Crumbs Bites the Dust

The same day shut down of 70 specialty cupcake stores has analysts talking.  This fellow has a close reading of the story:

Mia and Jason Bauer founded the first Crumbs in New York in 2003, and did quite well. Crumbs thrived and grew organically—first in Manhattan, and then in well-off areas of the tri-state metropolitan area, as people who worked in the city took their newfound taste for cupcakes home with them. Crumbs avoided advertising and contracted production out, thus keeping a lid on costs. In post-bust New York, rents were comparatively low and so the model worked. By 2009, when I first warned of a cupcake bubble, Crumbs had expanded to about two dozen locations where the people are as rich as the cupcakes—wealthy areas of Los Angeles, the Hamptons, New Canaan, Ct. Sales boomed from $5.3 million in 2007 to about $23 million in 2009, and the company was profitable.

I would note that this "get big or get out" is a culprit, for many small chains thrive for decades if not centuries without big expansion.  But when credit is limitless and cheap, people "go for it."  But then comes this excellent note:

When the business model isn’t fundamentally sound and the zeitgeist goes against you, it can be tough going. Crumbs tried to adjust by closing stores, cutting costs, and seeking to license its name. But the costs were simply too high. In 2013, the company had $47 million in sales, up 10 percent from the year before. Fans were still willing to shell out for the product—the company reported a gross profit of $25.5 million. But rent ($12.7 million) and staffing ($16.4 million) more than ate up the operating profit. Crumbs couldn’t sell enough cupcakes to pay all its bills. In the end, its rent was too damn high.

Yes!  Lending credit is exactly the problem.  It was fine as a couple of cupcake stores, but then they went B I G ....  and with cheap credit we had asset inflation in real estate, and those inflated prices knocked out the small company.

This is textbook classic example.  The specific policies of get big or get out work well, they help the big get bigger and destroy the small.  When commercial real estate drops drastically, and rents follow, we may see some resurgence of small business.  We badly need a real estate bust in USA to help fight unemployment.

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