Lessons From The Crumbs Bankruptcy

What can credit unions learn from the cupcake chain’s abrupt closure?

cupcakeIn a move that caught many sweet teeth off guard, New York-based Crumbs Bake Shop shuttered all 50 of its locations on July 7. Shares of its stock closed at 23 cents that day and Crumbs filed for Chapter 11 bankruptcy protection soon after.

Founded in 2003, the bakery which boasted no fewer than 50 varieties of artisanal cupcakes baked fresh daily enjoyed a period of tremendous growth during an American food revolution that stressed both the artisanal and the local.

So where’s the smoking oven?

For one, people have recently taken a more attentive role in tracking what they put in their bodies. According to a Department of Agriculture study, working-age adults consumed an average of 118 fewer calories a day in 2009 and 2010 than four years earlier.

But building an empire around a product that is high in calories, fat, and sugar is only partly to blame for Crumbs’ bankruptcy. After all, people eat foods worse for their waistlines (I’m looking at you Double Down). A troika of interconnected factors ultimately contributed to this sour development: differentiation, overexpansion, and price point.

Many post-mortems that flooded the Internet last week pointed to Starbucks’ successful variation on the Crumbs model. Like Crumbs, Starbucks is known for a single product, coffee. But Starbucks customers have a bevy of options not limited to the caffeinated drink sandwiches, salads, and baked goods, among others. You don’t want or you don’t like coffee? Starbucks still has value. You don’t like cupcakes? You’re not going to Crumbs.

Understanding the single-tracking of the company’s business, it’s a little surprising it maintained as many locations as it did. That’s a lesson Starbucks learned as well. The coffee chain’s sales and share price dropped significantly when the recession hit, prompting CEO Howard Shultz to close 900 stores worldwide for a cost savings of $580 million, according to a 2011 New York Times article. For Crumbs, operating too many locations and offering too few products was a recipe for money loss and, eventually, bankruptcy.

Finally, a six-pack of Crumbs’ signature cupcakes cost $27.00. That’s $4.50 each. Although value is in the stomach of the eater, cheaper options like Dunkin’ Donuts offer a greater value for the wallet six donuts for $5 and a dozen for $8 as well as the diet.

Each of the these factors is translatable to cooperatives. An institution that lacks a differentiated set of products caps its potential membership; overexpansion of its branch locations can drain institutional resources; and providing a lower value than competitors is harmful to the long-term prospects of any organization, even if the product or service in question is superior.

Crumbs is an example of a business whose inability to change, eagerness to expand, and failure to provide adequate value ultimately forced it to file for Chapter 11. And that’s the way the cupcake crumbles.

July 17, 2014

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