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The Crumbnuts Weren't Enough, as Cupcake Chain Closes Amid Glut

By Selina Wang
July 08, 2014 1:37 PM EDT 7 Comments
Crumbs Bake Shop Inc. was known for supersized cupcakes topping out at 1,090 calories.
Photographer: JB Reed/Bloomberg
Crumbs Bake Shop Inc. was known for supersized cupcakes topping out at 1,090 calories.

Crumbs Bake Shop Inc. (CRMBU), the cupcake chain facing default on more than $14 million in loans, closed all of its stores yesterday after years of struggling to make money in a crowded market.

“Crumbs has been forced to cease operations and is immediately attending to the dislocation of its devoted employees while it evaluates its limited remaining options,” the New York-based company said today in an e-mailed statement.

The move follows an attempt to reinvigorate the company under Chief Executive Officer Edward Slezak, a lawyer and former Aeropostale Inc. (ARO) executive who took the reins at Crumbs in January. After losses of about $23 million the past two fiscal years, Crumbs tried to bolster sales in April by forging ties with BJ’s Wholesale Club. That included selling a croissant-doughnut hybrid called a crumbnut at the warehouse chain.

New franchising and licensing efforts failed to turn around the company’s finances, according to a person familiar with the situation. After getting a $5 million credit line from Fischer Enterprises in January, the company wasn’t able to obtain additional funds. That forced it to move toward liquidation, said the person, who asked not to be identified because the deliberations are private.

Fewer Servings

The broader U.S. market also is showing signs of cooling. In the 12-month period ended in April, cake servings at restaurants -- including cupcake places -- declined 1 percent, according to the NPD Group. That compares with an 8 percent rise in the corresponding period of 2011, when the cupcake trend was going strong.

As of April, Crumbs had about 65 locations in 12 states and the District of Columbia. That number shrank to 48 in previous rounds of closings, and all the locations were shut by yesterday evening. Crumbs had about 165 full-time employees as of the end of last year, with 120 working in the stores.

The company, which started in 2003 on Manhattan’s Upper West Side, said in a filing last week that the Nasdaq was delisting the stock. The move is expected to trigger a default on $9.3 million in secured notes and $5.1 million in unsecured notes, the company said.

Demand for cupcakes surged over the past decade, enticing chains like Crumbs and Sprinkles to spread out across the country. 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.

Too Fast?

The company, then run by Crumbs co-founder Jason Bauer, planned to open 200 locations in the top 15 markets by the end of 2014.

The pressures of being a publicly traded company may have led Crumbs to grow too quickly, said Peter Saleh, an analyst at Telsey Advisory Group in New York.

“Once you go public, you start promising certain growth metrics,” he said. “Private companies can expand at a much more modest pace if they so choose.”

Crumbs was known for its large cupcakes, including a $42 “Colossal” version that served as many as eight people. A recent addition, the crumbnut, was an attempt to capitalize on the popularity of cronuts -- the croissant-doughnut combo sold by the Dominique Ansel Bakery in New York.

While adding locations and increasing sales, Crumbs remained unprofitable. Investors grew frustrated with the chain, sending the shares from $13 in 2011 to under a dollar last year. The stock, which was trading at 11 cents by last week, fell below the Nasdaq’s listing requirements.

In addition to forging the BJ’s partnership, the company turned to other deals in recent months to boost sales. In January, it announced a line of White Coffee flavors that were inspired by Crumbs’ cupcakes. The following month, the company said it was creating a line of cupcake mixes and hot-chocolate kits with Pelican Bay Ltd.

The dessert industry is a difficult market to compete in, Saleh said, in part because all restaurants offer them.

“It’s very tough to make it work,” he said.

To contact the reporter on this story: Selina Wang in New York at swang533@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net John Lear

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