This was a sad week for cupcake lovers.  On Monday, cupcake juggernaut Crumbs (CRMB) announced it was closing all 48 of its stores.  The company was struggling financially as the cupcake fad faded, and faces default on more than $14 million in loans and Chapter 7 bankruptcy liquidation.  It is publicly traded but was de-listed from Nasdaq on July 1st.

While my taste buds are quite upset (their Funfetti cupcake was out of this world), the company’s downfall has a couple lessons to teach us:

1. Trends die; innovation is key

This is a point I bring up time and time again in my posts about Apple (AAPL).  You could have the coolest, most exciting product in the whole world.  But if you’re just a one-trick pony you don’t survive.  The key to a sustainable business is the ability to innovate, particularly if you can anticipate market demands shifting and change before the market does.

The only innovation I’ve seen from Crumbs is was a crumbnut, which was really just a rip-off of someone else’s innovation (the cronut at Dominique Ansel in New York).  Otherwise, the company only had one product – cupcakes.  When the cupcake trend withered, so did Crumbs.

2. Healthy choices matter

I’ve been seeing a growing preference in the consumer market for more health conscious products, particularly among affluent consumers. Now there aren’t cupcake trends; there are boutique gym trends. In NY and DC there’s a new gym opening constantly, including rapid expansion from fitness chains like SoulCycle, Pure Barre and Flywheel.  Plus there are cool start-ups like Peloton Cycle making the boutique gym experience available to anyone, even if you don’t live in a big city.

Crumbs cupcakes – while delicious – were an extremely unhealthy food option.  The huge cupcakes were 600 calorie bombs.  And with its cupcakes costing over $4 a pop, Crumbs was targeting a smaller, affluent customer base.  That strategy worked until the affluent customer base decided they would rather spend $35 on a spin class than $4 on a snack.

So why do I bring Coca-Cola (KO) into the discussion?

Much of the reason for Crumbs’ demise was the shifting preference for health-conscious choices.  As a company mostly known for sugary soda (considered one of the devils in the health world, even the diet version) Coca-Cola doesn’t do well in this healthier environment.  Granted, Coca-Cola is buffered a bit by its large presence in the developing world, but it’s still being hit.  The company’s net income is down a whopping 27% from 2010 to 2013.

Up until now, it’s seemed like Coca-Cola’s version of “innovation” in the face of healthier preferences has been to make new diet versions of its sodas.  The thing is, diet still isn’t healthy.  Health proponents don’t want chemical laden diet versions, they want low-calorie AND all natural.  Coca-Cola needs serious innovation for healthier, natural drinks or it could be in for trouble down the line.

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1 Comment on Why a cupcake empire crumb(led) and why that signals trouble for Coca-Cola

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