How many times have you heard the words “Red Velvet Cupcake” in the last few years? If you live in New York City, you probably have heard of (and ate) them more than desired. Slowly, these moist little goodies have taken over dessert menus and cupcake stores are popping up at every street corner. In Manhattan alone, there are over 200 cupcake factories.
The cupcake industry impact over the past 15 years is remarkable. Magnolia, one of the most popular cupcake brands in Manhattan, opened in the summer of 1996 in Greenwich Village, New York. Fourteen years later, Magnolia has changed ownership and added five more locations in New York City.
More niche players have emerged like New York city-based Baked by Melissa, a miniature dessert company most famous for its bite-sized stuffed cupcakes. And the madness has expanded to reality television. The Learning Channel (TLC) is hosting a six-part series that follows the day in a cupcake life of sisters and business partners Sophie LaMontagne and Katherine Kallinis as they operate their Georgetown Cupcake stores. Foodie bloggers are riding the sugar high as well; our favourites are Cupcakes Take the Cake and Redvelvetdiaries.
Enter Crumbs. Crumbs Bake Shop first opened its doors in March of 2003 on the Upper West Side of Manhattan by Mia & Jason Bauer. The menu is mix of the classics like Vanilla, Red Velvet, and Chocolate and specialty cakes. But it is no doubt that the signature size cupcakes take the cake of popularity. Crumbs serves over 50 varieties of baked fresh daily goods. Having 34 locations in six states and Washington DC, Crumbs has built a platform poised for accelerated growth. They anticipate opening between 15 and 21 stores by end of 2011.
On January 9, 2011, 57th Street General Acquisition Corp, (a publicly traded blank check company), offered to purchase Crumbs for $66 million. The investment highlights are:
- Creator of the gourmet cupcake and the largest US-based retailer of cupcakes
- Demonstrated track record of profitable growth with a 3-year revenue CAGR of 81.8%
- Attractive unit economics with average transaction of $18-$20
- Transaction allows for an initial expansion to a planned 200 locations in the top 15 markets by year-end 2014
- Ranked number 10 on Inc. Magazine’s list of the fastest-growing private companies of 2009 within the food & beverage industry, and ranked number 10 on their list of breakout companies of 2010
- Business combination valued at approximately $82.1 million on a fully diluted basis, implying a multiple of 16.4 times projected 2011 Adjusted EBITDA, and 6.7 times projected 2012 Adjusted EBITDA
Photo: Franchise Hound
Even the Co-Founders of Crumbs were surprised with their success. Jason Bauer, CEO, said, “Mia and I never could have envisioned how far Crumbs would come when we started eight years ago. This transaction is a statement for us about how many lives Crumbs has touched and eight years of really hard work and the dedication of our amazing employees. We are very excited about Crumbs’ future and look forward to becoming a public company upon the closing of our transaction with 57th Street.The additional equity capital that may be available should enable us to execute our development strategy more quickly and help us reach our initial expansion to a planned 200 locations in the top 15 markets by year-end 2014.”
What we find most astounding is that Crumbs’ financials; a Crumbs outlet generates $1.1 million in average sales and in excess of $1,000 in sales per square foot. And no fryer needed, just a simple location. We would love to understand their margins better and understand if competition is eating away pricing, but we assume their operating model is well-defined and lends itself to scale. To that end, we think Crumbs should pass the dessert around and start franchising. We bet the line of prospective franchisees would be out the door. Heck, thefranchisehound may stop writing and put our money where our mouth is. Interested?
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