The Randolph brothers busted a hole in the wall of their bakery to accommodate factory worker’s short break time. That was the first of 3 ways to create word of mouth.

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Dave Young:
Welcome to the Empire Builders Podcast. I’m Dave Young. I’m here with Stephen Semple, and we’re going to talk about an empire that was built. That’s why we call it the Empire Builders, in case you hadn’t caught onto that whole thing about why we’re named what we are. Good morning, Stephen. How are you?

Stephen Semple:
Wow, you’re really on it this morning.

Dave Young:
I’m not on a… People ask, “Is that scripted?” Oh gosh, no. Isn’t it obvious? You whispered our subject for the day in my ear just as we started the countdown, and it instantly brought back memories of trips to Austin, Texas, with my children back in the early 2000s. Probably back around the turn of the century, young man, shortly after.

Stephen Semple:
Really?

Dave Young:
Mm-hmm. When Julie and I first traveled down to Wizard Academy, we had four kids at home. And this was when Wizard Academy was still down in Buda, at Roy’s office. So the easiest way to get there was down I-35, if you’re familiar with Austin.

Stephen Semple:
Right. Okay.

Dave Young:
Well, right at… I think it’s at Slaughter and I-35. We had to make a stop every time as we headed south at a Krispy Kreme Donuts.

Stephen Semple:
At a Krispy Kreme. All right.

Dave Young:
Because we didn’t have a Krispy Kreme donuts back in Western Nebraska, there probably still isn’t one.

Stephen Semple:
There’s no question. They’re far more concentrated in the south although another city that has a ton of them is New York City.

Dave Young:
Really?

Stephen Semple:
Yeah. When I was doing the speaking engagement this summer at NASDAQ… So first of all, there’s a really neat one right off of Times Square. I swear, you couldn’t go five minutes in Manhattan without bumping into a Krispy Kreme. They were everywhere.

Dave Young:
Really?

Stephen Semple:
Yeah, they were absolutely everywhere in New York.

Dave Young:
In case the listener hasn’t figured it out, today’s topic is Krispy Kreme donuts.

Stephen Semple:
I guess we never did announce that, did we?

Dave Young:
What we loved about it… I mean… Shoot, I’m raising kids, and everybody ate donuts, right? But we had a place in our hometown called Daylight Donuts, which I think was a small franchise. And you could get donuts at the grocery store. You could get the boxes of donuts, but man, there was just nothingness. And Dunkin’ was around, but there was just like the Krispy Kreme had the green light, red light thing on the drive-up. And if the green light was on, it means they’re making donuts right now. And yours will still be hot from the grease when they hand it to you out the window. And it was like, “That was an amazing thing.”

Stephen Semple:
Yeah, they’ve done incredible. They were founded by two brothers, Vernon and Louis Randolph, and Winston-Salem on July 13th, 1937. And today, they have 1400 locations. They have 21,000 employees, and they do half a billion in revenues. So they’ve done really well.

Dave Young:
I think half a billion is empire-sized.

Stephen Semple:
Well, yeah, it’s a lot of donuts. That’s a lot of donuts.

Dave Young:
It’s a lot of donuts. The other thing that was really cool about what was going on inside and watching them, was the whole assembly line, the mechanical automation, donut-making robot.

Stephen Semple:
Yeah. And this is where a lot of their innovation happened. And they did all sorts of really interesting things. So first of all, one of the reasons why they started in Winston-Salem is that Vernon saw the company name on a cigarette package, and it’s the depression. And he’s looking at it, and he realizes Winston is where a ton of cigarettes are made that actually, at the time, had one of the largest tobacco factories in the world. And so there are lots of jobs. So if we’re going to open up a business doing donuts, that’s a great place to go. So they land in Winston-Salem. And they’ve got 25 bucks to their name. They locate the shop just down the road from the factory. And they rent this place to make donuts. And Vernon had bought a recipe to make donuts from a New Orleans chef, and the secret was… There was a secret yeast, but also potatoes were used in the recipe.

Dave Young:
Great.

Stephen Semple:
And also, cream. It was cream-based. So that made the dough crispy when fried, and hence the name Krispy Kreme.

Dave Young:
Krispy Kreme.

Stephen Semple:
Okay?

Dave Young:
All right.

Stephen Semple:
But donuts are not yet popular. They are not a popular item. They saw the potential for donuts. So they start as a lot of bakeries do with this whole idea of selling the grocers, right? We’re going to sell the grocers.

Dave Young:
Sure. We’re going to sell wholesale donuts too.

Stephen Semple:
Yeah, yeah. But again, because donuts are not this big idea yet, it’s going really slow, and they’re actually literally struggling to pay the next month’s rent. And like a lot of innovative businesses, they’ve made this mistake of relying on others to sell this innovative product and idea rather than speaking directly to their customer. But here’s where things change for them. The workers who work down the road in the factory smell these donuts.

Dave Young:
Yeah, they do.

Stephen Semple:
And what they start doing is knocking on the door and saying, “Can we buy some donuts?”

Dave Young:
Wait, wait, wait, wait, wait. Their first thought was wholesale distribution, but they hadn’t even thought to sell them at the place they were making them.

Stephen Semple:
No. In fact, Lewis turns people away because he says, “Hey, you can buy them at the local grocery store. We don’t do retail.” Vernon says, “Screw that.” He grabs a sledgehammer, pounds a hole in the outside wall, puts in a window, and says, “We’re now doing retail.”

Dave Young:
I like Vernon. Yeah. Wait, when you have two brothers, there’s always a smart one. There’s one. There’s probably a really good match because there’s probably one that’s like, “We just got to get this done.” Boom, boom, boom, boom, boom. Right? Grind, grind, grind. Make the donuts. Time to make the donuts. And then you got somebody like Vernon that’s like, “Well, they’re trying to beat our door in. Why don’t we just make a window?”

Stephen Semple:
And this predates drive-throughs. Now, it wasn’t a drive-through, it was a walkup. But this is how innovative this idea was of just putting in a window where people can buy things. But here’s the other bonus to it all. Guess what they discovered. Customers liked them even better when they were hot, which they would never get at the grocery store, right? It becomes so popular that, literally, this becomes a Winston-Salem landmark. There are lineups for these donuts. And their timing was also good because of a couple of other things.

So unions are rising at this time, and the federal government creates the eight-hour workday, right? Because at the beginning of the Industrial Revolution, the working hours were just incredible. So they created both the eight-hour workday and the 30-minute lunch break. On top of that, more and more employers start offering these 15-minute breaks through the course of the day. So who can deliver food in this 10-minute period, right? It was really the invention of the coffee break. And guess what? Donuts fit into that. Coffee and donuts are perfect. Along with, as we know, another Winston-Salem intervention, the cigarette.

Dave Young:
That’s right. Have a cigarette, a cup of coffee, and a donut back to work.

Stephen Semple:
Right? Because remember when we go back to Buck, in the early days of American Tobacco, remember?

Dave Young:
Mm-hmm.

Stephen Semple:
His innovation on cigarettes was noticing these break times with factory workers.

Dave Young:
You didn’t have time to roll a cigarette.

Stephen Semple:
Correct, correct.

Dave Young:
Right. But you had time to smoke one.

Stephen Semple:
Right. And then donuts fit into this as well. So they start to expand into new markets. And by 1948, they have six locations selling directly to consumers. But donuts at the time were made by hand. And this created a challenge because there was this complete inconsistency in terms of size and flavor.

So because there are a lot of variables, it’s needed to cut by hand, turned by hand. No two are the same. So to create consistency, they need to mechanize. So they invented the machine, which is basically how pretty much every machine that makes donuts today is based upon. They made the first machine that made donuts.

Dave Young:
Drop a ring of batter into the hot oil.

Stephen Semple:

Yep. Fully automates the whole process, the kneading, the cutting, putting it in a circle dropping it in, turning it over, and lifting it out. And they call it the Ring King Jr.

Dave Young:
There’s a joke in there somewhere, but I’m going to leave that one alone though.

Stephen Semple:
And this thing churns out about 700 donuts an hour. And it’s still the standard for today in terms of how donuts are made. So this is the second innovation they do. So the first innovation they do is this whole idea of we’re going to put in a window. The next innovation is now we have a machine that can make it. But guess what? They started to notice when people came up to the window. They started noticing that people were fascinated by, what, David?

Dave Young:
Watching them.

Stephen Semple:
Watching the machine.

Dave Young:
Yeah.

Stephen Semple:
So they decide, “Let’s give the customer a front-row seat to watching this machine.”

Dave Young:
It’s fabulous to watch. I’d watch it all day long.

Stephen Semple:
And they actually called it Donut Theater. They changed the machine a little bit to make it so that it was a little bit more theater. But again, think about how innovative this is. We’re back in the late 1940s, and early 1950s, and you’ve got a place that’s manufacturing food. And at the sides, to take what we call… There’s a term that a guy by the name… a coach by the name of Dan Sullivan talked about backstage, front stage. So you’re backstage, the manufacturing of the food. Let’s bring it into the front stage, and have the customer experience it, and create donut theater.

Dave Young:
I love it. Hey, Stephen, I want to interrupt ourselves. That’s not proper grammar, but I did it anyway.

Stephen Semple:
There you go. Basically, this now really separates them and creates a real hardcore fan base for Krispy Kreme. The lovers of Krispy Kreme are religious about Krispy Kreme. And it’s neat. You go in there. You smell the donuts. You see the donuts floating down and being turned. It is really a very different experience from any other donut chain out there.

Dave Young:
I don’t remember who it was, but we didn’t go to our first Krispy Kreme because of an advertisement. We went because somebody said, “Oh my God, you’ve got to try this.”

Stephen Semple:
Right. You have to check this out.

Dave Young:
What they were really good at doing was creating this word-of-mouth machine.

Stephen Semple:
Yes.

Dave Young:
And in Wizard of Ads, we’ve had… Roy Williams developed this little presentation that we’ve had for years, but it talks about how to buy word of mouth. And I think Krispy Kreme was hitting on all the cylinders here. If I recall right, if they’re making hot donuts and you’re in there watching them, they’ll actually just give you one, won’t they?

Stephen Semple:
I don’t know because I haven’t done that.

Dave Young:
I think that their policy… We could research it, but I’m almost certain that if you’re just standing there with a hungry look on your face, watching donuts being made, they will pull one out and give it to you.

Stephen Semple:
Wow.

Dave Young:
And so that hits on all three of what we call the keys to building word-of-mouth. And they’re all three acts of magnanimity or generosity. So one is something like a sample. Here’s a free sample, right? Here’s a little something for you, right? If I give you one of these donuts, you’re probably going to buy a dozen.

Stephen Semple:
This is such a big topic, David. Here’s what we’re going to do. We are going to create a podcast on how to build word-of-mouth.

Dave Young:
Heck, yeah. And so this is a great example. So what I mentioned really early on when I was talking about visiting it myself, and that’s an architectural feature. So a green light, red light donuts are fresh, and then the kinetic. So letting people watch, giving them something to do, giving them motion to look at, bringing them back… What’d you call it? The behind-the-scenes-

Stephen Semple:
Oh, Yeah. Bringing the backstage to the front stage.

Dave Young:
The backstage to the front stage. Yeah.

Stephen Semple:
Yeah.

Dave Young:
So it’s exciting because they hit the triumvirate of word-of-mouth building.

Stephen Semple:
Well, and when you also think about… One of the other things that we talk about is one of the best things you can do is a high-visibility location. So their first location was just down the road from the factory.

Dave Young:
Where all the factory workers are driving by it every day.

Stephen Semple:
When they opened in New York, they opened in Times Square, a donut shop in Times Square. Do you know how… I have to guess that. Real estate and Times Square. And when you’re in Times Square, you stand in the middle of Times Square, and you do the circle, you can see right in Times Square the massive Krispy Kreme sign. Right.

Dave Young:
Sure.

Stephen Semple:
You cannot miss it. So in one of the most visible places in New York, and it’s not a little tiny store. You go in, it’s a big store. It’s got the machine and the whole nine yards. So by 1960, they were in 12 states. They’ve grown 29 stores. By 1973, they sold to Beatrice Foods. I was never able to find how much they sold to Beatrice Foods for. And then Krispy Kreme kind of went through a bit of a tough time where they were taken public and then taken private and then taken public, and all sorts of things happened, but there’s massive lessons here. And the first one that I like was when they were thinking about where to locate, they looked at the economic opportunity. They purposely went, “Here’s a place where the economy is good, and we’re selling this luxury.” Granted, it’s a small indulgence, but still, it’s a luxury device.

And then this whole idea of direct-to-consumer. And again, they stumbled across it. But look, one brother was like, “Hey, you get the grocery store.” The other brother grabbed a sledgehammer and bashed a window into the wall and sort of said, “Great. We’re now selling direct to consumer.” So very observational, right? He was really noticing what was going on. And a lot of businesses don’t do that. They fight it. They go, “Oh, these customers keep interrupting us.” It’s like, “If they’re showing up at our door, let’s sell to them.”

Dave Young:
Guess what they’re also doing? Still selling wholesale. You can go to the Krispy Kreme location and get it hot and fresh, but you can also go to the C-store a mile away and pick up Krispy Kreme donuts there. They may not be as hot, but they’re selling everywhere.

Stephen Semple:
They are selling everywhere. And then the other part that I really loved was the fact that, again, observational. They saw that when their customers came up to the window, they were watching the machine. And they went, “Well, that’s really interesting.” Maybe what we should do we should bring that machine forward. And here’s how innovative that is. Every donut shop on the planet uses these machines. They’re the only ones that show it, right?

Dave Young:
Yeah.

Stephen Semple:
They did this directly to consumers, and then they brought this entertainment forward. And again, innovative idea because it’s not like there were lots of businesses doing that at the time. There weren’t any shows how they make this. So very, very forward-thinking, very observational, really watching what was going on and tapping into those things. So I just thought there was a lot to learn from Krispy Kreme.

Dave Young:
Yeah. I love this story. And I am thinking about going to other donut shops now. I’m just sitting here thinking, “Okay, you go into a Dunkin’ Donuts.” Here in Austin, there’s kind of a famous one called Shipley, but I’ve never seen anybody make a donut except at a Krispy Kreme. So-

Stephen Semple:
Yeah. Because they’re the only ones who do it.

Dave Young:
… does that mean that they’re not making them inside a Dunkin’ Donuts? I think they probably are, right? You can’t do mass distribution of fresh donuts. That doesn’t make sense. Never seen them make one in there, but they probably are. They’re probably making all of them.

Stephen Semple:
Yeah.

Dave Young:
Huh. So I’ve got an idea for SB. Before we end, Stephen, when I have ideas, I like to give them away because I’m not going to ever act on them. This is an idea for you for a book. And it’s on the triple crown of worker breaks, coffee, cigarettes, and donuts.

Stephen Semple:
There we go.

Dave Young:
I think that would be a good book. You should write that.

Stephen Semple:
All right. And well, we already have the cigarette one, and we just now need to do the coffee one.

Dave Young:
So we transcribe this one and get the coffee thing under our belts. And it’s either a small book or a fat pamphlet.

Stephen Semple:
And the interesting part is when you look at that, those three things happened due to a couple of factors. One, the invention of the Industrial Revolution, and then the social upheaval that happened around the Great Depression, right?

Dave Young:
And the fact that unions were there and saying, “No, we need a little bit of break in the day.”

Stephen Semple:
Yeah.

Dave Young:
Thank you very much, uh-huh.

Stephen Semple:

Yep. So yeah, that would be interesting. Okay, I’ll work on that.

Dave Young:
I love the Krispy Kreme story. Thank you, Stephen.

Stephen Semple:
All right. Thanks, David.

Dave Young:
Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app, and leave us a big, fat, juicy, five-star rating and review. And if you have any questions about this or any other podcast episode, email to questions@theempirebuilderspodcast.com.

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