WINSTON-SALEM, N.C. - Roy Blount Jr. knew something was wrong at his beloved Krispy Kreme - long before the stock price began to plummet and the scent of corporate scandal filled the air.
When the North Carolina company opened its first doughnut shop in New York City, the Georgia-born humorist rushed right down to see how his favorite boyhood treat fared in that Northern clime. Bathed in the red-neon glow of the familiar "Hot Doughnuts Now" sign, he ate five of the signature glazed in one sitting and couldn't wait to tell his fellow Gothamites of their good fortune.
"When Krispy Kremes are hot," he wrote in the Sept. 8, 1996, edition of the New York Times Magazine, "they are to other doughnuts what angels are to people."
Some time later, after Krispy Kreme had become the darling of Wall Street and the fad food du jour on HBO's Sex and the City, Mr. Blount was strolling on Manhattan's East Side when the red the sign beckoned. The guy behind the counter handed him a cold doughnut; Mr. Blount protested.
The server admitted his manager had told him to leave the sign on all the time.
"Something in my heart broke just a little bit," the 63-year-old transplant said.
To investors and analysts, Krispy Kreme's woes are a black spot on the portfolio. A federal securities investigation, allegations of padded sales figures and this past week's ouster of CEO Scott Livengood have tainted what had been a sweet American success story.
To Southerners for whom a hot Krispy Kreme is part of a fond childhood memory of visits to Grandma and church get-togethers, the pain runs much deeper.
"It's the classic story of the country girl that comes to the city," Mr. Blount said. "You think anything that sweet couldn't get in trouble.
"But, of course, anything that sweet will get in trouble."
No lesser institution than the Smithsonian has declared Krispy Kreme a "Southern icon." But if the rents hadn't been so high in Peoria, Ill., we might be talking about that "Northern icon."
According to company legend, Vernon Carver Rudolph was looking for a place to open his own doughnut shop in the summer of 1937 when he landed in Peoria with $25, a Pontiac loaded with frying and rolling equipment, and a secret potato-flour-and-yeast-based recipe. He was standing on a street corner when he pulled a pack of Camel cigarettes out of his pocket and noticed where they were manufactured.
"Why not Winston-Salem?" the Paducah, Ky., native thought. "A town with a company producing a nationally advertised product has to be a good bet."
Mr. Rudolph used the last of his money to rent a tiny brick storefront across the street from Salem Academy and College. He had to borrow the money for his first batches of flour, eggs, potatoes and yeast.
By November, Mr. Rudolph was selling 1,000 dozen doughnuts a week at 25 cents a dozen. Things were going so well that he'd already obtained business licenses to sell in Charlotte, and had designs on Raleigh and Durham.
His business was geared toward the wholesale trade. When passers-by began stopping to ask for fresh doughnuts, however, Mr. Rudolph knocked a hole in the wall and began selling directly to customers.
By the 1960s, the company had developed an assembly-line system that automated the making of doughnuts in every store, a process so mesmerizing it was eventually put on display for customers.
Mr. Rudolph's brother, Lewis, tried to convince him that Krispy Kreme should devote itself to the wholesale mix business and let franchisees take the financial risk of opening new stores. But Vernon Rudolph didn't want to give up that much control.
"We're going to be the biggest doughnut company in the world," his son, Vernon C. Rudolph Jr. recalls his father saying. "We're going to be the leader."
Vernon Rudolph died in 1973 at age 58. Three years later, Krispy Kreme became a wholly owned subsidiary of Chicago-based conglomerate Beatrice Foods.
Thus, some say, began the first "fall" of Krispy Kreme.
Beatrice immediately began changing the brand in an attempt to make Krispy Kreme more profitable. It redesigned the familiar green-and-red script logo and began having Krispy Kreme stores sell some of Beatrice's other products - sausage biscuits, brownies, ice cream, soup. Then the company started fiddling with the secret recipe.
"They lessened the grade of flour, the amount of egg - the ingredients that are important to making a good quality doughnut," said Executive Vice President Jack McAleer, whose father, Joseph, was one of Mr. Rudolph's earliest franchisees.
Mr. McAleer refers to that period as "the dark ages." Sales began to slump.
Joseph McAleer, who got his start working for $1 an hour for Mr. Rudolph, was so disgusted by the changes that he began preparations to open his own doughnut business, but when Beatrice put the company up for sale in 1981, the Alabama man organized about 20 other franchisees and staged a leveraged buyout.
They immediately went back to the original formula and logo.
During the 1980s, the company began to realize that the future lay in the retail business. It decided to venture north of the Mason-Dixon line.
The first target was Indianapolis. When the double drive-through store opened in 1994, cars were lined up down the street, filled with people who had eaten Krispy Kremes growing up down South or during a family vacation.
"We were completely blown away by it," Jack McAleer said. "That's when we first started to understand that there was something more than just the doughnut even. That there was an emotional connection."
Thus began the second "rise" of Krispy Kreme Doughnuts.
New Yorkers fell in love with Krispy Kreme in 1996, and even President Clinton was having them delivered to the White House. Three years later, the little North Carolina company took on Los Angeles.
In 2000, the company went public at $21 a share. Investors seemed to embrace this tangible, flour-and-sugar product like financial comfort food.
Soon, Rosie O'Donnell was serenading the treats on her talk show, and Krispy Kreme won key product placements on Sex and the City and NBC's Friends.
The glazed rings suddenly had become chic. Lines at grand openings were two, three hours long.
The company jumped to the New York Stock Exchange in 2001. Two years later, the brand went international, opening stores in Australia and England, where the tabloids dubbed Krispy Kremes "as addictive as crack cocaine."
Stock prices soared to near $50 by the summer of 2003. Nearly 400 Krispy Kreme stores as far away as Korea were producing nearly 3 billion doughnuts a year.
Then, like a doughnut left too long under a bright lamp, things started to deflate.
Last May, Krispy Kreme issued its first profits warning. Blaming the low-carbohydrate craze (each original glazed packs 200 calories, 12 grams of fat and 22 grams of carbs), the company slashed its 2005 earnings forecast by 10 percent.
By fall, the Securities and Exchange Commission announced it was looking into some dubious accounting practices at Krispy Kreme.
Last month, amid allegations in a stockholder lawsuit of padded sales figures, the company restated its 2004 earnings and warned investors that it was in danger of defaulting on a $150 million credit line. On the news, the share price tumbled more than 17 percent to $10.15. On Jan. 14, just over a week ago, it reached an all-time low close of $8.72.
On Tuesday, the company's board ousted Mr. Livengood as CEO amid expectations of yet another quarterly loss.
"They grew faster than they were being efficient," said Carl Sibilski, who follows the company for Morningstar in Chicago.
But Mr. Sibiliski is confident the company can get beyond that.
"This is just a time that we've got to get through," Mr. McAleer said. "And we'll look back in years to come, and it'll be one of those dark years, just like the dark ages."
The Augusta Chronicle ©2012 Morris Communications, LLC. All Rights Reserved.
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