The Crumbs cupcake trade: boom or bubble?

LOS ANGELES Thu Jun 30, 2011 3:18pm EDT

1 of 6. An employee holds a tray of cupcakes at a Crumbs Bake Shop in Hollywood, California June 29, 2011.

Credit: Reuters/Fred Prouser

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LOS ANGELES (Reuters) - Investors in Nasdaq newcomer Crumbs CRMB.O hope to cash in on the cupcake craze.

But will they whip up big profits or get creamed by another food fad?

Shares in Crumbs debuted at $13.10 on the Nasdaq on Thursday, giving the biggest U.S. cupcake chain a market value of $58.9 million. They rose to $13.30 in midday trading.

The gourmet cupcake pioneer, which got its start in 2003 on Manhattan's Upper West Side, now sells 1.5 million cupcakes a month through 35 stores located on both U.S. coasts.

"We launch our brand where people work and we expand to where they live," said co-founder Jason Bauer, whose goal is to "bring back the neighborhood bakery that disappeared in the 70s and 80s".

Crumbs cupcakes aren't your mother's chocolate, vanilla and strawberry.

Its signature products are $3.75 cupcakes in flavors like caramel apple, chocolate pecan pie or red velvet. They are stuffed with fudge or other goodies, piled high with frosting and sold in sizes ranging from a dainty "taste" to a "colossal" cupcake that serves six to eight.

Bauer is aiming for 200 stores by 2014. He said he can envision 500 to 600 outlets, but not 10,000.

He said Crumbs would not follow in the footsteps of doughnut chain Krispy Kreme (KKD.N), a former Wall Street high flyer that crashed after an expansion binge.

"That was the downfall of the brand," said Bauer, who added that Crumbs will not license its products or franchise stores.

SUGAR-FUELED FOOD FIGHT

The business of peddling cupcakes is so competitive that it has inspired a Food Network TV show called "Cupcake Wars".

First-time cupcake sellers must carve out a profitable niche if they want to compete with icons like New York's Magnolia Bakery -- whose vintage-inspired frosted treats had a cameo on the popular cable TV show "Sex and the City".

California-based Sprinkles, which also is opening stores around the United States, has deployed cupcake trucks to take its fare direct to customers. Other bakers have abandoned brick-and-mortar storefronts in favor of online sales.

Los Angeles blogger Tara Settembre, organizer of a popular cupcake meet-up group, says weaker operators are washing out.

"It got a little crazy," said Settembre, who counts herself among the fans of Crumbs cupcakes.

Asked if she'd invest in Crumbs, she said: "I worry about this bubble and how many (shops) they would be opening."

Crumbs had a profit of around $34,400 on revenue of $9.7 million in the latest quarter. A year earlier, it earned almost $219,500 on revenue of $7.1 million. The year-over-year profit reduction was mostly due to expansion costs.

A so-called blank-check company bought Crumbs in May for $66 million. Buyer 57th Street General Acquisition used a public offering to raise the money for its Crumbs purchase and Nasdaq gave it clearance to start trading on Thursday.

John Gordon, principal of Pacific Management Consulting Group, says there are enough wealthy and population-dense U.S. markets like Manhattan, Malibu and Beverly Hills to support as many as 250 Crumbs stores.

While moving into suburban U.S. markets could lower Crumbs' average annual store sales from the current level of $1.1 million and threaten margins, emerging markets like China present ample opportunity for robust growth, Gordon said,

Michael Yoshikami, president and chief investment strategist at YCMNET Advisors, is cautious about Crumbs, in part because he sees cupcakes as a discretionary item.

"I wouldn't be investing ... although I like their cupcakes," Yoshikami said.

CUPCAKES ARE DEAD, LONG LIVE CUPCAKES!

Like other growing food-service chains, Crumbs aspires to be the next Chipotle Mexican Grill (CMG.N) -- the popular burrito chain that moved upmarket with high-quality ingredients and now trades above $300 per share.

The difference between Chipotle and Crumbs is that burritos are a meal and cupcakes are dessert -- while you need a healthy meal every day, you don't necessarily need a daily cupcake.

Still, cupcakes have proven a resilient craze.

"I have predicted the demise of the cupcake so many times that I'm actually going to go to the dark side now and say the cupcake trend is not going to abate," Dana Cowin, Food & Wine magazine's editor-in-chief told Reuters.

"It's so big it's spawning mini trends" like mini cupcakes, frosting shots and cupcake pops, said Cowin. She added that that macaroons, doughnuts and other treats that were predicted to trump the cupcake failed to knock it from its perch.

Settembre says it's easy to explain the cupcake's enduring popularity: "You can't be unhappy eating a cupcake."

(Reporting by Lisa Baertlein)

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