Restaurant Finance Monitor: On Crumbs’ Crumbling Sales

We read with interest this Wall Street Journal piece on the cupcake fad, in light of sales declines at the New York-based cupcake shop Crumbs. But a deeper look at the sales declines show that Crumbs’ issues are not so much related to the end of the cupcake fad, so much as they’re due to concerns about Crumbs itself.

In short: Crumbs overestimated demand for its cupcakes, primarily in its home market. But it remains to be seen whether the cupcake fad is actually fading.

There’s no doubt that Crumbs is struggling. Consider this: two years ago, when the chain went public through a reverse merger with a blank check company, its average unit volumes were an impressive $1.1 million. Today, those unit volumes average $788,000. That’s a decline of more than 28 percent in just two years. And remember: Crumbs is supposed to be a growth concept.

Last year, sales at the 37 stores in the company’s same-store sales base declined $5.9 million—an average of nearly $160,000 per store.

“I’m not happy about our past or present performances,” CEO Julian Geiger said on the company’s most recent earnings call. “No excuses. We should have done better.” The company reported a net loss of $7.7 million last year and recently agreed to sell $10 million in convertible promissory notes to a company controlled by Michael Serruya, the co-founder of the Canadian Yogen Fruz frozen yogurt chain.  The chain’s lower store cost was supposed to protect profits in case of a sales decline.

Crumbs’ sales problems started early. Crumbs went public in 2011. The second quarter of that year, the company reported a 6-percent fall in its same-store sales. By the end of that year, it had replaced its CEO and quit reporting same-store sales numbers. When a young restaurant chain has sales numbers like that, “you either overpenetrated, or customers went in for a trial and either didn’t like the product or thought it was too expensive,” said the restaurant consultant John Gordon.

It may have overpenetrated. Crumbs has 21 locations in Manhattan alone. The chain sells primarily one product, cupcakes. Those cupcakes are good. But they’re heavy and dense, and people don’t need to eat them that often. A recent visit to New York found a Crumbs shop there completely empty at 1:30 p.m. on a beautiful day. “It’s not an impulse buy,” Gordon said. A cupcake shop cannot penetrate a market in the same way that a coffee chain can because people don’t get cupcakes as often as they buy coffee.

Then again, maybe it’s the product, because we also noted this: according to its latest annual report, Crumbs’ e-commerce, catering and wholesale sales fell 28.3 percent last year. That’s not over-penetration. People are simply not using these other avenues to get their cupcakes.

Crumbs’ stock, which had traded in the $13 range in 2011 before the sales problems became evident, is now trading below $2 a share. The company is now focused on the questionable strategy of aggressively opening new locations when its current sales are suffering so much—the chain kept opening new stores through sales declines and sales at existing locations have only worsened. The company is opening in different types of locations, focusing on suburban mall development rather than its traditional urban locations. Geiger did indicate on the company’s conference call that it may look to terminate leases for underperforming stores, and he said the company needs to “do a better better job of energizing the in-store customer experience.”

Crumbs is also working with a well-known but still-unnamed chef to create a line of sandwiches for those struggling New York locations. Will it work? We don’t know, but its last effort to use a non-cupcake product to bring in business didn’t work, either.

Last year, Crumbs enjoyed a share price spike after it announced that it would replace its coffee with Starbucks coffee in the hopes that the coffee would lure cupcake buyers. That didn’t work. The company increased the price for its coffee, and sales subsequently fell. Sales of regular coffee fell “significantly.” Suffice it to say, that didn’t help same-store sales. (By the way: why go to a Crumbs for Starbucks coffee when you can just go to Starbucks, which probably isn’t that far away?)

It can be argued that Crumbs’ sales decline could be a precursor to a broader end of the cupcake fad—after all, New York is the epicenter of the movement, the home of Sex and the City, which popularized the cupcake. If consumers in New York have taken their treat business elsewhere, perhaps consumers in other areas will, too, eventually.

Yet other chains that have emerged in recent years haven’t had the same troubles. Magnolia Bakery appears to be doing OK—the company told the Journal that its same-store sales grew last year, though it didn’t say by how much. The California-based chain Sprinkles appears to be doing well and just got an investment from the private equity firm Karp Reilly, which generally has a good track record of making restaurant investments. Then there’s the Nashville, Tennessee-based Gigi’s, which has grown from zero to 84 units in just four years.

None of these concepts are nearly as saturated as is Crumbs. Magnolia, also based in New York, has just five locations there, compared with the 27 (including six in the suburbs) for Crumbs. Sprinkles has six locations in its home Los Angeles area, but those are spread out, too.