7 Business Lessons from Gourmet Cupcakes

Michel Theriault
Wed, 02 Oct 2013 00:00:00 +0000

The Cupcake business became a media darling story. Born from placement on several TV series including 2 Broke Girls raising money to start a cupcake business, and several other TV shows featuring cupcakes from the Magnolia Bakery, it was helped along by cooking shows that were essentially cupcake-making competitions, such as Cupcake Wars.

Then the trend was expanded by entrepreneurial bakers everywhere, from existing business to new startups and home-based businesses hoping to cash in on a high-margin, premium product that was easy to make.

Finally, the trend has started to crash on market saturation, over exposure, and possibly the realization that cupcakes are calorie bombs.

That’s what happened to Crumbs, the cupcake maker who lost 90 percent of its stock value after going public at just over $9.50 per share in 2010 and now trading around $1.10. And even though there are still many to choose from, there are numerous cupcake establishments reported as closed on Yelp.

What can this culinary mess teach entrepreneurs, start-ups, and home-based businesses, not to mention corporations trying to cash in on trends?

Here are seven key business lessons you can have with your cupcake:

Low Cost of Entry

Whenever anyone can get into your business, you should reconsider, develop a strong (and hard to reproduce) differentiator or have a strategy to ride it until it bursts with an exit plan already in place.

Any existing bakery, whether a mom-and-pop shop, local grocery store, or conglomerate can easily make gourmet cupcakes and put them in their showcase.

Any mom with a desire to be an entrepreneur and open a small business can sell cupcakes at markets, out of a food truck, or even go into debt to open a store. Nothing special here, it just takes some spare money you are willing to lose.

Something (Almost) Anyone Can Do

Ok, I probably can’t make cupcakes like they do, but it’s not high tech or even complicated. It takes some skills that are reasonably easy to acquire and a modest amount of equipment along with some creativity.

This applies to many other things, even coffee and donuts, but for some reason, it’s different with cupcakes, except when you consider the premium donut company that faltered in the same way, Krispy Kreme. More about that later.

No Exclusivity

You can’t patent cupcakes. There is no intellectual property. This means you aren’t protected from copy cats. You can open a cupcake store today and another one opens across the street next week. Or any existing store, whether it’s a café, bakery, or grocery store, can simply add gourmet cupcakes to their showcase. And for all you know, the hardware store is next.

If you watch Shark Tank (or the Canadian equivalent, Dragon’s Den), you know that a frequent question the Sharks ask entrepreneurs is whether their product is patented. If not, the likelihood of getting the Shark’s money goes down significantly.

Premium Pricing

At up to $4.50 for a cupcake they really are a luxury item, meaning limited markets in the long run that can support an expensive snack that is no more filling than a $1 donut. Sure, there will still be a market for upscale cupcakes for special occasions like birthdays and weddings, but ultimately once the novelty and the “I gotta try one” feeling wears off, demand for this kind of premium priced product goes soft.

Swims Against the Trends

Back to Krispy Kreme, which illustrates the issue cupcakes have in the health trend department. They were also a tasty treat craze at a premium price over existing donuts. After an initial boom and the opening of many new stores which saw people (Including me) braving long line-ups to get the “hot now” donuts, people simply stopped buying them.

It was just around the time people realized how many calories a single donut delivered, at 200 calories for the Original or 360 for a filled donut. Not to mention the fat and sugar. They were also a victim of the low-carb diets advocated by the Atkins and South Beach diets.

While doing better now, they barely avoided bankruptcy and they closed a lot of stores in the meantime, with franchisees suffering as a result. So to stick with the health trend issue, keep in mind that your typical large frosted premium cupcake can have as much as 500 calories. That’s practically a full meal, yet you are unlikely to be full after just one.

Market Saturation

Going back to the first two points, that of “low cost of entry” and “anyone can make them,” there are simply too many cupcake makers. That’s because of the low cost of entry, ease of making cupcakes, and also non-exclusivity.

These are all tests you should apply to your products before going for it. If copycats can pop up and steal your market share before you’ve become the dominant player, you probably won’t last unless you have a really compelling differentiator. And even then, you’ll constantly need to stay one step ahead of the competitors.

That’s not easy to do with cupcakes. While you can come up with unique cake mixes and frostings for your cupcakes, complete with fancy names, that’s not going to be enough.

Over Exposure

Anything that starts and is quickly built based on a fad is likely to burn out eventually. This is a product without shelf life, excuse the pun. That’s not to say cupcakes aren’t here to stay, but the popularity of gourmet high-priced versions simply doesn’t have staying power. While a product category that burns hot initially makes a lot of money for some, fads like these are more likely to cool down, and even if they are still marketable, become less of a money maker in the long run.

Not everyone who opens a cupcake store can possibly last, though enough will certainly endure to satisfy our sweet tooth cravings.

Adding cupcakes to an existing establishment or as a small part of your other culinary offerings is likely a good idea. Building a business solely on cupcakes is a risky business proposition.