Crumbs chain to capitalize on America’s cupcake craving
Crumbs, the gourmet cupcake chain with three New Jersey stores, is preparing to capitalize on America’s craving for cupcakes by becoming a public company.
The deal, announced this week, will give Crumbs the capital it needs to expand from 34 stores to more than 200 by 2014, with the potential for 600 or more Crumbs stores going forward. The company, now in six states, plans to expand first in the top 15 metropolitan areas in the country, focusing on cities such as Denver, Dallas and Seattle. Crumbs has stores in Ridgewood, Hoboken and Westfield.
The deal with 57th Street General Acquisition Corp., a public company created for the purpose of financing the purchase of a private company, gives Crumbs owners and investors $27 million in cash and $3.9 million in 57th Street common stock, for a combined price of about $66 million.
Crumbs was created in 2003 by husband-and-wife team Mia and Jason Bauer. Mia Bauer first began baking cupcakes, brownies and other treats as a teen growing up in Demarest. The Bauers opened a bakery on the Upper West Side of Manhattan and quickly noticed that cupcakes outsold the other baked goods offered in their bakery.
The couple will continue to run the company after the merger, which is expected to close in March. After the deal closes, 57th Street will change its name to Crumbs Bake Shop and be listed on the Nasdaq Stock Market.
Mia Bauer, in a phone interview Thursday, said investment firms have been approaching Crumbs with deal offers for years, but the company waited for the right time and the right offer. “We knew that the time had come for us to raise more capital to expand the way we wanted to expand, and do it the right way,” she said. “We were fortunate in that we could take our time and find the right partnership.”
The decision to take Crumbs public has triggered talk of a “cupcake bubble” and raised questions about whether the treats are a fad or a lasting trend.
Mia Bauer said the company has heard and pondered that question ever since they launched the first Crumbs store in Manhattan in 2003. “It’s something we asked ourselves every single night – ‘Is it here to stay?’ And eight years later it’s hard to say it’s a fad,” she said. “It’s a category that’s been around forever, and what we did was revitalize it and make it fun and sexy and exciting. It’s part of the dessert culture now. To me it’s like asking somebody, “Are cookies no longer going to be popular?’ ”
The company served up cupcakes and sales statistics Wednesday at a high-powered investment conference in California. Analysts at the meeting pronounced the cupcakes delicious but said a stock based on the sweet snacks could be a tough sell.
“I don’t think the cupcake itself is a fad, but building a whole concept around it, that could be where the unsustainability is,” said John Gordon, restaurant analyst for the Pacific Management Consulting Group, who attended the ICR XChange investment conference where Crumbs made a presentation Wednesday. The reaction of analysts he spoke with about Crumbs, Gordon said, was, “Well, it looks interesting but it’s just such a narrow focus.”
“In this business, it is extraordinarily difficult to build a business based on a snack occasion, or what we call a single day-part occasion,” Gordon said.
The chain also will face tough competition from everybody else who is trying to grab the coffee and snack market, a category that includes Dunkin’ Donuts, Starbucks and dozens of other coffee chains, as well as independent coffee shops and bakeries.
Jason Bauer, in presentations to analysts and potential investors this week, said the company liked the 57th Street deal because it would raise capital and allow Crumbs to go public more quickly than a traditional initial public offering. He said there is a strategic advantage in being “first mover” in the cupcake category – the first chain to expand on a national level.
One statistic Jason Bauer said is especially attractive is Crumbs’ average transaction – the average amount spent per customer. “Our average transaction, $18 to $20, is off the charts,” he told investors during a presentation. “Our typical customer is not saying, ‘Let me have a cupcake and a cup of coffee.’ Our typical customer is saying, ‘Let me have six, let me have 12,’ and they’re bringing them somewhere.” Bauer also presented data showing Crumbs stores have sales throughout the day, with the bulk of the sales midday, but with healthy percentages in the early morning and evening as well.
Analysts who are deciding whether to invest in the company are focusing on Crumbs EBITDA – earnings before interest, taxes, depreciation and amortization – of $2.4 million to $2.6 million on revenue of $31.1 million in 2010. That level of EBITDA is “very thin” Gordon said.