Chicago, IL 3/26/12 (StreetBeat) -- The announcement one year ago sounded delicious: my favorite New York cupcake bakery, Crumbs, was going public.Crumbs (NASDAQ: CRMB) had been the underdog of New York bakeries. Its rival, Magnolia Bakery, basked in attention thanks to an iconic episode of Sex and the City in which Carrie and Miranda discuss their love lives while eating cupcakes at Magnolia. The bakery catapulted to fame, particularly among 18-to-35 year old women. Tour buses began dropping off roughly 600 visitors per weekend day at Magnolia Bakery so they can taste a piece of television history.
While Magnolia enjoyed the decade's sweetest public relations coup, Crumbs was left to compete on the quality of its cupcakes. Fortunately, creating amazing cupcakes – most sold at $4.50 each -- is what Crumbs does best. Its efforts garnered the bakery $31 million in revenue in 2010, with earnings between $1.7 to $1.9 million, according to Crain's New York Business. It eclipsed Magnolia to become the largest cupcake retailer in the nation, with more than 50 locations across New York, Washington D.C., Boston, Chicago and Los Angeles.
Last spring, when Crumbs agreed to a merger acquisition that allowed the company to go public, the news sounded sweet. Crumbs is the first cupcake business to IPO, and in June it opened at $13 per share, representing a value of $66 million.
Given the strong growth potential in the cupcake industry, that valuation seemed reasonable. Cynical foodies have been predicting the decline of the cupcake trend for years, but Americans’ love for these portion-controlled cakes knows no end. The Food Network broadcasts cupcake-baking competitions, urban food trucks help busy commuters get their cupcake fix, and fashionable brides have embraced cupcakes – complete with laser-cut liners and crystal stands -- as an alternative to traditional wedding cake.
But Crumbs plummeted. Last fall its stock tumbled 80 percent, from a high of $16 per share to a low of $3. Its stock has held steady near that low for months. Its management hasn’t done much to bolster public confidence – last November it replaced its founder with an outsider CEO. Like many hot-growth companies, it seems to be suffering from an internal jumble.
But its outside prospects look good. The company has opened roughly 15 new locations since its IPO, it stands as the lone leader in a growth industry, and it faces no serious competition. If this new CEO is worth his salt (er, his sugar), I believe Crumbs can make a comeback.
To make my point, let’s compare Crumbs with another dessert company that recently IPO’ed.
An Icing-to-Icing Comparison
There are no other public cupcake companies, so it’s tough to make an apples-to-apples (er, icing-to-icing) comparison between Crumbs and other businesses in its industry. PerhapsDunkin Donuts (NASDAQ: DNKN) provides the closest approximation. Fashion-forward women love cupcakes and cappuccino the way regular ‘ol guys love donuts and coffee.
The two businesses are not competitors. Dunkin Donuts is a blue-collar joint with a drive-thru, while Crumbs is chic, sophisticated and urbane. But their corporate stories are similar. Both companies are predominantly located across the East Coast, with small forays into the Midwest and West Coast. Both companies compete on quality taste rather than low prices. Both companies decided to go public last summer.
Of course, their scale is different. Dunkin Donuts is a much older and established company, at 61 years, compared with Crumbs’ short 9-year history. It’s no surprise that Dunkin’s size blows Crumbs out of the water: the donut company raised $422 million in its IPO.
Growth (And Not Just in the Waistline)
Both Dunkin and Crumbs are growth plays. Crumbs founder Jason Bauer said he'd use the IPO cash to expand into Southern and Western cities like Atlanta, Dallas and Denver. He toldThe Street that he hopes to grow to 200 locations by 2014.
Dunkin Donuts, which already has a strong presence in the Southeastern U.S., is also chasing growth. The company wants to use its IPO money to strengthen its West Coast presence and expand overseas into growth markets in Asia and Europe. (This strategy seems sound to me. I’ve spent more time and money than I care to admit in the Bangkok Dunkin Donuts, which is always packed with customers).
Competition
Neither company is facing a major competitive threat. I’ve already mentioned that Crumbs doesn’t have to worry about competition – it’s already the leader in its industry. (Magnolia Bakery, in fact, couldn’t keep up with demand from the Sex and the City bus tours, so it ceded cupcake production to another bakery.)
Dunkin can also expand without any direct competitor, per se. Dunkin Donuts has avoided the West Coast in part because it sees Starbucks – which dominates the West – as its biggest rival. But Starbucks (NASDAQ: SBUX) caters to a different crowd. Starbucks plays music, sells fair trade coffee, offers wi-fi and the New York Times. Instead of selling donuts, Starbucks offers croissants, muffins, salads and other foods popular with the white-collar crowd.
Dunkin is different. It doesn’t play music, install track lighting, or hang photos of indigenous children on its walls. Its commercials feature police officers and construction workers. Dunkin is the only coffee-and-donuts shop of its kind.
The Bottom Line
Dunkin and Crumbs have different sizes, scopes, customer profiles, and operate in different industries. Yet their corporate stories, their growth plans, and their unique positions within their respective industries make them comparable, at least in limited ways.
Dunkin has not suffered the stock-price-slashing that Crumbs has experienced. Its stock, in fact, is performing quite well. Its age, reputation and size may add to investor confidence about this brand.
Crumbs, as the new kid on the block, lacks the size and goodwill that inspire investors to stick with this company through thick and thin. When Crumbs makes any move that undermines investor confidence – like replacing its founding CEO or suspending its 2011 guidance – investors grow skittish and punish the company, perhaps a bit too harshly. I believe its 80 percent stock plummet may have been an overreaction.
If new CEO Julian Geiger can take advantage of Crumbs’ strong position within a hot, growth industry, the company – and its stock price – could become a sweet story.
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