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[14 comments]

That's the way the cupcake chain crumbles (or not)

July 11, 2014

The cupcake craze may be over, but Crumbs Bake Shop may live to sell its gourmet versions another day. Earlier this week, when the chain announced it was shutting its doors immediately, numerous business obituaries covered Crumbs' rise as a result of the cupcake fad that was sweeping the country in the early 2000s. All fads come to an end, however, and there are just so many $4+ cupcakes even a gluttonous society is willing to buy.

But, as with Mark Twain, it appears as though tales of Crumbs' demise may have been premature. According to various reports, Crumbs is close to securing financing from a group of investors, including Marcus Lemonis, chairman of Camping World and Good Sam Enterprises. Mr. Lemonis may be better known as the star of CNBC's reality show "The Profit," which features stories about rescuing small businesses.

"We know that everyone has an emotional connection to the Crumbs brand and its products and we're pleased to be in talks with various interested parties that are allowing us to pursue all of our options for the business, which includes consideration of restructuring alternatives," said Edward Slezak, the CEO and chief counsel of Crumbs, in a statement via The New York Times.

Mr. Lemonis and Fischer Enterprises, which bought Dippin' Dots in 2012, are expected to provide necessary financing to Crumbs, with the two eventually buying the company outright.

According to CNBC, Mr. Lemonis views Crumbs as "a good brand that has lost its way." The plan would be for Crumbs to diversify its offerings and turn itself into a bakery with products beyond cupcakes.

An example for Crumbs to follow may be Magnolia Bakery, a company that may think it is the originator of the cup cake fad.

In an interview with The Wall Street Journal, Magnolia CEO Steve Abrams said, "It's one thing to have a great product. But you have to use that to build something. That was their downfall. For us, cupcakes have been under 50 percent of sales since the day I took it over."

FINANCIALS:     [OTCMKTS:CRMB]

Discussion Questions:

What lessons, if any, should be taken from the problems faced by Crumbs and the desire by companies to chase fads? What will it take for the company to succeed going forward?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How important to Crumbs' future success is diversifying its product offerings?

Comments:

Chasing fads is almost always a bad idea, unless you and your products get in at the very beginning, do it right, and know that you are in it for the short-term. If you go this path, you need to plan accordingly for short-term gain and a profitable exit strategy.

Not only did cupcake entrepreneurs make costly mistakes by getting in with too little, too late, I have also seen this pattern with consumer goods and retail entrepreneurs in any number of categories over the years. For example, as a consultant, I still get calls from entrepreneurs looking to get into the energy-water business. Are you kidding me?

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

The big lessons here are that fadism does not an institution make and that great retailers know when it's time to evolve and/or leave the party.

Of course there are additional lessons, such as the oldest of retail bromides: 1.) don't expand faster than your market, 2.) under-capitalization is the hobgoblin of failing businesses, and 3.) stay close to the consumer and really know what it is they want and—in the case of fad-based businesses—what they are tired of.

In order to survive, the company will have to secure real financing, get better management, cut costs, diversify the brand and find a better way of listening to its customers.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

I'm not sure that cupcakes themselves are the problem—calling them a "fad" is like calling donuts a "fad" just because Krispy Kreme had the same kinds of problems. Yes, there are too many places to buy cupcakes, and every city has its own local examples of failures. Four years of the "Cupcake Wars" series on Food Network might be a sign that the category is post-peak—not explosive, but still sizable and profitable. (Who doesn't love cupcakes, after all?)

It sounds like the lessons of Crumbs—whether it survives or not—are more particular to its business model. Did it expand too fast? Did it offer enough diversity on its menu, like Magnolia? Did it have the financing and infrastructure in place to support its growth plans? These are all cautionary questions that any growth-oriented retailer needs to ask, no matter whether it is selling cupcakes, jeans or candles.

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Dick Seesel, Principal, Retailing In Focus LLC

Crumbs is a example of what happens when companies are built on a fad foundation. The fad is great while it last. Customers seek out your locations, sales and profits are great, etc.

However, fads are always short-lived and the company must be prepared to jump on the next fad (risky in the retail world as the location, store size, etc. may not be applicable). A safer alternative is to use the profits from the current fad to diversify and provide customers other reasons to come to their location.

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Steve Montgomery, President, b2b Solutions, LLC

Chasing a fad is fine as long as you hedge your bets with other options. I saw this a lot when I was in the party supply business. The hot license would fill the store, but we always made sure to have a diversified assortment, and also had deals with the vendors for markdown money if the fad suddenly tanked.

Ice cream is a really good food example of how to manage fads. You take a brand like Häagen-Dazs: its stock in trade is premium ice cream, yet it has hopped on the gelato bandwagon, along with "lite" ice cream. Is gelato here to stay? I hope so/I hope not (it's so rich and decadent), but I know Häagen-Dazs has hedged its bets.

Crumbs will have to diversify into cakes and other desserts.

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Paula Rosenblum, Managing Partner, RSR Research

Sorry, I don't think cupcakes are a fad. If you go down the street with a plate of cupcakes, will you see people look at them like they were a Chia pet, or a pet rock? I don't think so.

I don't see people going home and baking a dozen cupcakes for themselves anytime in the future. But what this does show is that for better or worse, their product offering did not meet consumer expectation. Personally, I never thought they were of the quality of Magnolia.

Can the brand come back after shuttering stores? That's a good question. They could come away as a damage brand.

I see the rescue as pretty much a PR stunt for the CNBC host. But then, maybe I'm just jealous of the publicity for him.

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Bob Phibbs, President/CEO, The Retail Doctor

Best advice is from Phil Rosenthal, Chicago Sun Times: "Food, like fashion, tends to cycle, recycle, combine, strip down and occasionally throw something entirely new into the mix. You've barely heard of kale and quinoa and, all at once it seems, they're everywhere. Sriracha is a hot sauce and paninis have given way to wraps, which gave way to lettuce leaves and less."

This Millennial-driven trendiness and this Boomer desire for better health (that probably will not help many of them live much longer) is the business destruction force that all companies need to think about. It is all about how fast you can adapt and how far you can see into the future.

Crumbs was born off hype, like many shops are. They ride the hype and crash. They are also forgotten very fast. Crumbs would be wise to sell of the brand and ditch this effort. The other option is make the cupcakes out of kale and ride that trend out. Oh, make sure to use a local small brewery's product in the cakes. This is another hot trend prepping to nosedive.

Have a happy Friday.

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

People here in DC still line up for cupcakes (maybe we're late adopters), but that can't last forever.

Starbucks has had good luck with diversifying and adding non-coffee menu items; Crumbs should try this too, and soon, while they're riding this wave of publicity.

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Cathy Hotka, Principal, Cathy Hotka & Associates

Years ago, I passed a Crumbs on Lexington Avenue. This was before the big expansion. In fact, I thought this was the only store. So I tried it. Hmmm. The name is "Crumbs." I love crumb cake. Bought it. It was awful. the next time I passed, I thought I would try something else. I have a weakness for donuts. bought one. It was awful. I tried it one more time, but don't remember what I bought. I do remember that it too was awful. And by awful, I don't mean just bad. I mean awful. I never went to a Crumbs again and could never understand their success.

Gee, maybe to be successful, they have to sell good products?

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Gene Detroyer, Professor, Independent

I wish I could throw something positive and witty into this conversation. But I am not and never was a fan of cupcakes. Like Dunkin' Donuts, to be successful they will have to franchise; which means finding others of like mind willing to invest in something with little expansion, except around the waist.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Lessons learned from Crumbs' crumbly crusade are; don't sell bad products and don't chase fads. Many of the appropriate reasons are mentioned above.

To succeed going forward, Crumbs must take off their blurred bakery blinders and focus on developing a solid business plan, supported by quality products and efficient operations. It seems to me that many businesses have heard that song before—but only after it was too late.

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Gene Hoffman, President/CEO, Corporate Strategies International

There's a huge difference between a "fad" and a "trend."

Cathy Hotka is exactly right about Starbucks in diversification of menu items. That is and has been part of their success.

The difference is taking a platform, whether that is a "fad" or a "trend," and using it as a means of launching something more sustainable and enduring. Starbucks did that with a simple cup of coffee and made it an experience. Can you do that with a cupcake? Maybe.

One has to question the recent rise of yogurt shops in the same way. Are they the fad they were in the '80s, returning once again as a not-so-new fad? Or are they sustainable, based on the trend that is more enduring of healthier eating? Does anyone see Greek yogurt, as the item it is today, as being from the '80s?

On the other side of the equation, the outcome of a daily treat of a cup of black coffee from Starbucks as compared to a daily treat of a cupcake will have different results in the waistline and notches on the belt. Cupcakes are occasion treats. The challenge for Crumbs in diversification, for sustainability, will be that whatever it has, the product must be different enough to both be a compelling reason for the customer to go there and to increase the frequency of visits.

'Scanner'

My memory of cupcakes is related to my mother baking them and us kids helping to ice and decorate them. That's why I've never understood the success of all these cupcake retailers. Except for special occasions, I've never known anyone to buy them. They've always been empty when I've passed them by. All I could figure is that they must make their money from catering special occasions.

We have some very well-established and well-respected bakeries in our area—some world renowned . Even Costco and most local grocers have pretty good bakeries. I can't see Crumbs being able to compete with them by broadening their offerings.

'RetailRetell'

This seems very similar to the craze of Mrs. Fields and Cinnabon of the '80s and Krispy Kreme of the '90s. These specialized one-item retailers are finding themselves competing with bakeries that offer an entire assortment of baked goods, grocery store bakeries (usually a less expensive alternative) and boxed mixes (some even have fillings), and frosting now comes in flavors such as cotton candy and root beer (even cheaper).

Local independent cupcake shops probably have an advantage of having a lower overhead because they don't have or need all of the layers of management and don't need to answer to, or wait for, corporate to make a change, but rather can do whatever is necessary for the shop to survive and prosper.

'LarryEC'

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