Will the Cupcake IPO Crumble?
Crumbs Bake Shop has been a huge hit since its first New York City store opened in 2003. Last year the chain sold 13 million decadent cupcake goodies in its 34 stores, which stretch from NYC to the San Fernando Valley. Crumbs generated revenues of US$31 million, most of it thanks to its flagship $3.75 oversized cupcake that comes in as many as 30 flavors. Now the chain will go public, with the goal to open as many as 200 many stores throughout the country by 2014 if its initial public offering succeeds. Cupcakes have indeed evolved since the days of Betty Crocker and elementary school bake sales. Our neighborhood in Silver Lake has one of the best cupcake shops in the Southland, Lark Cake Shop, and DC has its share of indulgent cupcakes at Cake Love and other stores from U Street to Georgetown. But will an IPO for cupcakes create long term financial and business success? On one hand, Crumbs’ has a business model that works. While the founders’ recipes are still used, the cupcakes are not baked on the premises, but outsourced to commercial bakeries: . The average transaction is about $18 to $20, impressive for a store with a limited product offering. And each store makes a minimum of $1 million in revenues. Nevertheless, there is a long list of specialty food chains that have expanded but then flailed: Krispy Kreme, Cosi, Jamba Juice. Pinkberry, the frozen treat craze that made Southern California go mad just a few years ago, expanded so fast that it generated a bevy of copycat competitors, saturating the frozen yogurt market; and the long lines that were part of the chain’s brand allure have been replaced by largely empty stores (though in fairness the chain is still expanding). So are cupcakes just a fad, as some commentators and foodies already suggested a few years ago, and become the Crocs of food? Crocs could be a model for Crumbs to follow: after flying high several years ago, its stock price fell with a thud. The company has recovered after massive layoffs, and has attempted to find more consumers with new styles besides the round toed shoes that look good on Peanuts characters but not on most human beings. Crocs has its challenges, but appears to have stabilized after peaking and collapsing quickly. Crumbs could take a few lessons from Crocs’ travails. For Crumbs to be able to sustain its value--and its stock price--the company will have to rely on more than just selling $4 cupcakes. Its management could consider product extensions, events like birthday parties or corporate meetings, and retail products like cake mixes or bakeware. Cupcakes may not be a fad, but investors will want to see something more tangible than an occasional 500 calorie indulgence. With all that said, I doubt Crumbs has an organic white chocolate rosewater cupcake like what I found here . . .
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