Krispy Kreme's recent earnings call buzzed with excitement over their impending nationwide rollout with McDonald's. The deal, promising to add over 12,000 points of access for their iconic glazed doughnuts by 2026, is a game-changer. Analysts, understandably, fixated on the incrementality of the partnership, potential cannibalization, and the logistics of supplying thousands of McDonald's restaurants daily. However, hidden beneath the surface of the enthusiastic expansion narrative lies a fascinating detail that seems to have slipped past the radar: Krispy Kreme's commitment to automating doughnut production.

While executives discussed their pilot program with Ryder for last-mile delivery and the expansion of their hub-and-spoke model, the subtle hints about automation were particularly intriguing. Josh Charlesworth, Krispy Kreme's CEO, casually mentioned a fully automated production line running in their Bronx facility, capable of topping, filling, and even packing doughnuts without human intervention. This seemingly offhand remark carries immense weight when considering the sheer scale of the McDonald's undertaking.

Currently, Krispy Kreme can supply roughly 6,000 McDonald's locations with their existing infrastructure. To reach the ambitious goal of 12,000, they're investing in new production hubs. But what if these hubs aren't merely replicating the traditional model? What if they're designed to accommodate a future where robots churn out doughnuts at an unprecedented pace?

The financial implications of this hypothesis are staggering. While executives shared projections for incremental revenue and EBITDA growth from the McDonald's deal, those numbers might pale in comparison to the efficiency gains unlocked by automation. Imagine a scenario where labor costs, currently expected to rise by high-single to low-double digits in 2024, become significantly less relevant. The operating leverage potential would skyrocket, leading to even more impressive margin expansion than currently projected.

Let's delve into the numbers. Assuming Krispy Kreme's Bronx facility serves as a blueprint for future automated hubs, they're likely aiming for a significant reduction in labor dependence. If a fully automated hub can achieve a 50% reduction in labor costs compared to a traditional hub, the impact on their US segment's adjusted EBITDA margin, which was 14.4% in Q1 2024, could be substantial.

Currently, their US segment's labor costs likely represent a significant portion of their cost of goods sold. A 50% reduction in that cost could translate to a 3-5% increase in adjusted EBITDA margin, potentially pushing it close to 20%. This is a conservative estimate, considering the potential for further automation advancements and the inherent scalability of a robot workforce.

While this hypothesis relies on connecting the dots between seemingly disparate pieces of information from the earnings call, the logic is compelling. Krispy Kreme has a clear incentive to maximize efficiency as they embark on their largest-ever expansion. Automation, while initially requiring upfront investment, offers a path to long-term cost savings and unprecedented production capabilities.

Of course, several questions remain unanswered. What is the timeline for rolling out automated hubs? Will all new hubs embrace this technology, or will it be a gradual transition? How will Krispy Kreme ensure consistent quality and freshness with increased automation? These are questions only future earnings calls can answer.

Potential Impact of Automation on Adjusted EBITDA Margin

The following chart illustrates the potential positive impact of automation on Krispy Kreme's adjusted EBITDA margin, assuming a 50% reduction in labor costs at automated hubs. This is a hypothetical projection based on information from the Q1 2024 earnings call.

However, one thing is certain: Krispy Kreme isn't just betting on their delicious doughnuts to conquer McDonald's. They're quietly building a robotic army, ready to revolutionize doughnut production and propel their growth trajectory to new heights. The analysts focused on traditional metrics might be missing the biggest story of all.

"Fun Fact: Did you know that Krispy Kreme's signature "Hot Now" light, signaling fresh doughnuts rolling off the line, was originally a marketing accident? In the 1930s, a passerby noticed the delicious aroma wafting from a Krispy Kreme store and inquired about purchasing some. The store manager, lacking a proper sign, flipped on the red light intended for construction warnings to signal the availability of fresh doughnuts. The rest, as they say, is history."