Three Simple Words: No More Cupcakes

by Alyssa Oursler | August 10, 2012 3:38 pm

I swear, cupcakes are on their way to taking over the world. Either that, or they’re like Crocs (NASDAQ:CROX[1]) for our mouths, and are going to be the next crash-and-burn fad out there.

I’m praying it’s the latter.

Come on, people. Sprinkles just debuted a cupcake ATM[2], many bakeries have added e-commerce to their millions of cutesy shops, and there is a TV show called Cupcake Wars. Could it get any worse?

The answer is “yes,” because there’s also Crumbs Bake Shop (NASDAQ:CRMB[3]) — a public company that allows you to actually invest in cupcake-mania.

That’s something I hope you never do.

Instead, we should follow the advice of Josh Brown of The Reformed Broker blog: Burn all the cupcake stores[4].

He writes:

“I’ve had quite enough. There are so many gourmet cupcake shops in NYC they’re opening them inside of each other. And have you looked around? Does it look like we need more buttercream frosting?”

No, we do not need more buttercream frosting. And yes, all the hype about cupcakes is annoying to say the least. Mix in the idea of investing in that hype and it becomes just plain absurd.

Crumbs, for some reason, is busy using the $66 million it raised when going public to open even more stores. The company plans to have around 200 locations[5] by 2014, and up to 500 or 600 total down the road. But the company has yet to make any money since going public.

Sure, you can point to the great growth story[6] of Chipotle Mexican Grill (NYSE:CMG[7]), which has made amazing gains mostly through expansion. Yet despite the restaurant’s terrible margins — which appear to be finally coming back to bite CMG in the butt[8] — Chipotle at least was profitable in its first year on Wall Street. And it actually sells real food.

Before going public, Crumbs owner Jason Bauer said[9], “You can’t argue with the numbers. Cupcakes are here to stay.” Alright, Jason. Here’s some numbers: Year-to-date, CRMB shares are down more than 30%. Since going public, they’ve plunged 80%.

That loss is including the recent spike CRMB shares saw after Crumbs announced a deal[10] with Starbucks (NASDAQ:SBUX[11]) to serve its coffee at its stores.

As if Starbucks coffee — which you can find at more than 12,000 Starbucks locations in the U.S., be it their own stores, at Barnes & Noble (NYSE:BKS[12]), at grocery stores … heck, you can make it at home! — changes the fact that the company isn’t profitable, has countless competitors and is based on a food fad, and food fads die.

The bottom line is this: One day, people are going to wake up and realize that spending nearly $4 on a cupcake — even a red velvet one with cute, frilly raspberry swirls — is just silly. And then, if they want their Starbucks, they’ll just go to Starbucks.

It’s not very different from Krispy Kreme‘s (NYSE:KKD[13]) crash and burn, or the frozen yogurt fad that’s sweeping out nation right now. People love the dessert because they can put a pound of fro-yo in a cup, toss every fruit, nut and candy on top, and convince themselves it’s healthy.

In typical fashion, fro-yo joints have been jumping all over the place, and competition is getting crazy. There’s only one fro-yo pure-play here in the U.S. — U-SWIRL (PINK:SWRL[14]) — but it’s an extremely thin-volume penny stock trading on the pink sheets. A larger, more financially diverse company called MTY Food Group, which is traded internationally, is in on the fad. MTY owns Tutti Frutti, TCBY and Yogen Fruz … but also numerous other chains serving anything from French croissants to Korean barbecue.

Point is, there’s no real good way to trade frozen yogurt, and that’s probably a good thing.

For now, Crumbs — and its investors — have gone all-in on the cupcake craze. But one day, that craze will end, the darling desserts will go back to living the lives of normal sweets and, well … Crumbs likely will crumble even more.

Let’s just hope that, for the sake of my sanity, that day comes soon. For now, keep your money away from the buttercream frosting.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. CROX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CROX
  2. just debuted a cupcake ATM: http://investorplace.com/2012/06/would-you-buy-your-cupcake-from-an-atm/
  3. CRMB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CRMB
  4. Burn all the cupcake stores: http://www.thereformedbroker.com/2012/08/08/first-burn-all-the-cupcake-stores/
  5. around 200 locations: http://www.reuters.com/article/2011/06/30/ipo-crumbs-idUSN1E75S22720110630
  6. great growth story: http://investorplace.com/ipo-playbook/how-to-find-the-next-chipotle/
  7. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  8. which appear to be finally coming back to bite CMG in the butt: http://investorplace.com/2012/07/chipotle-stock-crash-was-overdue-cmg/
  9. Crumbs owner Jason Bauer said: http://www.thedailybeast.com/newsweek/2011/02/02/sweet-success.html
  10. announced a deal: http://investorplace.com/2012/08/nations-largest-cupcake-chain-to-start-serving-starbucks/
  11. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  12. BKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKS
  13. KKD: http://studio-5.financialcontent.com/investplace/quote?Symbol=KKD
  14. SWRL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWRL

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