How Does the Cupcake CRUMB-le?

Darren Tristano
July 9, 2014
Technomic

Was anyone surprised by the recent demise of the Crumbs Bake Shop? For those who read the Wall Street Journal article about the gourmet-cupcake crash in April 2013, or those that had invested in the publicly traded company, it should not have been unexpected.
Last April, it was clear that the “cupcake fad” was crumbling right at the time Crumbs Bake Shop was expanding locations and working hard to be the category leader in the high-growth cupcake snack segment.
So what went wrong?
With Crumbs following in the footsteps of high-flying brands like Mrs. Fields, TCBY, Cold Stone Creamery and Krispy Kreme, consumers have proven that they are very fickle about where they shop for indulgence. As more independent and regional chains of cupcakeries grew nationally, the strong demand and growth provided short-term evidence that the trend was hot and would continue. But supermarkets jumped in with significantly lower price points, and consumers began baking cupcakes at home for even less. Kids’ lemonade stands across America began offering cupcakes for 50 cents, and the obsession with this traditional classic fell flat.
Brands that rely on a narrowly focused product will have greater risk. 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.
How have other brands fared with more narrowly focused offerings?
Mrs. Fields brought fresh baked cookies to America and by 1993 had nearly 600 stores open in malls around the country. At a time when malls were very popular, many consumers couldn’t get enough of those chocolate chip cookies. Today, there are less than 230 locations open and some have paired up with frozen yogurt brand TCBY to provide more variety in the co-branded location.
TCBY was the original leader in fro-yo until gourmet ice cream stole the show, forcing many stores to close. TCBY peaked in 1997 with more than 2,800 locations in the U.S. Americans’ willingness to pay more for what they considered “better ice cream” was evident as many brands emerged in the premium ice cream category including Ben & Jerry’s, Cold Stone Creamery, Marble Slab and Maggie Moo’s.
Krispy Kreme’s exceptionally craveable glazed donuts became President Clinton’s favorite and soon worked their way into regular consumption across the country. Peaking in 2004 with nearly 400 units, the donut company had sales in the U.S. of over $1 billion. Then came Atkins and low-carb diet trend. Krispy Kreme’s narrow focus on donuts paired with aggressive expansion put it at risk and caused it to shutter nearly half its restaurants by 2010. Today, Krispy Kreme has continued to expand globally and has started to open new stores in the U.S., posting a year-end 2013 total unit count of 249.
Cold Stone Creamery captured the hearts and wallets of many American consumers by introducing gourmet ice cream, customized on a cold slab with mix-ins. Although the chain continues to provide frozen desserts to many Americans, it does so with far fewer locations since its peak in 2007 at around 1,400 locations. Cold Stone Creamery ended 2013 with 990 stores in the U.S.
So what are the early warning signs for when a brand or category may be at risk?
Early warning signs appear as the category becomes more competitive. Category leaders begin to slow unit expansion, and same-store sales level out. As many brand leaders push expansion nationally, they begin to see greater competition from regional chains and independents that are in tune with the local consumer base. As more regional chains expand nationally and begin to battle for share in larger markets, new locations result in cannibalization and often consumers trying new brands just to see if they are different.
Strong blocking and tackling efforts are necessary to maintain differentiation and loyalty. Customers can be easily lost if franchise and company stores don’t deliver high levels of service and quality standards.
When does a segment become mature?
Many up-and-coming categories show high growth in unit expansion that drives sales volume growth. When longer-term sales growth shifts from high growth (above 5 percent) to lower growth (below 5 percent) you can usually see that the consumer interest is plateauing or that supply has caught up with demand.
In some cases, older legacy brands may be on the decline, offsetting growth from more contemporary concepts. Or menu-category products have been introduced into other segments, such as flatbread pizza in casual dining competing with limited-service pizza or more seafood options in the steakhouse segment competing with seafood-focused restaurants. In any event, declining growth rates generally show the state of the category and where it is headed.
Which segment is hot today but at risk in the short-term?
Juice concepts appear to be all the rage today. With health and wellness getting more play from affluent and Millennial consumers, it’s clear the cold-pressed juice concepts will be pushing hard to expand. Even though these concepts have price points over $10 in major markets like Los Angeles and New York, it’s clear that Hollywood starlet impact on our country with juice cleanses is evident. Juice specialists will likely expand quickly as the fad continues but the trend will settle into concepts that represent reasonable prices for the mainstream consumer.
Expect major brands like Starbucks’ Evolution Juice and Juice It Up to have a leg up on the competition, but ultimately, the “craze” will settle down and many restaurants will likely see declines in sales that make it difficult to continue their operations.
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