Crumbs … To Be Continued?

Way back in September 2011, I posted an article called “Is Pie The Next Cupcake?” that cited numerous sources regarding the growing popularity of pie and the declining interest in high-priced gourmet cupcakes. Well, the Los Angeles Times and I may have been ahead of our time in referring to pie as “the ‘in’ dessert among those ‘in the know’ for food trends,” and declaring cupcakes passé, but last week’s announcement that Crumbs is turning off its ovens and closing its 48 remaining stores came as no big surprise to many industry observers.

Crumbs had its start in New York City in 2003, spurred by the popularity of Sex and the City and the women’s focus on the hip eateries that sold such decadent desserts. At that time, cupcakes were sold for close to $5.00 each, and they flew out the door as customers scooped up a dozen at a time. Sales per square foot approached that of foodservice behemoth McDonald’s. Given such compelling unit economics, the chain quickly expanded.

The menu also expanded from the colossal cupcakes that came in just a few basic flavors to more than 75 flavor options available from bite-sized to sharing size. Other baked goods such as cakes, pies, cookies, and brownies were available, but in the most recent fiscal year cupcakes accounted for more than 78% of net sales.

Crumbs Bake Shop Inc. was acquired by 57^th Street General Acquisition Corp. and taken public in June 2011 with 35 stores. By the end of 2011, there were 48 stores, 15 of which had been open less than a year. At the end of 2012 there were 59 stores, 11 opened that year, and in 2013 22 new stores opened, resulting in 70 locations in 12 states and the District of Columbia going into the new year.

However, at the same time the company was planning and executing a major expansion, competition was heating up as more companies entered the gourmet dessert arena. Although net sales continued to increase, largely reflecting an increased store count, same-store sales began to decline and profits disappeared. In 2012 Crumbs reported a $7.7 million loss, and by 2013 the loss had nearly doubled to $15.3 million on net sales of $47.2 million. Six months later, NASDAQ delisted the stock, and the company reluctantly called it quits shortly thereafter.

What went wrong? There’s been a lot of discussion in the investment and foodservice communities about the demise of Crumbs over the past week, and the consensus comes down to several major catastrophic missteps:

• Merriam-Webster.com defines a one-trick pony as “someone or something that is skilled in only one area.” Even as the economy was beginning to recover from the effects of the recent recession, consumer tastes and focus changed. Concern about diabetes and obesity have become front-page news, and so-called “sugar bombs” that pack up to 600 calories in one portion aren’t conducive to a healthy lifestyle. Add to that the fact that food trends come and food trends go, the ever-fickle consumer palate gets jaded (cronut, anyone?), and it’s obvious that the Crumbs business model as developed was not designed for long-term success.
• While going public allows a company to tap into new dollars for growth, it comes with a significant burden to maximize shareholder value. Shareholders were not pleased with a stock that traded as high as $13 per share in mid-2011 plummeting to $.11 per share at the end of June 2014. The original founders sold the concept many years ago, and there has been turnover in the head office several times since then. However, the infrastructure of the company could not be maintained in its present state.
• One of the major overhead costs for any business is rent, and Crumbs locations were concentrated in the high-rent urban Northeast, with Manhattan accounting for 25% of the total 70 locations open at the end of last year. Nearly half of the 70 stores were open less than two years, and it typically takes a while for a new restaurant location to grow traffic. Also, with so many locations concentrated in a relatively small space, cannibalization was unavoidable.
• Cupcakes or any such treat do not own a daypart, making maintaining a sustainable business difficult. Unlike burger chains or taco chains that serve food all day every day, a cupcakery is dependent on customers who buy on a whim or for a special occasion. Stores without all-day traffic are unlikely to succeed in the long run, especially with a high-priced product. Evolution of the business model is essential, as has been illustrated by the co-branding between Dunkin’ Donuts and Baskin-Robbins, or companies must offer more competitively priced products to keep consumers coming in the doors on a regular basis. Despite some late efforts to sell products through BJ’s Wholesale Clubs, it was too little, too late.

The news that Crumbs was closing appeared to be the end of an era, at least until the news broke late last week that Lemonis Fischer Acquisition Company LLC, a joint venture group composed of Marcus Lemonis LLC and Fischer Enterprises LLC, will be acquiring the company. Following the acquisition, the new group plans to begin to reopen some of the locations using a re-tooled business model that improves Crumb’s product mix. The principals in the two firms own or are invested in such other brands as Dippin’ Dots, Doc Popcorn, Sweet Pete’s, Wicked Good Cupcakes, and Pie King. The expectation is that the transaction will close within the next 60 days. Stay tuned …