Crumbs CEO on cupcake demand, bakery's future

For $3, you can buy a Crumbs cupcake. Or you could buy six shares of its stock.

It wasn't always this way.

As recently as mid-2011, Crumbs Bake Shop stock traded in the double digits, fueled by investor enthusiasm for its rapidly expanding gourmet cupcake business.

So what happened?

A selection of cupcakes is seen at Crumbs Bake Shop.
Getty Images

Crumbs CEO Ed Slezak places part of the blame on the cupcake itself, which he said is "too narrow of an assortment" and "too tight a niche to attract a sufficient number of people" daily. Still, cupcake sales make up 78 percent of Crumbs' net sales.

Cracks in the cupcake

"At the heart of it, I think that cupcakes by themselves do not attract enough people every day any longer," he added. "Maybe when Crumbs was 10 stores, it most certainly did."

But since going public in 2011, Crumbs has grown to many multiples of that size, which Slezak saw as a liability.

As the company's footprint soared to 80 locations, including a sizable mall presence, they began cannibalizing each other. More recently, the company has begun closing stores, and now has 65 locations in 12 states and the District of Columbia.

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Last month, in a filing with the Securities and Exchange Commission, Crumbs said its accountants expressed "substantial doubt" about its ability to "continue as a going concern," unless it was able to raise additional funding.

Crumbs' rapid expansion has contributed to what Technomic Executive Vice President Darren Tristano said was a "saturation of restaurants selling cupcakes" in the face of demand that's begun to decline.

"We said it was likely going to be a fad with some long-term sustainability," Tristano said in a phone interview. "Clearly, consumers are moving on to something else. It's kind of in the rear-view mirror now."

The National Restaurant Association's "What's Hot" annual survey of chefs and data from market research firm The NPD Group reflect this.

The association had cupcakes on its "hot" list from 2007 until 2012, when they were taken off since their trendiness level had barely budged for several years, said spokeswoman Annika Stensson. Today's hottest desserts include hybrid desserts (such as the Cronut), savory ones, artisan ice cream, mini desserts and deconstructed desserts.

Retail cupcake servings dropped 5 percent from 2012 to 2013, according to NPD.

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Bonnie Riggs, an NPD restaurant industry analyst, attributed this decrease to the closure of cupcake shops. While Riggs said by email that she thinks cupcakes will continue to be a popular treat, she described the proliferation of cupcake stores a few years ago as a fad—and one that appears to be passing.

"Cupcakes were often priced too high, there wasn't a strong enough market (many shops were opened in smaller towns without the population to sustain the business), and there was too much competition from other cupcake shops and retail outlets," she wrote.

It is against these headwinds that Crumbs is trying to revitalize itself. In January, the company secured a $5 million term loan it plans to use for general working capital to close underperforming stores and to support its licensing and franchising efforts, Slezak said. But, the company acknowledged it will still need additional capital to fund future operations aimed at evolving the brand.

Three-pronged turnaround plan

With Slezak at the helm since December, Crumbs has taken a three-pronged approached to trying to revive the company, consisting of shuttering underperforming stores, expanding its licensing program and converting many stores to franchisees.

The efforts come after a challenging year for sales. Although net sales rose 9.7 percent in 2013 to $47.2 million, this increase was driven by Crumbs' new locations. Meanwhile, its same-store sales plunged 13 percent as fewer people visited.

Slezak described 2013 as "choppy" and "up and down" as the company tried to lure customers with Starbucks coffee and sandwiches—two initiatives it's since abandoned.

So far, licensing has been a bright spot. Crumbs has partnered to sell branded baking mixes, hot chocolate, coffee and more with two licensees. More are coming soon, Slezak said.

Crumbs is also in the process of applying to be a registered franchisee, which it expects to occur by late September.

Since August, Crumbs has closed 15 locations. Another 15 are on the chopping block. Mall-based stores have presented an especially big headache for the chain.

Although these stores initially "started incredibly well," many of them "sort of fell off a cliff," Slezak said, who cited declining numbers of mall shoppers, increased online and mobile shopping and mall violence as possible explanations.

The future of Crumbs

As Crumbs' share price hovers around 45 cents, the company hasn't ruled out strategic options.

In its annual report, it said it was in the process of identifying potential sources of capital and may enter into a strategic arrangement with a third party.

"We always look at alternatives and options, and we're always open to speaking to people," Slezak said. "We always evaluate whatever is in the best interest of our shareholders. So if that becomes something that's the right thing for our shareholders and the company, it's definitely something we would explore."

—By CNBC's Katie Little.