Crumbs – Lessons from failure.

2014-07-14 17.47.47On July 7th, 2014 Crumbs Bake Shop Inc. officially notified its employees that it would be shutting down.

Briefly, Crumbs, which started off in 2003 as a small store in Manhattan, expanded rapidly to 65 stores and went public in July 2011. By September stock prices started falling and the company’s financial performance had been declining since then.

Here are some hypotheses on why the Crumbs model failed:

Take the cupcakes leave the stock

Foods, especially singular niche products, are cyclical in nature. Food trends change all the time. Going IPO on the basis of a single successful product, in this case cupcakes, may not be the smartest route. As Reena Aggarwal, a professor of finance at the Georgetown University McDonough School of Business put it, this trend is not just symptomatic of the dessert industry. “More broadly you have very high-growth companies come into the market and do a successful I.P.O. It’s kind of the fad of the day. Then things go sour”.

Bigger isn’t always better

Evan Feldman, from the Doughnuttery in Chelsea Market stated “People are more health conscious (and they don’t want to) eat one big gluttonous cupcake,”. A similar opinion was voiced by Kevin Burke, a restaurant industry expert at Trinity Capital, a Los Angeles investment banking firm, “Monstrosity, 600-calorie cupcakes that cost $5 a pop don’t fit in with yoga studios and juice shops,” Crumbs was “competing in a changing market with a product that was over the top.”

Too much too soon

Going from a small Manhattan location to more than 65 locations by 2013 is an extremely high expansion rate, though not sustainable growth.

Changing consumer habits matter

Since the time Crumbs was established in 2003, there has been a shift in consumer choices, in terms of size of deserts (E.g. baked by Melissa), variety (mini doughnuts, cronuts, cake pops etc) and growing health consciousness. According to a 2007 NPR report a Crumbs Vanilla cupcake has 780 calories and 36 grams of fat versus Magnolias version which has 389 calories and 19 grams of fat. In spite of evidence of changing consumer habits, Crumbs continued to produce its signature large sized cupcakes.

Competition

Craig Garthwaite, assistant professor of strategy at Northwestern University’s Kellogg School of Management, said the closures aren’t surprising.“You’ve got a restaurant that’s making a product that’s very easy to imitate,” Garthwaite said. “In the end what you’re selling is a brand. Making a cupcake isn’t that hard.”.

When there are several competitors, each of whom can match your product in quality and price, there is bound to be a loss in profits. This needs to be factored in when competing with similar brands, especially local ones, which tend to be favored more than national chains (e.g. Georgetown cupcakes in DC).

Creating brand value

When there is competition, how do you still differentiate yourself as a brand? You do it, by developing a brand which is not only distinct, resonates with current consumers, but also offers more value than similarly placed competitors. For e.g. Sprinkles labeled itself as a specialty dessert store and has expanded into offering ice cream and cookies. Magnolia bakery (which has 7 locations domestically), offers other desserts such as cookies, banana pudding, blueberry pies etc.

 

The demise of Crumbs provides some valuable insights into what startups need to keep in mind when developing their product/service:

–        Know who your users are and their behavior trends.

–        Target several categories of products and not just one – unless what you are offering is unique and there are no other competitors.

–        Don’t do too much soon. Know your capacity and expand accordingly. “The hallmark of successful scaling is knowing when to hit the brakes so you can scale faster later.

–        Find advisors who can guide you and are experienced in the industry you are entering.

–        Understand that the end user is not going to be passionate about your product as you are.

 

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