(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
July 9 Creating needs among consumers is both
the basis of our economy and a really risky investment strategy.
That is the message from the demise of cupcake company
Crumbs Bake Shop, a (former) seller of cupcakes each
of which averaged about one fourth of your daily caloric needs.
Crumbs, which not too long ago had lines out the door, said
this week it was ceasing trading and would shutter all its
Shares in the publicly traded bakery, which had 48 stores in
10 states, now change hands at 1 cent, down from its peak of
$12.72 in 2011 shortly after it went public via a reverse merger
with a publicly traded special-purpose acquisition company.
While it is easy to dismiss Crumbs as an ill-conceived
business surfing the confluence of several self-limiting trends
(diabetes might arguably have been mentioned as a risk factor in
its SEC filings), the company is actually worth considering in a
bit more detail as an illustration of how we live, invest and
function as an economy now.
A crucial feature of our modern economy is that, as old
human needs are filled more easily and cheaply, newly
manufactured ones must arise. This is important in that it
redeploys otherwise underused capital and labor to new markets.
This is why, despite the migration of the cotton mills from
Massachusetts to Alabama in the 19th century and on to China
more recently, those locations, while suffering unevenly during
the process, saw living standards rise.
That's been done through the creation of markets for new
needs and services, most of them undreamt of by our ancestors
and former selves. Be it iPhone cases, day spas or cupcakes, the
country would arguably dissolve into depression and riot if we
all weren't buying stuff we until recently didn't know we
Now, many of these new goods and services are hugely useful
- think GPS-based location applications - and are simply the
result of the clever use of technology to fill old needs better.
(Think, for example, of how often you would consult a map in
Some, like those services which allow you to turn on the
kitchen light from your office, span the gap between useful and
ONE MAN'S CUPCAKE ...
Still others, like massage or cupcakes, are, though they
usually make some appeal to being therapeutic, essentially about
pleasure, and pretty much entirely optional. Pleasure, of
course, is a good thing, and lots of money has been made from
The problem, and here we return to Crumbs, is that what
people consider to be pleasurable is so changeable. The tasty,
affordable treat of 2008 is 2014's shuttered retail premises.
And yet, as investors, we are almost forced to commit
capital to some of these areas. Arguably it is very difficult to
be an investor in 21st-century America without being heavily
exposed to trends, many of which may prove to be evanescent.
Another way to look at it is to look at household
expenditures on non-necessities. According to the Bureau of
Labor Statistics, household spending on life's extras has risen
from just above 20 percent in 1901 to more than 50 percent at
the turn of the millennium. That's a huge share of the economy.
Crumbs is one example, albeit one at the indiscriminate edge
of discretionary spending. But, just as people today aren't
interested in the cupcakes that seemed so 'fun' three years ago,
so might they decide in future that Facebook (or Myspace)
isn't where they want to spend time. True Facebook's network is
a powerful force, in essence a very effective loyalty card, but
these things often develop unexpectedly.
The creation and adoption of new needs is inevitable, but
highly unpredictable. It is not at all clear that the publicly
offered securities in businesses in these sectors reflect these
Which brings us to the last trend that Crumbs seems to
represent - financialization, which as a concept boils down to
the increase in a country's financial spend as a percent of the
economy. Your typical chain of restaurants 35 years ago would
grow more slowly than today, use less debt and have far less of
an eye to an exit for founders and early investors via equity
markets. Everyone's best exit is via the stock market, and the
stock market's offerings, inevitably, reflect that.
Chains today grow very quickly and, it seems, take large
risks in order to get a chance at large paydays via public
Investors would do well to remember that when considering
the latest hot IPO.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at email@example.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)