When you hold the throne, everyone comes for you. McDonald’s has been in that position since the 1970s, maybe even earlier, as it has been dominant for that long.
The challenge is that when you sit on top of the mountain, every rival knows who to target. Wendy’s (WEN) – Get Free Report and Restaurant Brands International (QSR) – Get Free Report Burger King have, on a variety of occasions, targeted McDonald’s (MCD) – Get Free Report in their ads.
In some cases, like Wendy’s new breakfast, the commercials might even be accurate. In others — like every time Burger King and Wendy’s introduce new french fries — they’re decidedly wrong.
Yum Brands (YUM) – Get Free Report Taco Bell has also done the same thing. When it launched its breakfast, it ran commercials trolling McDonald’s. That’s not a bad strategy because everyone knows what an Egg McMuffin looks like and tastes like. So, if you’re looking to establish yourself with consumers, saying “we’re better than something you’re familiar with” is an easy way to make some connections.
McDonald’s also faces another key challenger that’s more subtle in its approach. Starbucks (SBUX) – Get Free Report doesn’t need to tell you it has better coffee than the fast-food giant. Everyone understands that it does, but its lineup of beverages and snacks not only takes customers away from McDonald’s in the morning, it steals them from the non-meal snacking parts of the day.
There’s one big way McDonald’s can push back all those challengers, grow its own business, and have a product that rivals Starbucks all day long. McDonald’s should buy Krispy Kreme (DNUT) – Get Free Report.
McDonald’s and Krispy Kreme have been testing a partnership.
McDonald’s Needs a Doughnut and Coffee Brand
McDonald’s and Krispy Kreme already have a limited partnership where the burger chain is selling its doughnuts in over 160 McDonald’s restaurants in Kentucky, which kicked off at the end of March.
That fits with Krispy Kreme’s strategy of becoming a wholesaler of doughnuts. Its model includes standalone restaurants, but its growth will come from adding thousands of new distribution points for its doughnuts.
A national deal with McDonald’s would immediately deliver that growth, but the doughnut company does not have the resources to support the burger chain on a national level (or across all dayparts).
“With the McDonald’s in Kentucky test, adding trucks and adding significant — adding production, doubling production in those existing hubs completely sort of changes the context of us becoming a much more of an operator behind the scenes, as well as obviously upfront at the doughnut counter,” Krispy Kreme COO Josh Charlesworth said during the doughnut company’s first-quarter earnings call.
McDonald’s has over 13,000 US locations. Krispy Kreme can’t grow fast enough to serve the chain nationally on its own. If the burger chain bought its partner, it could not only fund that expansion, it could also add a Krispy Kreme-branded coffee product.
McDonald’s Needs Non-Meal Options (and Better Coffee)
McDonald’s could help protect its morning dominance from Wendy’s and Taco Bell (its most-aggressive competitors in that daypart) by adding Krispy Kreme nationally. It could also become a viable Starbucks alternative if it offered not just doughnuts, but better coffee all day long.
Krispy Kreme does not actually have a great coffee product, but it has a better name than McCafe. If McDonald’s owned Krispy Kreme, it could rebrand at least some of the McCafe line and simply have a more credible snack and coffee play that’s higher-end but still speaks to its working-class roots (as opposed to Starbucks’ snootier airs).
McDonald’s has not hinted at considering acquiring Krispy Kreme, and it’s possible the two sides could simply slowly ramp up their relationship. A deal, however, would bring the two brands together and allow McDonald’s to control which rival channels sell Krispy Kreme doughnuts.
It might, for example, want to build its grocery relationships and its sales at Target (TGT) – Get Free Report and Walmart (WMT) – Get Free Report, but want to cut back on certain convenience store chains. No matter how McDonald’s would leverage Krispy Kreme, this deal would make sense for the company as it looks to maintain its morning position and become more viable the rest of the day.