AN AMAZING DOUGHNUT FINDS A HOME ON TOBACCO ROAD – INSPIRED BY A CAMEL

INTRODUCTION

On my long journey down Tobacco Road, I never used tobacco products. Long before any health issues, my grandfather warned me of the threat to my economic health from tobacco and alcohol. In his young days, he did distill illegal alcohol.  But he made a strong point with me that it was just a product in inventory, and he never touched his inventory.

But Winston-Salem, where I grew up, is famous for another product – the Krispy Kreme doughnut.  And unlike tobacco, I have been an avid consumer all my life. Until I was 24, I had never seen any other doughnut. I like to say, “Krispy Kreme was born one mile and two years from my birth.”  To be accurate, Krispy Kreme was not born in Winston-Salem, but it arrived there in its infancy and has grown from a hometown product to a worldwide brand.

THE FOUNDER

Vernon Rudolph was born in Benton, Kentucky in 1915. His work ethic developed early. He did well in school. In 1933, eighteen-year-old Vernon began working for his uncle Ishmael Armstrong’s small general store in Paducah, Kentucky.

While the origin of the doughnut recipe remains partially a mystery, it is believed that an Ohio River steamboat cook, a Frenchman from New Orleans named Joseph LeBeouf gave Armstrong the recipe for a light and fluffy doughnut.[i]

So, in 1933, Rudolph began selling the yeast-based doughnuts door to door for the Krispy Kreme Doughnut shop in Paducah. He also took part in producing them, gaining all-around experience in the business.

The doughnuts were a hit. But their store struggled during the Great Depression, so in 1934, Vernon and Ishmael moved to Nashville, Tennessee where they hoped business would be better. They focused solely on selling doughnuts. The shop did so well that Vernon's father also moved to Nashville to help.

But Armstrong, in 1935, decided to sell the shop and return to Kentucky. Rudolph wanted to buy it but did not have the money. His father borrowed the money, and soon after Krispy Kreme was operating under new ownership. In 1936 Rudolph's father opened another shop in Charleston, West Virginia, and later, a third shop in Atlanta, Georgia.

THE VISION INSPIRED BY A CAMEL

Vernon Rudolph still wanted his own store. In 1937, he left Nashville in a 1936 Pontiac with two friends, $200, and a dream. While looking for a location, he stood on a street corner in Peoria, Illinois, one evening. Rents were high there, and he was running out of money. He took a pack of Camel cigarettes from his pocket and noticed that they were made in Winston-Salem, N.C. "Why not there?" he thought, "A town with a company producing a nationally advertised product has to be a good bet." So, to North Carolina the three went.

With only $25 left, in Winston-Salem, they rented a space on Main Street in what is now called “historic Old Salem.” They got ingredients and some equipment on credit and began making doughnuts on July 13, 1937. 85 years ago this week. Vernon Rudolph believed in producing only this high-quality mouth-watering doughnut, and the formula has never changed.

Krispy Kreme began as a wholesaler. Using delivery trucks, Rudolph primarily sold to convenience stores. But soon the wonderful aroma from the shop caused passersby to ask for doughnuts, especially workers at the nearby R.J. Reynolds cigarette factory. Rudolph cut a window in the store front and instantly became a retailer. Customers even came for fresh doughnuts during nighttime production hours, midnight and 4am.

EXPANSION

In 1946, the Krispy Kreme Doughnut Company was incorporated. Then in 1947, the Krispy Kreme Corporation, was also formed. The Company directed individual store operations, while the Corporation produced the dry mixes used by the shops. Vernon Rudolph was President and Chairman of the Board.

The Corporation created three essential departments:

Mix Department to mix, in bulk, the key ingredients, to ensure that all stores made the same excellent products.

Laboratory to test and experiment with ingredients to see if a new ingredient would make a great product better.

Equipment Department, staffed with engineers and machinists, to manufacture its own doughnut making equipment.

Vernon Rudolph worked seven days a week. He strove to make Krispy Kreme the best in the doughnut business. [This video [here] shows the atmosphere at a Krispy Kreme shop.  But nothing can describe the aroma of the fresh, hot doughnuts. You must be there to appreciate it.]

By the 1960s, Krispy Kreme was known throughout the Southeast, and it began to expand into other areas. Rudolph entered into partnerships or associate (franchise) relationships. These gave the operators use of the Krispy Kreme name and the ingredients. But they had to agree to adhere to the Krispy Kreme philosophy of producing only the highest quality doughnuts.

OWNERSHIP CHANGES

Rudolph’s death in 1973 at age 58, left a large void. And in 1976, Beatrice Foods bought Krispy Kreme.[ii]  Like most conglomerates, Beatrice emphasized immediate profits. Beatrice encouraged Krispy Kreme to add menu items and substitute ingredients in the mix. As often happens, the new owner’s culture clashed with Krispy Kreme’s historical philosophy of simplicity and quality. So, in 1981, Beatrice decided to sell its subsidiary.

One Krispy Kreme associate saw this as an opportunity.

Joseph A. McAleer, Sr., had been with the company since 1951. An Alabama native, he went to work at the Pensacola, Florida store for $1 per hour. McAleer worked 120-hour-weeks for over a year. With this experience, in 1953, he started his own shop in a suburb of Mobile. This location was not good, and he opened another shop in 1956 - near a busy street in Mobile - this time successfully. Over the next 17 years, McAleer opened other Krispy Kreme shops in Alabama. Members of his immediate family worked in the different shops.

In 1982, McAleer talked with others who had a stake in Krispy Kreme. He formed a group of investors who became the new owners. McAleer steered the company back to its traditional emphasis on high quality and a family work atmosphere.

Krispy Kreme had steady growth. Its stock went public in 2000 at $21 per share, valuing the company at $1.38 billion.  The stock reached its all-time high of $50 in August 2003, 2.3 X its Initial Public Offering, and a $3.2 billion market value. But an ambitious expansion proved unprofitable and the stock suffered. It sold as low as $1.01 per share in 2009.

In 2016, the company returned to private ownership under JAB Beech. The Luxembourg-based firm bought Krispy Kreme for $21 a share in cash, a total value of $1.35 billion, the same price as the IPO 16 years earlier. Then in 2021, Krispy Kreme had an IPO at $17 a share, valuing the company at $2.7 billion. The stock is now at $14.50, down 15% from its IPO 6 years ago. (159.7MM shares)

Even though Krispy Kreme is a famous product with a secret recipe, after 2000 it has not found a “recipe” to achieve consistent operating profitability. But, through good times and bad, the number of stores has still grown, and the doughnut’s fame has spread. About 370 stores in the U.S. and more than 1,300 in 32 foreign countries make 120 million doughnuts a day.

Some years ago, in a Bangkok shopping mall, my daughter and I immediately spotted the red and green Krispy Kreme sign. Our “hometown” doughnut has come a long way in 85 years; it felt like a piece of home, even 9,000 miles away.

[i] The recipe is locked away in the company vault in Winston-Salem. There's been plenty of speculation about the ingredients, but the historic recipe likely consists of cream of fluffed egg whites, mashed potatoes, sugar, shortening, skim milk and flour. What's really in them? The world may never know.

[ii] Retired RJR executive Sam Angotti represented the Rudolph family in the sale negotiations.