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Crumbs' closure could spell trouble for the cupcake category

The death of the cupcake?

By Maggie Hennessy , 10-Jul-2014
Last updated on 11-Jul-2014 at 16:53 GMT

NPD Group's Warren Solochek:
NPD Group's Warren Solochek: "Everybody likes to buy cupcakes, and certainly gourmet cupcakes for special occasions or gifts, but for any kind of restaurant to exist, you need a lot of regular business.”(Photo by Crumbs Bake Shop)

The struggling retail cupcake chain Crumbs Bake Shop closed its doors for good this week as it mulls filing for bankruptcy. Analysts from market research firm NPD Group weigh in on what went wrong, and whether this signals the end of the cupcake’s reign.

Just last year, Crumbs was touted as the world’s largest gourmet cupcake business with 70 stores globally (and arguably the largest cupcakes, clocking in 6 ounces, four inches tall and upwards of 600 calories)—but its sales had been falling off for several years, alongside sales of cupcakes as a whole across retail and foodservice channels.

According to NPD Group, in the 12 months to April 2014, cupcake servings declined 1% at US restaurants and retail shops, compared to an 8% increase in servings during the same period in 2011, when gourmet cupcakes were gaining popularity.

So what changed? Warren Solochek, vice president at NPD Group, says that the price-value relationship for many cupcake shops on Crumbs’ level simply couldn’t be sustained, coupled with the fact that cupcakes aren’t purchased very often.

“Given the current economy and the fact that there has been very limited growth in discretionary income, I think that there is a very low likelihood that gourmet cupcakes or cupcakes in general will be able to exist as a category onto themselves going forward,” Solochek told FoodNavigator-USA. “It’s hard to understand how they could generate enough ongoing business. I think everybody likes to buy cupcakes, and certainly gourmet cupcakes for special occasions or gifts, but for any kind of restaurant to exist, you need a lot of regular business.”

Crumbs was born on Manhattan’s Upper West Side in 2003, a few years after a scene from HBO’s “Sex and the City”—during which the main character munched on a cupcake from New York City’s Magnolia Bakery—incited a city-wide cupcake craze that quickly spread across the country. Gourmet cupcake shops began popping up everywhere, and supermarket bakeries answered by rolling out their own premium versions of the handheld cakes.

Crumbs' MO was its colossal cupcakes, though focusing on one product may have hurt more than helped. (Photo by Crumbs Bake Shop)

By the time Crumbs went public in 2005, it was a ubiquitous presence in Manhattan and had expanded to a few other major cities such as Philadelphia and Washington, DC. By 2011, it had 35 stores—which it doubled by 2013.

But cracks had already begun to appear. Poor sales figures in 2012 and 2013 led Crumbs to shutter dozens of locations. On July 1, the Nasdaq dropped Crumbs for failing to meet the minimum stockholders equity requirement of $2.5 million. Then on Monday, the chain shuttered its remaining 48 locations across 10 states, the same day it notified all employees they would lose their jobs. 

Market saturation was an issue for many cupcake shops with only one product

Bonnie Riggs, NPD restaurant industry analyst, said Crumbs’ demise could be attributed in part to the fact that there are simply more cupcake shops than demand. “Market saturation was certainly an issue for many of these shops who relied on one product,” Riggs noted. This sentiment was echoed by Technomic, whose executive vice president posted a blog on the topic yesterday:

“Brands that rely on a narrowly focused product will have greater risk,” wrote Darren Tristano. “Although In-N-Out Burger has fewer than 10 items including burgers, fries, soda and shakes, it continues to do well by expanding slowly and cautiously and staying in tune with its customer. Overall, a bakery positioning with a broader offering and strong beverage platform could have strengthened the Crumbs business model with a bigger play at lunch to complement their breakfast and snacking occasions.”

Crumbs did make a concerted push into premium coffee beverages and other baked products such as cookies, brownies and muffins in an effort to upsell customers and establish more of a “bakery” brand, but it appeared to be too little too late, as they’d already been established in the consumer mindset as a cupcake shop—so visits were likely limited to when they wanted a cupcake.

“Look at Starbucks,” Solochek noted. “They have sweets, pastries and various small cakes, but with coffee. And the margin is great, you get a ton of foot traffic, and have a lot of regulars, so it’s a different kind of business model. Crumbs was located in areas where there were a lot of other places to get coffee, and frankly, they were late to the game. Did their coffee really stand out? And oh, by the way, was it priced appropriately?

People are very sensitive to how much they pay for food in restaurants, because it is discretionary income and for a vast majority of the population, there’s a cap on it.”

Crumbs couldn't compete with supermarket price points

Moreover, as more and more retailers got into the cupcake space—and supermarkets entered the fray with significantly lower price points, it became harder to stand out, particularly with a product that cost between $3.50 and $4.50.

“Were the cupcakes that Crumbs sold just so much better that people couldn’t find something that was a reasonable substitute?” Solochek asked. “Most people would say, ‘I can get something reasonably close at the supermarket for less money.’”

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