Coverage: Saving the cupcake

It’s the afternoon coffee shop of choice for many. You pop out of the office for a cup and a mini cupcake. Or maybe it’s someone’s birthday and you pick up a dozen on the way into the office. If you live in a city with a Crumbs Bake Shop, you’ve likely stopped by at least once. So on Monday, it felt like the cupcake fad died when Crumbs announced it was closing all its stores.

But there’s hope.

The New York Times had this story by Sydney Ember:

It’s not over for the Crumbs cupcake yet.

When Crumbs Bake Shop said on Monday that it was shutting all of its stores, dessert aficionados lamented the loss of their frosted confection. Loyal customers rushed to see if they could buy a final dozen. Someone bid $255 for a Crumbs cupcake listed on eBay.

But by Thursday, Crumbs was said to be close to securing financing from a group of investors including Marcus Lemonis, the chairman and chief executive of Camping World and Good Sam Enterprises and star of the CNBC reality show “The Profit,” about saving small business.

According to CNBC, Mr. Lemonis is teaming up with Fischer Enterprises, which bought Dippin’ Dots out of bankruptcy in 2012, to provide financing that could eventually lead to a deal to buy the company.

In a statement, Edward M. Slezak, the chief executive and general counsel of Crumbs, said, “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.”

Those following Mr. Lemonis on Twitter may not be shocked by the latest news. On Tuesday, he posted somewhat cryptic tweets in response to articles about Crumbs closing. “Stay tuned,” he wrote. “Not so fast.”

Katie Little wrote for CNBC that investors sent the stock soaring on the news:

Following the news, the company’s stock soared more than 950 percent from 3 cents to 35 cents.

Lemonis plans to incorporate other holdings, including Sweet Pete’s Candy, into the new entity that contains Crumbs. Click here for the full Profit episode about Sweet Pete’s.

On Monday, the gourmet bake shop closed all of its stores roughly one week after its shares were delisted from the Nasdaq stock exchange.

In a CNBC in-person interview in April, Crumbs CEO Ed Slezak placed part of the blame for the company’s difficulty its flagship product, saying the cupcake is “too narrow of an assortment” and “too tight a niche to attract a sufficient number of people” daily.

Crumbs’ rapid expansion coincided with a drop in cupcake demand. For the year ended in April, cupcake servings from retail shops fell 8 percent, according to market research firm The NPD Group.

After going public in 2011, Crumbs quickly expanded to 79 stores by early August with a sizable mall presence. Ahead of its delisting, the company had been aggressively closing underperforming stores and focusing on licensing efforts as it tried to turn around the business.

Forbes reporter Clare O’Connor pointed out the chain might not be worth saving:

Its profits were no match for its operating expenses as it expanded aggressively, hitting a peak of 79 stores in less than eight years. (As of Monday, there were 50, which all closed suddenly without prior warning to employees.)

Business turnaround experts wonder if the chain can be saved by Lemonis and the Fischers’ investments — or, indeed, if keeping it afloat is a worthwhile endeavor.

“Crumbs as a standalone entity, 50 cupcake shops, is not worth saving,” said Craig Garthwaite, professor ofmanagement and strategy at Kellogg School of Management, where he’s studied Crumbs competitor Starbucks closely.

Garthwaite sees Crumbs’ best chance at survival as a combination of its current offering — namely, giant 500-calorie cupcakes — with some other sweet treats, probably including Lemonis’ candy product line and the Fischers’ Dippin’ Dot ice cream snacks.

“I don’t have high hopes for it, but it’s a better plan than they have now,” he said, adding that he uses the example of a cupcake shop when teaching his Kellogg students about low barriers of entry to market. “They’re still in an industry with lots of competition, competing with local coffee shops.”

Writing for The Wall Street Journal, Sarah Randazzo interviewed the CEO of Magnolia, who, of course, said the cupcake wasn’t dead:

As Crumbs considers its restructuring options— which could include an investment in the coming days—Mr. Abrams says not to look for a Magnolia takeover offer. The lack of on-site kitchens in Crumbs’ shuttered stores and employees who never actually baked the cupcakes, Mr. Abrams says, leaves “very little pick up for me.”

In an interview with the WSJ, Mr. Abrams explained why he thinks cupcakes are here to stay and how Magnolia, which owns seven U.S. locations and is opening franchises abroad, is not about to crumble.

Here are some edited excerpts from the interview:

To start, what’s your post-mortem on Crumbs? What did the company do wrong?
There’s been an enormous amount of talk about Crumbs being a one-trick pony in a sense. That obviously is the main downfall of this, in my opinion.

To what extent is it a reflection of the purported end of the cupcake craze?
Magnolia supposedly started the craze in 2001, but we didn’t invent the cupcake. The cronut is something someone invented. We were just capitalizing on something everyone in the U.S. has loved since they were a kid. Can it be a craze if it’s lasted 14 years? This is not going to kill the cupcake. The craze aspect was always overblown. It’s more, is there enough room for a one-product company? Since the day I bought the business in 2007 it was always a multidimensional brand. We’re making sure we stay that way.

Crumbs saved by a reality TV star? Let the fad comparisons begin. But if he can pull it off, this turnaround will make Lemonis an even bigger star – and likely the darling of many Wall Street speculators.