Finally, folks are declaring that the cupcake craze was indeed a bubble and it was indeed ludicrous. Yahoo writes, “More Evidence That the Gourmet Cupcake Bubble Has Popped.” Forbes writes, “RIP Cupcakes, Long Live Juice Cleanses? Inside the Fickle Food Trend Bubble.” An NPR story asks, “Has the Cupcake Bubble Finally Popped?” And finally, the Wall Street Journal wrote, “Forget Gold, the Gourmet-Cupcake Market is Crashing.”
In January 2011, I wrote about the announcement that Crumbs Bake Shop was going public via a $66M merger. I mentioned that the stock was a terrific target for a short sell. I was then attacked by cupcake-loving readers who were upset that I would cast aspersions on an industry that was representative of the free market, free choice, and non-coercion. However, there’s a major distinction between (1) criticizing a trend or fad for its underlying cultural-financial inanities and (2) calling for government intervention to coerce peaceful people during the course of their voluntary transactions. I never did the latter, so why all of the outrage? The stock for Crumbs Bake Shop nows sits at just above $1/share.
I said the trend wasn’t based on real wealth, but instead, the inane obsession with cupcakes was born out of credit expansion and artifically low interest rates. The cupcake craze has been a great example of malinvestment - too many people with too much credit spending too much money building up and/or expanding businesses based in faddish fixations that appeared, to them, to be prime investments. Thus small cupcake bakeries became booming businesses with hordes of consumers trying to become a part of the latest trend that was made popular by such cultural icons as “Sex in the City.” Cupcakes became the “hot” item for all of the wannabee consumers who had a need to fit in with the latest cultural rage. Therefore, the $5 cupcake became a statement of fashion. As Joe Queenan once wrote, America has had a “fawning subservience to the cupcake.”
However, the one thing all the media stories are missing on this issue is that this cupcake craze was one of many puerile trends that came about as a result of cultural changes spurred on by the boom-bubble-bust economic period. Dumbed-down, adult America became infatuated with cupcakes. The more outlandish and childish, the better. And then, stimulus policies, along with the Federal Reserve’s fight to keep credit cheap and money plentiful, kept skewing the market and distorting time preferences, making even the ridiculous seem profitable and real. Adults developed a strange obsession with enormous, sugar-laden, pricey mounds of sweets all dressed up in toppings and flavors suitable for the most discriminating 5-year-olds.
And now, the cupcake investors are the latest laughingstock of the financial world. Seeking Alpha put together a fantastic financial obituary of Crumbs Bake Shop for your reading pleasure. Except when challenged with the question, “What went wrong,” the author notes:
Based on the pricing, Crumbs has no reason not to be successful. Following a sampling of several cupcake stores in the Washington, DC area, Crumbs cupcakes appear to be the least expensive, and the shareable “signature size” cupcakes offer very good value. Reviews on Yelp seem relatively good, and the cupcakes are tasty (in my opinion, at least). Perhaps cupcakes have just been a fad and is now in secular decline? I have little hard evidence for or against this, but let’s take a look at the Google search trends for Crumbs and its two most famous competitors: Sprinkles and Georgetown Cupcakes.
The cupcake boom-bust has little to do with pricing strategies, perceived value, Yelp reviews, taste, or pure fads. These people who address these market quirks just don’t understand basic economics, including business cycles and economic intervention on the part of government and it’s monetary-banking sector.
With all things considered, the cupcake novelty has worn off, so get over it people. Thanks to the many wonderful readers who sent me these articles.9:18 pm on April 24, 2013 Email Karen De Coster