The trouble with bubble-callers is that they overplay their hand and point at everything as evidence of a bubble. As a result, the actual bubbles get lumped in with all the stuff that turns out to be just normal business activity and the public’s perception switches from “Maybe we should listen to these guys” to “Oh god, these guys again? Give it a rest.”
That said, the bubble-callers were spot on three summers ago when Crumbs Bakeshop went public in 2011…
It was the very peak of the gourmet cupcake bubble and the 34-store chain Crumbs – considered the originator of the trend in NYC along with its LA-based rival, Magnolia – had entered the public markets. Rather than list on an exchange via traditional IPO, the privately held Crumbs merged with a Special Purpose Acquisition Corporation (or SPAC, an investment banking tool used exclusively by assholes – more on that here and here). Once the deal was done, Crumbs had temporarily climbed to a valuation close to $100 million, or roughly $3 million for each of its existing cupcake stores.
As you can see on the map below, the bakery chain may have overbuilt just a bit in its home market, given the novelty of their wares.
That was then.
Nowadays, cupcakes are totally done. Hand a gourmet cupcake to someone in our newly one-hundred-percent gluten-intolerant society (when did that bullshit start?) and the look on your recipient’s face will register somewhere between utter disgust and absolute horror. “Can you believe it, she actually offered me a cupcake! Such a betch.”
Yesterday the news broke that Crumbs would be closing down all of its 49 stores and laying off its entire workforce. Even the guy who sprinkles the Reese’s Peanut Butter Cup chunks into the batter. It’s game over, hand in your apron. The company is completely out of cash. This is what happens when you extrapolate a passing fancy of the American people into a full-blown new category – and you believe that a $4 cupcake splurge will somehow become habit-forming enough to build a huge company around.
The most interesting parallel I’ve seen drawn to this situation was the Donut Bubble of 2003. If you recall, the donut chain Krispy Kreme came out of nowhere at the turn of the new century to become America’s favorite affordable luxury in the post-tech crash-cum-9/11 recession. Everything sucked, but so long as we could cram down a piping-hot, glazed disc of shame every once in awhile, we’d find a way to get through the day.
But then the economy improved and, just like that, the fad was over.
It ended just as Krispy Kreme was carrying out a massive expansion across the nation. Once everyone had tried their first or second Krispy Kreme donut, demand dried up and the chain struggled to add coffee and other stuff to bring us back into the store. All of a sudden, the stock began to crater on allegations of “creative” accounting – and we still never found that warehouse where they were hiding millions of unsold donuts.
In the chart below, you’ll see the Donut Bubble play out in shares of Krispy Kreme (KKD) between the start of the recession (2000) through the recovery period, ask demand for sweets fell through the floor and the Atkins low-carb craze savaged the industry:
The arc of Crumbs was very similar. As Wall Streeters, real estate players and other members of New York City’s hoi polloi lost their jobs or were faced with the threat of having to downsize their lives in the wake of the credit crash, a gourmet red velvet cupcake became just the sort of little luxury to help them forget about their troubles for awhile. Not to mention how many former Masters of the Universe even tried their hand at gourmet cupcake startups themselves (see here)!
And then the economy stabilized and people stopped worrying so much. And then the local real estate business took off again, as did finance and the stock market. Bonuses were back and so was job security. The cupcake crutch was no longer necessary. Or considered cool. The prototypical Crumbs customer – at least in Manhattan – can now be spotted at SoulCycle, not piteously licking frosting off their fingertips in the middle of the day.
Who needs sugar when you’ve gotten back your swagger?
The bubble-callers were rightfully skeptical of the cupcake craze. Sometimes they get one right.
Crumbs, the cupcakery that couldn’t, closes up shop (Washington Post)
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