the efficiency as you get the omnichannel approach. So that's how the business works. We've also seen in markets-- you know, the US started primarily as a doughnut shop business. So when we started to transform some of those shops to include the route system, their profitability improved dramatically, right? Because then you start to get the efficiency of what that producing shop can do.

SEANA SMITH: Mike Tattersfield, thanks so much for joining us here at Yahoo Finance, CEO of Krispy Kreme. We hope you come back--

MIKE TATTERSFIELD: Always a pleasure.

SEANA SMITH: --and join us soon.

MIKE TATTERSFIELD: Thank you to all the Krispy Kremers out there. Tell Brian I said hello, all right? Take care.

SEANA SMITH: We will. Of course we will.

MIKE TATTERSFIELD: All right.

SEANA SMITH: You got to bring doughnuts next time. Join us in the studio.

MIKE TATTERSFIELD: He always wants me to talk about doughnuts. So we got a great, you know, little, mini Happy Mother's Day bouquet, all right?

SEANA SMITH: Ooh.

MIKE TATTERSFIELD: So there we go.

SEANA SMITH: I've got to tell my husband--

MIKE TATTERSFIELD: Come on.

SEANA SMITH: --about that one. All right. Mike, thanks so much for joining us.

MIKE TATTERSFIELD: There you go.