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Hot Doughnuts Now: The Krispy Kreme Story

Growing up Jewish in the Northeast, I adhered to the traditional philosophy: When it comes to circular breakfast choices, make it a bagel. It is the Chosen Food, the one true choice for breakfast noshing. That other round breakfast treat, the doughnut? That was for the goyem. Well, I have a confession to make. A few days ago, I walked into the Krispy Kreme store in Raleigh and came out a convert. Had she been a bit more religious, my grandmother would be rolling in her grave, but the way the hot Original Glazed melted in my mouth was the closest I've come in a while to a religious experience.

It is precisely this experience, or "magic moment," as Raleigh store floor supervisor Marcus Scott likes to call it, combined with a hefty dose of marketing savvy, that has fueled Krispy Kreme's enormous success in an oft-stormy business climate. The doughnuts can now be found all over the world--most recently the company opened a store at Harrod's in London--and are received almost everywhere with a type of reverence and enthusiasm that is downright rare. And Duke doughnut connoisseurs, rejoice! Krispy Kreme will be returning to its North Carolina roots--with a store coming to Chapel Hill in the near future and the Durham Chamber of Commerce doing all it can to make hot Original Glazeds available in the Bull City.

In the span of 70 years, Krispy Kreme has grown from one man selling donuts at a small general store in Kentucky to a globally recognized brand with an output of 7.5 million doughnuts per day and over 310 retail locations. As far as volume goes, Dunkin Donuts has Krispy beat by a long shot, with over 5,700 stores worldwide. And although Dunkin's is not without its legion of loyalists (they will talk your ear off about the coffee), the brand has not achieved the level of cult status Krispy Kreme continues to garner. In April 2000, the company went public and 13,800,000 shares were offered on the NASDAQ under the symbol KREM. After the initial public offering company's common stock has since been transferred to the New York Stock Exchange under the symbol KKD. The stock exploded--it currently trades for just under eight times its initial offering price of $5.11. The stock's dramatic rise was fueled in part by many investors taking shelter in sweet Krispy Kreme after the high tech bubble burst and left a bad taste in their mouths. However, Krispy Kreme stock has experienced a decline in recent months. Analysts suggest that this has something to do with the stock being overvalued--perhaps much like the doughnuts themselves, the "hotness" of the stock could not last forever.

In order to find out how Krispy Kreme turned into the huge success it is today, I called up founder Vernon Rudolph's son. Carver Rudolph is clearly used to telling the Krispy Kreme story. He seems pleased with the way his father's company has been so much in the public eye in recent years, though there's a tinge of annoyance as he grumbles that reporters often make him come off sounding like an idiot. But later in our interview he allows that these days it's harder to offend him: "I've gotten old enough," he chuckles.

Vernon passed away in 1973 at the age of 58, and since 1976 there has been no Rudolph family involvement in the company--Carver works in commercial real estate--but the history is still very clearly a personal story and a bit different from the legend one finds on the company's website.

In 1933, an 18-year-old Vernon left college after a year and went to join his uncle Ishmael Armstrong in Paducah, Ky. Uncle Ishmael owned a small general store selling everything from horse collars and soap to milk and doughnuts.

According to the Krispy Kreme website, Vernon Rudolph bought a doughnut shop in Paducah from a French chef named Joe LeBeau and inherited a secret yeast-raised doughnut recipe that would become the magic formula still in use today.

But in the 1980s, the company sent one of its in-house lawyers to Paducah to find out a bit more about LeBeau and the company's roots and could find no traces of the French chef. Then in 1997, Carver received a call from a Paducah-based historian who wanted to know more about the company. Two years later, Carver went down to Paducah, where he and the historian were initially confounded.

"There was no doughnut shop in 1933," he says. "There was no Joe Lebeau."

"There was a Joseph G. LeBoeuf," he says, drawing out and emphasizing the 'was', "and we traced him to Louisville, Ky."

LeBoeuf worked as a cook on a barge on the Ohio river and was famous for three things--his flapjacks, his coconut cakes, and his light and fluffy doughnuts. Uncle Ishmael probably admired the recipe, Carver says, and LeBoeuf would have been flattered to share it--no secret transactions involved. Unfortunately, Joe LeBoeuf had passed away just 10 months before Carver Rudolph made it over to Paducah so there is still a bit of mystery regarding the exact origin of the recipe. As Carver explains, LeBoeuf was only making a few dozen doughnuts a day whereas his dad had to produce about 400, so, "I'm sure he doctored it right away... the proportions just don't work the same."

From what Carver and the historian were able to piece together, the recipe consisted of a cream (the eponymous "Kreme") of fluffed egg whites, mashed potatoes, sugar, shortening and skim milk that was chilled and mixed with flour and then fried and covered in glaze. Today, very few people can say what exactly goes into a Krispy Kreme doughnut, with the top-secret recipe secured in a vault at company headquarters in Winston-Salem.

After a year the struggle against the Great depression in small-town Kentucky compelled Ishmael to sell the general store and set up shop in a bigger city. He and Vernon moved to Nashville, Tenn., in order to concentrate exclusively on selling the popular doughnuts. They rented a storefront on Gallatin Road and opened the "Krispy Kreme Doughnut Company." Business was so good that it convinced Vernon's father Plumie to leave his job digging ditches for the government in Kentucky, and come join his brother and son selling doughnuts.

In 1935, Ishmael had had enough of the doughnut business and decided it was time to get back to Kentucky, his family and his true passion--farming. He wanted Vernon to run the business, but the 20-year-old had no assets and so Plumie took out a loan and purchased Krispy Kreme. Vernon worked with his dad at the Nashville store for two years, and assisted his uncle Roy Rudolph in opening a shop in Charleston, W. Va.

Uncle Roy had strong words for his nephew, telling him that if he ever wanted to make anything of himself, he had to get out from under his dad, Carver says. So Vernon started looking into opening up his own shop in Emporia, Ill. Vernon was prepared to sign a lease for what looked to be a good location, but he started having doubts as he saw that there were plenty of doughnut shops in town already vying for customers. The night before he was supposed to sign the lease, Vernon sat debating with himself and stared idly at his pack of Camel cigarettes. The package said, "Camel Cigarettes, Winston-Salem, N.C."

That the national brand was manufactured in the small North Carolina city gave Vernon the idea that Winston might be a good place to set up shop. So the next day he, a doughnut cutter and a salesmen left Emporia and drove across the mountains to Winston-Salem. The three men met realtor T.E. Johnson, leased an 18-foot-wide storefront across from Salem College and opened up their own Krispy Kreme Doughnuts shop on Friday the 13th of July 1937.

"I think [headquartering Krispy Kreme in Winston-Salem] is totally random other than the cigarette," Carver says, though he adds, "At that time, Winston was probably the industrial capital of North Carolina, 'cause of Reynolds tobacco and Haynes hosiery."

Despite the ominous opening date, the business thrived. After nine years, it was incorporated--with seven stores--and a 31-year-old Vernon Rudolph was president and major stockholder.

Vernon originally made the doughnuts primarily for convenience stores, but anyone coming in between the hours of midnight and four in the morning could get a hot donut. In the 1950s, the business opened its first doughnut shops that employed the concept of "doughnut theater": Glass was put into the retail areas so customers could see how the doughnuts were made.

I am treated to the show at the store in Raleigh. While I sit at one of the handful of tables, my gaze is held by the hairnetted women tending to the sea of doughnuts that steadily stream by on conveyor belts and through mysterious metal tunnels behind the glass window.

The 1950s also saw the mechanization of the doughnut-making process with the total automation of proofing, frying, glazing and screen loading. Hand-cut doughnuts were a thing of the past. Vernon and his associates worked to build their own mix plant and developed a dry doughnut mix that would be delivered to each store. They also invented and built their own doughnut-making equipment. Both the mix plant and manufacturing operations were headquartered in Winston-Salem.

Even today, each Krispy Kreme store still uses only company-manufactured equipment and gets nearly all its ingredients from the centralized plant. As Raleigh store manager Daryl Silver explains, "Probably the only thing that we have to purchase is milk!"

During the 1960s, Vernon worked to expand and modernize Krispy Kreme. The company enjoyed steady growth throughout the Southeast and began expanding outside its traditional base. The company also streamlined the design of its stores with green tile roofs and large road signs featuring the two "walking K's" and the recognizable logo. When Vernon died in 1973, Krispy Kreme was a thriving Southeastern business with about 70 retail/wholesale doughnut plants--half company-owned and half franchised.

A few days after my interview with Carver, I am able to speak with Mike Harding, who took over as Chief Executive Officer when Vernon died in 1976. Harding worked at Krispy Kreme for about five more years and then retired, but served on the board of directors until 1985. He now lives in Oklahoma City, Okla., and still serves as a consultant to the company. Harding and Vernon were born in the same year--1915--and Carver tells me the two men were quite close. Harding learned the business of baking at a young age.

"I spent my life growing up in Indian boarding schools and I learned the baking trade while going to school," he explains in a shaky voice. "I worked around a little bit and met Vernon Rudolph.... He promised me if I came with him we'd make a good living, but I'd never get rich."

A tinge of nostalgia creeps into Harding's voice as he tells me about his friend and former business partner. Harding addresses Vernon's wilder side but stresses the man's generosity and business sense above all.

"They had some wild stories about him--he had a habit of drinking," he says. "I imbibed a lot of times with him... . Nevertheless he was a very smart businessman and a pretty generous man. He gave many, many things away [and he] would do it anonymously. It was a shame to lose him."

(Vernon's fondness for alcohol has been brought out by more than one journalist, but Carver says they always fail to mention that Vernon gave up drinking completely in 1961.)

Harding saw Krispy Kreme through one of the rockiest times in the company's history--its management by the Beatrice Foods Inc., of Chicago. In 1976 Krispy Kreme became a wholly-owned subsidiary of the Chicago-based company. Headquarters remained in Winston-Salem.

Harding explains that at the time of his death Vernon was a prominent stockholder and the bank was his executor. Thus the bank was anxious to sell the stocks and after many offers, Harding and the Rudolphs accepted the offer from Beatrice, which presented a tax-free exchange of stock and what seemed to be the best deal for the Rudolph family.

Carver sighs heavily when I ask him about Beatrice and if he wishes there were still some family involvement in Krispy Kreme.

"Oh gosh, well... when you think about what the company was sold for in 1976 and what it's worth today...." he trails off. "I was 25, and I was pretty naive and gullible." Carver has two brothers and two sisters, but they were still in school at the time, whereas he had been working with his dad in the business for a year. Carver refuses to elaborate about the Beatrice merger, but he allows that a recent Fortune magazine article on Krispy Kreme that depicts the union as less than blissful got things right.

After six years the unhappy marriage dissolved when a group of Krispy Kreme franchisees led by an associate named Joseph McAleer purchased Krispy Kreme, making it an independent company once again.

As such, Krispy Kreme has blossomed from a regional chain of stores into a national phenomenon that is expanding internationally. The London store is the first of 25 retail stores the company has in the works for the UK and Ireland. In addition, the famous "Hot Doughnuts Now" sign recently had to be translated into French when Krispy Kreme opened its first store in Montreal, back in May. In addition, Krispy Kreme opened its first store inside a Wal-Mart in Mt. Airy, N.C., in October, and has plans to expand into Wal-Marts across the country. The company recently started manufacturing and selling coffee at its retail locations, which has helped to boost retail sales as well.

Krispy Kreme is far from where Vernon Rudolph began it, but Harding thinks his old boss would be pleased.

"We were content to be a company doing something like $100 million a year primarily in the Southeast, but the younger generation had bigger ambitions and it's right, they should," he says, the nostalgia creeping into his voice. "What we are today is all from a seed planted by Vernon Rudolph."

Harding takes a minute to gather his thoughts.

"Like any old man I'd like to be back in the middle of it. Sittin' back and looking at it is not as much fun. But I'm pleased and very proud," he says.

As he should be: Net income for the company's second quarter of Fiscal Year 2004 increased 46.8 percent to $13.0 million compared with $8.9 million in the same time period last year. Stock earnings increased as well.

The store in Raleigh performs very well and its success is probably fueling Krispy Kreme's expansion in the Triangle. It was one of the ones that Vernon was most proud of, Carver says. "Raleigh was an enormous personal success for my dad," he recalls. "With the capitol and the universities and Research Triangle, it just did so well."

The original store in Raleigh was one of the first seven to be incorporated in 1946; it was located down the street from where the store stands today. When I walk in, the first thing that catches my eye is the enormous volume of doughnuts--in all stages of production--behind the glass screen. Silver tells me that in his three years as manager he has seen retail sales nearly double from an output of 20,000 doughnuts a week to 40,000. In addition the Raleigh store produces doughnuts for distribution to convenience stores and grocery store delis, as well as for wholesale.

The store is open 24 hours a day, with the "Hot light" coming on for 10 hours each day--from 6 to 11 a.m. and then again from 6 to 11 p.m. During those times, a customer can be sure to get a hot Original Glazed, but as the store is always making some kind of doughnut, it may be possible to get a different type--say a blueberry-filled, glazed shell doughnut--hot at some other point during the day.

Each doughnut takes approximately an hour to make from start to finish--33 minutes to cook and then about 25 minutes to ice and cool down to room temperature. They are produced at a clip of about 400 dozen an hour. Although the process is mostly mechanized, Silver employs a staff of about 85 people, who perform key functions such as filling each jelly doughnut by hand.

Silver attributes the store's success to the number of universities in the area--he sees students from all over the Triangle--as well as the number of government employees. In fact, as we pull into the parking lot, someone in a car with a State House of Representatives license plate speeds by, cutting us off in order to get a good spot in the drive-thru line snaking around the parking lot.

The store's popularity with college students makes it an obvious match for downtown Chapel Hill. The company is currently actively looking for a site there, says Krispy Kreme spokeswoman Brooke Smith.

And while she said Krispy Kreme does not currently have any site plans for Durham, Chuck White, an Economic Development Associate at the Durham Chamber of Commerce says he has been actively working to get Krispy Kreme to come to town. The Chamber has proposed various locations for the store--Northpoint Mall or the site of the former South Square mall (which will see the construction of a Super Target next year) or even downtown.

"Anywhere it would go it would be success," he says, citing hungry Duke students as a factor.

Inordinately long lines are the norm when a new Krispy Kreme store opens in town. Lorri Macmillan, a business analyst who just moved to Michigan, remembers driving out to the recently-opened Krispy Kreme store in Van Nuys, Calif., and sitting in the drive-thru line for about an hour with her then-boyfriend Mike who had come out to visit her from Pittsburgh.

Mike grumbled about the long wait... until he had one of the doughnuts.

"Okay, I'm out with a bunch of Californians who are really health conscious and we're waiting in line for about an hour to get doughnuts," he recalls. "I don't know if I'd say it was totally worth waiting in a car for an hour, but they were good donuts."

The details of Lorri and Mike's Krispy Kreme experience can be found on a website called "The Quest" (for Krispy Kreme doughnuts), one of many Krispy Kreme fan sites populating the Internet.

Mike and Lorri ended up getting married not too long after their Krispy Kreme date.

"I don't know if you can attribute it to Krispy Kreme," she says, "but Krispy Kremes are definitely part of our life now."

Some couples are more formally integrating the doughnuts into their marriages by serving up Krispy Kreme wedding cakes. The doughnut-cake trend received national attention last year after it was featured in the Spring weddings issue of In Style magazine.

As of yet, Krispy Kreme wedding cakes have not reached the Triangle, though Silver says he has supplied doughnuts for over a dozen weddings. Couples can purchase boxes of two, four or six donuts to hand out as wedding reception party favors. And he says if he did receive a request for an actual cake he'd be happy to comply.

Krispy Kreme has certainly capitalized on the brand's retro spirit but fans everywhere point less to crafty marketing than to the quality of the product itself.

Silver explains to me precisely the difference between the yeast doughnut--the Krispy Kreme Original Glazed--and the cake doughnut--the Dunkin Donuts staple. The former engineering student describes in detail the technology that lets the yeast-based dough rise in about a half hour (the process would normally take two hours or more) and create the light, fluffy, melt-in-your mouth doughnuts of which Krispy Kreme fans can't get enough.

"A lot of people call it a pastry more than a donut," he says.

Terrence Baity and Joseph Highsmith have stopped at the Raleigh store on a break from driving a field trip from Wilmington. The two men are enjoying the doughnuts and coffee and tell me I really need to come over to Wilmington to see the store there, although they do confess this store is bigger.

Baity admits Krispy Kremes may not be the healthiest choice. (And this is perhaps a bit of an understatement--an Original Glazed doughnut has 200 calories and 12 grams of fat; a chocolate-iced, custard-filled doughnut jumps to 300 calories and 17 grams of fat.)

"A lot of sugar... isn't good for anybody," he says. "[But] when I do break the rules, I break them at Krispy Kreme."

Baity likes Krispy Kreme because of the variety and the quality of the Krispy Kreme doughnut, which he contrasts with Dunkin Donuts:

"Their donuts are heavy," he says. "They're dry and they choke you and you need milk."

Silver has this to say when asked about his biggest competitor:

"A dunkin donut is taking your favorite beverage and dunking a Krispy Kreme in it," he says, clearly amused at the joke he's just made. "That's my definition."

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