Can Cupcake-Maker Crumbs Hit the Sweet Spot on Growth?The Food Network may air a show called Cupcake Wars, but when it comes to dramatic rivalries with his competitors in the increasingly crowded cupcake-store sector, Jason Bauer will have none of it.

"I've never had a bad cupcake in my life," says Bauer, CEO and co-founder of the 34-unit Crumbs Bake Shop, when asked about how his cupcakes stack up against those from stores like New York-based Magnolia Bakery or Beverly Hills, Calif.-based Sprinkles Cupcakes. "The more people in the category, the better it will be for the category."

Granted, Bauer has good reason to be gracious. The company he started in 2003 with his wife, Mia, as a single bake shop in New York's Upper West Side, now claims to be the largest U.S.-based retailer of cupcakes. Crumbs is being purchased for $66 million by 57th Street General Acquisition, which in turn plans to take it public, listing it on the Nasdaq as early as next month. After that, explains Bauer, Crumbs plans to expand to about 200 stores by the end of 2014, and as many as 600 stores thereafter.

"Crumbs is an immediately recognizable brand with broad demographic appeal," said Mark Klein, CEO of 57th Street, on a conference call earlier this week. "It's a true growth company."

The Next Krispy Kreme?

But whether Crumbs will turn out to be a sweet deal for investors in the long term is harder to predict. Krispy Kreme Doughnuts (KKD) and Pinkberry were among the optimistic dessert specialists lured by surging popularity and large margins to rapidly open new stores, only to close many of them after unit sales fell.

Krispy Kreme, which was founded in 1937 and went public in 2000 based on the popularity of its hot glazed doughnuts in the South and on the East Coast, saw its stock price more than double within three years and had expanded to almost 400 stores by early 2004. By the end of that year, though, same-store sales had gone negative after the company broadened distribution to include supermarkets, big-box retailers and other outlets, while much of management had turned over. The stock, which went public at $21 a share, plummeted to close to the $1 level in early 2009. It now trades at about $7.

Likewise, closely held Pinkberry fed the revival of the tart frozen yogurt craze -- fans have been known to refer to it as "crackberry" because of its addictiveness. Since its 2005 founding, the chain has since expanded to more than 100 stores worldwide, but its success has inspired a number of less-expensive knockoffs. While the company continues to expand into markets such as Washington, D.C., and Miami, it has also shuttered at least a half dozen stores in the Los Angeles area in recent months.

Big Money in Small Desserts

With Crumbs looking to multiply sixfold within three years, the company risks repeating history, especially with the food and beverage industry only slowly recovering from the recent recession, according to Bonnie Riggs, restaurant industry analyst at NPD Group. "This is a highly discretionary, indulgent product," says Riggs. "If we were five years back, it'd be a whole different ballgame."

Riggs adds that by expanding rapidly, Crumbs also runs the risk spurring competition from larger food and beverage companies like McDonald's (MCD) and Starbucks (SBUX), which could both easily jump into the cupcake fray.

Granted, Crumbs' financials are impressive. Last year, the company generated about $1.8 million in net income on $31.1 million in sales, and it opened seven new stores, the company said in a preliminary earnings estimate this week. Crumbs estimated that it may double profit this year to as much as $3.9 million as it opens as many as 21 new stores and boosts its revenue to as much as $50 million.

A typical Crumbs store generates more than $1,000 of annual sales per square foot, numbers that put the company on par with McDonald's when it comes to sales volume.

Furthermore, in an age where many restaurant companies would be happy to have flat same-store sales, Crumbs' same-store sales have jumped about 15% for each of the past few years, Bauer says. And the company gets about a $19 check average, as visitors tend to buy batches of its cupcakes, which come in more than 75 varieties and whose prices range from about $2.50 to $4.50 each, depending on size and toppings.

"We still seem to be in the growth stage of the cupcake trend, and nobody has taken a dominant position in this arena," says Darren Tristano, executive vice president at Chicago-based food and beverage consultant Technomic. "Three years from now, cupcakes may not be the top of the trend list, but that's where a good unit economics will put them in position for years to come."

Baking a Good Business Plan

In terms of quality, Crumbs appears to match up well against its independent competitors. Crumbs' original location in New York City's Upper West side gets about three-and-a-half stars, on average, in its 184 reviews on user-review site Yelp, while Magnolia's Greenwich Village shop, which opened in 1996, averages about three stars from its more than 1,200 reviewers. Across the country, Sprinkles' Beverly Hills shop gets about three-and-a-half stars, the same rating Yelpers give the Crumbs store two blocks away.

Bauer, who says the company is eyeing markets such as San Francisco, Boston and Atlanta for expansion, acknowledges the risks of rapid growth, but he says Crumbs will be different from Krispy Kreme or Pinkberry. First, Crumbs will continue to offer its cupcakes only at its stores and for delivery via its website. It won't engage in the broader distribution strategy that Krispy Kreme attempted, which cannibalized its store sales.

And unlike Pinkberry's frozen yogurt, he notes, cupcakes appeal to customers year-round and in cold-weather climates. In addition, he says, variety is another advantage Crumbs has over Pinkberry's essentially single-product approach because his chain also sells larger cakes, danishes, scones and beverages.

As for Magnolia -- which has four locations in New York, one in Los Angeles and an outpost at the Bloomingdale's in Dubai -- or Sprinkles -- which has 10 U.S. stores and is preparing to jump into another dozen U.S. markets, plus London, Paris and Tokyo -- Bauer says the more, the merrier.

"Eight years ago, cupcakes weren't even a category," Bauer says. "There are a lot of great bakers, but it takes more than a good recipe. You have to run a business."

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man, i love cupcakes

January 22 2011 at 10:57 PM Report abuse rate up rate down Reply

I'm not a big fan of cupcakes; too much icing and not enough cake. Give me a whole-grain muffin with bananas or blueberries any day; they're an actually satisfying snack, AND you can sneak healthy ingredients (fruits, nuts, bran) into them. Maybe I should open a muffin shop...

January 22 2011 at 10:29 PM Report abuse +2 rate up rate down Reply

I've never heard of Crumbs, don't care for cupcakes much. I loved Krispy Kreme, actually, and we got a store a few years ago here in western CO. But...they only really taste good fresh, so I have never actually bought them in a grocery store. The KK store closed a couple of years ago, unfortunately. I am sure that made Michelle Obama happy...I am pretty sure they are about to make a law that mandates NO MORE CUPCAKES.

January 22 2011 at 8:13 PM Report abuse rate up rate down Reply

That will be the day when I spend more than fifty cents for a single cupcake. Hope they do not do to well or McDonald's will put cupcakes on their menue. I would not bet on them. It will probably be a franchise where the franchisee struggles to be successful while the parent company prospers. Good Luck!

January 22 2011 at 8:10 PM Report abuse +1 rate up rate down Reply
dave and mary

When I visited S. Carolina in the 90's I had to have more of the K. Kreme's after one bite. But when I inquired about a franchise and learned the details, I KNEW they would not do well in Chicago/Illinois. Bad marketing plan. They approached the business climate like they were God's gift. Guess what - other people may not sell K.Kreme's; but they sell good product to compete non the less. These cupcake people better look into that.

January 22 2011 at 8:01 PM Report abuse rate up rate down Reply

Cup cakes are childish, big bucks cupcakes are absurd. No way a $5 a pop cupcake fad will last a year... for $5 I can bake a dozen gigantic muffins; loaded with nuts, seeds, fruit, very healthful and delicious... for New Years I splurge with eggnog bran muffins with pineapple, coco lopez, and dripping with rum... no one refuses my pina colada muffins.

January 22 2011 at 7:58 PM Report abuse +1 rate up rate down Reply

This company should do well in the fat belt (down south)

January 22 2011 at 7:24 PM Report abuse +1 rate up rate down Reply
Scott Langteau

Saying you've never had a cupcake in your life does not instill any confidence in anyone thinking of trying your product. It makes it sound just about money. Those of us who loved baked goods like cupcakes want to know the person making them LOVES them and gets great pleasure from how great they are. This CEO is an idiot. And the cupcakes look WAY "preservativey" which equates to "not good at all". PS: Best cupcakes in LA? Yummy Cupcakes on Magnolia!

January 22 2011 at 6:50 PM Report abuse -1 rate up rate down Reply
1 reply to Scott Langteau's comment

If you knew how to read you would see it said he's never had a BAD cupcake which obviously means they must love them.

January 22 2011 at 7:03 PM Report abuse +1 rate up rate down Reply

i love Crumbs!! they are better than sprinkles...

January 22 2011 at 6:47 PM Report abuse rate up rate down Reply
Yo, Braddah

Appeals to a broad demographic? maybe broad behinds! They taste like sugar, sugar and more sugar, except for the trans-fat oils in them. Yech! for $4.50???
You would need to be mighty foolish to think that there is any long-term viability to this fad. I really hope it does IPO, I'll be waiting for the runup and selling call options like crazy.

January 22 2011 at 6:32 PM Report abuse +2 rate up rate down Reply