July 9 (Bloomberg) -- Is America’s decade-long cupcake craze ending?
The frenzy, which spawned treat-dispensing ATMs and a $42 “colossal” cupcake that serves eight people, ran into reality this week when Crumbs Bake Shop Inc. shut all 48 of its stores. After initially planning to open 200 locations nationwide, the chain struggled to expand beyond its home base in New York and a few other pockets of affluence. The company lost tens of millions of dollars and now faces default on more than $14 million in loans.
While Crumbs had unique challenges, including the demands of being a public company, the industry faces a painfully crowded market for baked goods and is seeking ways to enliven a fad that’s lost its novelty. Sprinkles Cupcakes Inc. has opened 24-hour cupcake machines in six cities, aiming to give people a new reason to visit their stores. For most Americans, though, the excitement may have run its course.
“When you see something that gains adoption so rapidly, that suggests it might also decline rapidly,” said Neeru Paharia, an assistant professor of marketing at Georgetown University who keeps an eye on the line at nearby Georgetown Cupcake in Washington. “It peaks really early and crashes.”
In the 12-month period ended in April, cake servings at restaurants -- including cupcake places -- declined 1 percent, according to NPD Group Inc. That compares with an 8 percent rise in the corresponding period of 2011, when the cupcake trend was going strong.
Typical Americans lack the cash to turn gourmet cupcakes into an everyday purchase, even with celebrities like Oprah Winfrey touting them. That means the market at best was small, said Bonnie Riggs, an analyst at NPD in Rosemont, Illinois.
“You’re not going to be buying these discretionary purchases unless you’re part of the 1 percent,” Riggs said. “It’s not going to be middle America.”
Dessert-focused places like Crumbs also suffer from competition from restaurants that carry more than just sweets. And while doughnut chains such as Dunkin’ Brands Group Inc. have proven their staying power, their food is seen as more versatile.
“People are not going to eat a cupcake for breakfast,” said Peter Saleh, an analyst at Telsey Advisory Group in New York. “It’s not a very sustainable business model where people are going to come in and eat the same thing every day. You eat a cupcake every day, and you’ll be dead.”
Crumbs, which began on Manhattan’s Upper West Side, has its defenders. Rhonda Barginear, a 62-year-old retiree from Connecticut, has been visiting a midtown Crumbs shop once a week for almost a year, ever since her grandson was born.
“We’re really disappointed,” she said.
Two other chains, Sprinkles and Magnolia Bakery, say they’re avoiding Crumbs’ fate by expanding more slowly and trying new things.
“We’ve been mindful of where and when we’ve expanded,” Sara Gramling, a spokeswoman for Magnolia Bakery in New York, said in an interview. “We know it’s not always interesting for our customers to have that one product category of cupcakes, so we’re always trying to add new items for them to choose from.”
Magnolia is seen as a pioneer of the gourmet cupcake craze, thanks in part to its appearance on an episode of “Sex and the City.” It also offers regular cakes, pies and other baked goods, Gramling said.
“We’ve been in operation since 1996, and we’ve seen many competitors come and go in that time,” she said. “But we never like to see a business fail. We’re certainly sad to see Crumbs closing.”
Sprinkles has added food trucks, ice cream and cookies to entice customers. It’s also never opened more than five locations in a year, said Charles Nelson, co-founder of the Beverly Hills, California-based chain, which started in 2005.
“We’ve always tried to be very cautious,” he said in an interview. “We’re still very positive on the industry.”
In places like the Upper East Side, cupcake choices continue to abound. Magnolia, Sprinkles and another chain -- Baked by Melissa -- are all located within a few blocks of one another along a stretch of Lexington Avenue. Sprinkles set up one of its cupcake ATMs here in March and drew lines around the block.
“The key to our business has always been innovation,” Nelson said. “We continue to grow.”
Even so, Crumbs’ downfall rattled an industry that was hot enough in 2009 and 2010 to spawn two reality shows: “Cupcake Wars” and “DC Cupcakes.”
Crumbs was hailed as a “breakout company” by Inc. magazine in 2010 and became a publicly held business the following year through a merger with 57th Street General Acquisition Corp. Crumbs co-founder Jason Bauer, who was then chief executive officer, vowed to open 200 locations by the end of 2014, saying the company had great economics. Instead, its losses widened and Crumbs began closing stores, shrinking from 65 locations earlier this year to the final 48.
Crumbs made its own efforts to diversify the business, including selling a croissant-doughnut hybrid called a crumbnut. The move was an attempt to capitalize on the popularity of cronuts, the wildly popular creation of the Dominique Ansel Bakery in New York. It also forged deals to sell Crumbs-branded coffee and cake mixes, though the licensing pacts weren’t enough to improve the company’s finances.
The industry faces some of the same challenges as frozen-yogurt sellers, which have to prove that they’re more than a fad, NPD’s Riggs said. Customers may come in once or twice for the novelty and then they’re gone.
James Angwin, a 43-year-old former Crumbs customer, said he was surprised to see the chain shut down suddenly, though he can see that tastes have changed.
“My waistline is not too disappointed about it,” he said.
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