Crumbs Bake Shop – a small chain of cupcake shops, almost totally unknown outside of New York City and Washington, DC – announced it was going out of business today. Normally, this would not be newsworthy. Even though NASDAQ traded, Crumbs small revenues, losses and rapidly shrinking equity made it economically meaningless. But, it is receiving a lot of attention because this minor event signals to many people the end of the “cupcake trend” which apparently was started by cable TV show “Sex and the City.”
However, there are actually 2 very important lessons all of us can learn from the rise, and fall, of Crumbs Bake Shop:
1 – Don’t believe in the myth of passion when it comes to business
Many management gurus, and entrepreneurs, will tell you to go into business following something about which you are passionate. The theory goes that if you have passion you will be very committed to success, and you will find your way to success with diligence, perseverance, hard work and insight driven by your passion. Passion will lead to excellence, which will lead to success.
And this is hogwash.
Customers don’t care about your passion. Customers care about their needs. Rather than being a benefit, passion is a negative because it will cause you to over-invest in your passion. You will “never say die” as you keep trying to make success out of an idea that has no chance. Rather than investing your resources into something that fulfills people’s needs, you are likely to invest in your passion until you burn through all your resources. Like Crumbs.
The founders of Crumbs had a passion for cupcakes. But, they had no way to control an onslaught of competitors who could make different variations of the product. All those competitors, whether isolated cupcake shops or cupcakes offered via kiosks or in other shops, meant Crumbs was in a very tough fight to maintain sales and make money. It’s not you (and your passion) that controls your business destiny. Nor is your customers. Rather, it is your competition.
When there are lots of competitors, all capable of matching your product, and of offering countless variations of your product, then it is unlikely you can sustain revenues – or profits. There are many industries where cutthroat competition means profits are fleeting, or downright elusive. Airlines come to mind. Magazines. And many retail segments. It doesn’t matter how much passion you have, when there are too many competitors it’s a lousy business.
2 – Trends really do matter
Cupcakes were a hot product for a while. And that’s great. But it wasn’t hard to imagine that the trend would shift, and cupcakes would be displaced by something else. Whatever profits you might have when you sit on a trend, those profits evaporate fast when the trend shifts and all competitors are fighting for sales in a declining market.
Remember Mrs. Field’s cookies? In the 1980s an attractive cook and her investment banker husband built a business on soft, chewy, warm cookies sold in malls and retail streets across America. It seemed nobody could get enough of those chocolate chip cookies.
But then, one day, we did. We’d collectively had enough cookies, and we simply quit buying them. Mrs. Fields (and other cookie brand) stores were rapidly replaced with pretzels and other foodstuffs.
Or look at Krispy Kreme donuts. In the 1990s people went crazy for them, often lining up at stores waiting for the neon sign to come on saying “hot donuts”. The company exploded into 400 stores as the stock flew like a kite. But then, in a very short time, people had enough donuts. There were a lot more donut shops than necessary, and Krispy Kreme went bankrupt.
So it wasn’t hard to predict that shifting food tastes would eventually put an end to cupcake sales growth. Yet, Crumbs really didn’t prepare for trends to change. Despite revenue and profit problems, the leadership did not admit that cupcake sales had peaked, the market was going to decline, competition would become even more intense and Crumbs would need to find another business if it was to survive.
Few trends move as fast as tastes in sweets. But, trends do affect all businesses. Once we bought cameras (and film,) but now we use phones – too bad for Kodak. Once we used copiers, now we use email – too bad for Xerox. Once we watched TV, now we download from Netflix or Amazon – too bad for NBC, ABC, CBS and Comcast. Once we went to stores, now we order on-line – too bad for Sears. Once we used PCs, now we use mobile devices – too bad for Microsoft. These trends did not affect these companies as fast as shifting tastes affected Crumbs, but the importance of understanding trends and preparing for change is a constant part of leadership.
So Crumbs Bake Shop failure was one which could have been avoided. Leadership needed to overcome its passion for cupcakes and taken a much larger look at customer needs to find alternative products. It wasn’t hard to identify that some diversification was going to be necessary. And that would have been much easier if they had put in place a system to track trends, observing (and admitting) that their “core” market was stalled and they needed to move into a new trend category.