Business Question
Why was it ever a good idea to make a multi-store cupcake chain into a publicly traded company?
This is obviously about Crumbs which shut its 30-somewhat stores this week. As I understand it, the stock market is a bet that a company is going to be around for a long time (decades) and will make steady profit and growths. Cupcakes seemed like a trend that stayed around for a while and are now receding. Crumbs started when Sex in the City created a demand for cupcakes and Magnolia bakery (the store featured in SATC) refused to expand beyond their little Greenwich Village store front.
This worked great for a while until it did not. I can understand wanting to franchise a business like Crumbs but it seems like folly to make it a company with stocks.
Do the more business and economically oriented people here have any defenses for turning Crumbs or any other faddish one hit wonder into a publicly traded company? Any insights into what an investor would be thinking? Did they really think the cupcake trend would go on forever?
Was it a good idea for the then-current owners of the company to sell a big chunk of it to a public that assumed that it would be around for a long time? It seems so. Definitely better than holding on to it. Was it a good idea for all of those members of the public to buy it? Apparently not.Report
They were already profitable; the money from the IPO was just icing on the cake.Report
heh. Good one.Report
I’m not really on board with the contempt so many people have for people who start businesses and then sell their shares to outsiders even when they don’t need to raise capital. I don’t think it’s really a moral imperative for the founders of a company to keep most of their net worth tied up in one company or to wait for years and years of dividends instead of trading some of their equity for cash so they can profit personally from what they built.
I’m well over a year into a two year zero-salary stint building a tech company. If the company makes it through the next few months, a big chunk of my net worth will be tied up in basically untradeable stock in a company that may not have the cash to pay dividends for years. If it tanks, that’s delayed retirement and a lot of dirty looks from the wife. But if it gets up and running, it will be something of substantial value that we built by sacrificing a big chunk of earning potential and leaving that value at risk for years. But the default assumption seems to be that if we want to sell it for cash, we’re scamming everybody.Report
Actually, I’d do the same thing, SELL, if only for the principle of diversification. Income and investment all tied up in one company? Hell no. I fault no one who owns a start up wanting to sell some stock, or all of it.Report
That’s the way the cupcake crum-
Ah, forget it.Report
A joke that is too obvious even for Glyph!Report
There are simply no puns to be made on this subject that won’t come out half-baked.Report
I can’t say it makes much sense to me. The reason to list is to raise a lot of capital – more than a small group could manage. I don’t know why cupcake retailers would need that kind of money.Report
I am just doing this off my head but I think there is an idea that running a small but successful business in the U.S. is considered weak and wrong. You should always be looking to grow grow grow. Modest dreams are for chumps man….
As I noted above, Sex in the City was enough of a pop culture thing that it created a whole cottage industry in NYC of SATC tours which would (and maybe still do?) go around to various landmarks and places that were mentioned or seen in the show. One place that the tour buses would go to was Magnolia Bakery. Magnolia Bakery is a little whole in the wall (I can’t emphasize how tiny this place was) bakery that sold retroy cakes, cupcakes, and other assorted sweets (they made a really good banana pudding). Part of the SATC tour was stopping at the bakery to pick up a cupcake. I was in grad school in the area during peak-SATC* and would see the tour buses stop in front of the Bakery.
Magnolia could not keep up with the demand sometimes and Crumbs stepped in to pick up the slack with bigger, more absurd, and generally less tasty cupcakes but people liked them enough. I guess Crumbs wanted to expand the cupcake craze to areas and to people who could not get to NYC for the real deal at Magnolia.
Now I don’t blame people for wanting to step in where Magnolia refused to go but perhaps there was wisdom in Magnolia also choosing not to expand big. Perhaps they felt that going too big would damage their brand and what not.Report
Magnolia has indeed expanded around the country and even overseas (http://www.magnoliabakery.com/locations/), with all of the international locations being franchises (http://www.magnoliabakery.com/franchise/). They remain privately owned.Report
Color me wrong. Still 5 of the locations are in Manhattan with one in Chicago and one in LA. That is rather modest compared to Crumbs. I am not surprised at the locations of the International ones.Report
Silly me. And here I thought the purpose, at least in the tech sector, was to enrich the founders. With a handful of exceptions, an excellent trading strategy for the last several years is to wait six months after the IPO of the companies you’ve never heard of, then short it and ride it all the way down. Amazing how many of the founders in that situation sell a billion or two of their shares of pretty quickly so that they don’t get caught in the smash…Report
Speaking of, did anyone here follow CYNK Technology? The SEC halted trading of it, as it seemed deeply suspicious that a penny stock with no apparent business skyrocketed up 25,000 percent.
Yeah, it was a supposed “social media” site and hit 5 billion or so in worth in less than a week. Social media, except no one had heard of it, it’s product was highly undefined, and it’s website was…well, basically something someone slammed together in a few days. (Or at least looked it).
I’m deeply curious to find out what exactly was going on. I’m not thinking it was herd stupidity, not unless someone set out to make it automated trader bait (which, now that I think about it, would be a deeply clever and completely legal thing to do. That’d be a fun ethical question for lawyers to debate over beer).
Probably not a straight up scam — it was invisible until the stock price zoomed up. So maybe chum for algorithmic traders, or maybe some deeply weird laundering deal (although it’d seem to be a very dumb one).Report
The best explanation I heard was your last paragraph. It was a penny stock that people pumped up to sell quickly and make a profit. The sketchy part comes from the fact that it has one employee and he is located in Belize and the address seems to be non-existent.Report
Five billion dollars worth in five days seems…excessive, even for market exuberance.
Betcha money it’s either some complicated laundering scheme or some algorithm got ahold of it and everyone else played follow-the-leader. I think they’ve had at least one market crash because of something similar.Report
You know, it takes the services of an investment bank like Goldman Sachs to even go public and issue stock in the first place. Given the apparent sketchiness this could maybe turn into an interesting story.Report
Road,
hope nobody disappears while telling it.
Financial reporting isn’t supposed to be deadly!Report
At BusinessWeek, Nick Summers argues that CYNK’s performance is an illusion.
The WSJ supports the claim of low volume.
Seems plausible, but I won’t pretend to know whether he’s right or not. And of course it doesn’t explain the why of what happened.Report
I dunno. There was a time when everyone said the same about shops that specialized in donuts, or coffee, or tea, or pretzels with sausages in them, or bagels, or… well, you get the picture. The odds were always stacked against Crumbs, but in the way they’re stacked against any new venture. But it wasn’t any less a good business idea than any of the others. It just didn’t happen to stick, which is the way with most new businesses.Report
I am not sure this is the best comparison. Coffee and teashops have been around for hundreds of years. They were vital to English business and politics in the 1700s. Llyod’s of London got its name because all the shipping merchants and brokers liked to hang out at a coffee shop called Lloyd’s.
http://en.wikipedia.org/wiki/Lloyd%27s_Coffee_House
People had been drinking coffee and donuts for hundreds of years. The cupcake thing was clearly a fad connected to a specific TV show.Report
Yes, but when I was a college student, the notion of a $4.00 fancy coffee drink was a novelty and it was not at all clear that it would be an enduring business model. Coffee was something a business basically sold at cost, an inducement to encourage people to buy food.Report
For all our coffee drinking habits, and Americans have long been devotees of the stuff, we were very late in developing a coffee culture in this country outside certain bohemian crowds.Report
Markets are arenas for experimentation. How do we know the world, or at least a small part of it, doesn’t demand cupcake shops on every corner until someone gives it a try? Or maybe multiple someones. The problem may not be a lack of cupcake demand (or it may), but just not doing the expansion carefully (e.g., Boston Market). They may simply have tried to do too much too quickly and not have had the developed procedures and skills for choosing and managing multiple locations well.Report
When you’re right, you’re right. A chain of cupcake shops doesn’t strike me as an absurd business or an absurd investment on its own. It’s all about the details.
The new owner will probably not be using the “going broke opening new stores” business plan, which –let’s be honest– is not “baked in” to the “let’s make money selling cupcakes” idea.Report
Markets are for experimentation but publicly traded companies might not be the best form of experimentation for certain businesses. Crumbs might have done better if it remained a closely held corporation with a less dramatic expansion.Report
I would be inclined to agree. But seriously, how can we really know until someone tries the going public route?Report
You can’t but my commercial inclinations and cautious nature would lead me to favor growth that provides a decent and steady profit rather than an expansive profit in a short amount of time that might lead to a bust.Report
@leeesq
“You can’t but my commercial inclinations and cautious nature would lead me to favor growth that provides a decent and steady profit rather than an expansive profit in a short amount of time that might lead to a bust.”
sure, but to be fair, how many new commercial ventures have you been involved in?Report
If you can reliably identify which phenomena are fads and which are the beginnings of new trends ahead of time, then I would be willing to pay you for that information, and a lot of others would pay you a lot more. It’s easy to be dismissive of the cupcake fad now, but if you lived in the universe where it became a long-term trend, I’m sure your brain would be able to make sense of that too.Report
Frozen yogurt. Why? But it worked.Report
Frozen yogurt is the intersection of health food and ice cream. Can’t miss.Report
I’d be curious about GoPro as well. It occupies a niche, but it’s an important niche. Cameras are becoming commoditized, but people don’t want to mount their smartphones on their sailboat masts.Report
Karen De Coster has and interesting article up on her site about this:
http://karendecoster.com/i-called-the-cupcake-bubble-bust-and-it-leaves-behind-crumbs.html
In short, lot’s of cheap money (gee where have we seen that, *cough* housing *cough*) added to a fad/trend.Report