Short-sighted focus on one trendy
product with limited demand
High competition with low barriers
High overhead from renting large
retail spaces in high profile
Too much debt
Sure, people were crazy for cupcakes after a bunch
of television shows popularized them. But how many
people need a cupcake to start the day (unlike
coffee)? Realistically, $4 cupcakes are an
occasional guilty pleasure or a novelty
item. Moreover, do you really need 3,300 square feet
of retail space to sell cupcakes (like one Crumbs'
outlet near Chicago)?
Management's other big sin might have been over
exuberance. Crumbs focused on being the biggest and
trendy, losing sight of its founder's strategy: "The
goal was to have a neighborhood bakery where I knew
everybody and their kids, and I made all their
birthday cakes." In pursuit of growth, Crumbs may
have lost sight of its cozy, neighborhood feel.
The Writing on the Walls
Crumbs showed signs of impending trouble for years.
Since its initial public offering, the company saw a
steep decline in profitability. Same-store sales
plummeted as the firm pursued massive expansion
plans, suggesting an over-saturated market. The
company reported a $7.7 million loss in 2012 and a
$15.3 million loss in 2013. In recent years,
Crumbs closed under-performing stores and licensed
cupcake-related products for sale in grocery stores.
But these last-ditch efforts turned out to be too
little, too late.
In its March quarterly statement, the company posted
an accumulated deficit of $28.8 million. Shortly
after the NASDAQ delisted it, Crumbs closed all of
its remaining 50 retail stores in 10 states and the
District of Columbia. Delisting signals to investors
that a company is in trouble and may cause creditors
to call its credit lines and rating agencies to
downgrade its credit score. So at this point,
bankruptcy seems like the most probable course of
action for the cupcake giant.
Beating the Odds
When filing for bankruptcy, companies have two
1. Chapter 7 bankruptcy (liquidation). This
is what typically comes to mind when you hear the
word "bankruptcy." A court-appointed trustee sells
the company's assets and distributes proceeds to
creditors in a specific order set forth in the
bankruptcy code. Businesses that file under Chapter
7 generally close their doors forever.
2. Chapter 11 bankruptcy (reorganization). Some
bankrupt companies continue to operate. Under
Chapter 11 filings, the company retains its assets
as a "debtor in possession." Meanwhile, owners
relinquish control to a court-appointed turnaround
specialist who works with creditors and the
bankruptcy court to come up with a turnaround plan.
A court-imposed reorganization protects the
company's assets from creditors until the plan is
devised and approved. Companies that file for
Chapter 11 filings also can renegotiate existing
debts and contracts, including leases and union
contracts. Examples of companies that survived
Chapter 11 filings in the last decade include Delta
Air Lines, General Motors, Sbarro and Eddie Bauer.
Other distressed businesses opt for out-of-court
turnarounds, which tend to be less expensive and
structured than formal bankruptcy proceedings. For
example, Starbucks never reorganized under Chapter
11, but has suffered some rocky years.
Like Crumbs, Starbucks expanded rapidly in the early
2000s with nearly 15,000 stores by 2007. Worried
that coffee was too trendy, Starbucks diversified
into music, accessories and food. When the recession
caused profits to nosedive, the company's founder
returned to the helm and re-focused on Starbucks'
core product: premium coffee. He also diversified by
selling coffee in packages that customers could make
at home or in the office. And he made painful cuts,
laying off baristas and closing unprofitable
locations. Now, Starbucks is positioned more like a
local gourmet coffee shop, rather than a competitor
with inexpensive coffee outlets, such as McDonalds
and Dunkin' Donuts.
Launching a Successful Turnaround
If your company starts experiencing the early
warning signs of financial distress (see right-hand
box), it's time to assemble a turnaround team and
select a chief restructuring officer (CRO) to lead
it. The best CRO candidate may be an objective third
party, such as an accountant or attorney, who can
offer fresh ideas and has previous experience
turning around other struggling firms.
His or her initial charge will be to regain control
over daily operating cash flow. By collecting cash
faster than it goes out the door, the CRO gives
the team breathing room to devise a turnaround plan.
Buy-in of management, lenders and other outside
stakeholders is essential to a successful turnaround
effort. Often creditors may need to restructure --
or even partially forgive -- debt to keep a
distressed business afloat.
Another reason a third party is a good choice for a
CRO is that they're generally more objective and
unemotional when it comes time to make difficult
cuts, such as closing stores, laying off workers and
reducing fringe benefits. Turnaround specialists
also are familiar with how to analyze labor pool
demographics to minimize discrimination lawsuits
related to layoffs.
Looking at the Big Picture
Ultimately, a disciplined long-term strategy is what
makes (or breaks) a turnaround plan. Most companies
need to refocus on core operations and reposition
their brands, as the Starbucks example demonstrates.
Although many people criticize Crumbs for its myopic
focus on cupcakes, several other brands -- such as
Cinnabon and Annie's Pretzels -- have operated
profitably for years without diversifying their
offerings. A turnaround is usually not the time to
experiment with new, untested ideas that can drain
Part of refocusing on core operations is liquidating
non-core assets. But, some businesses take it a step
further and decide to sell the entire company to a
strategic buyer who is particularly interested in
certain key assets, such as the distressed company's
customer base, facilities and assembled workforce. A
valuation professional can help management
understand the market values of these intangible
assets in an orderly liquidation.
One Size Doesn't Fit All
Only time will tell if Crumbs Bake
Shop will be able to pick up the pieces. Turnarounds
often necessitate management shakeups, painful cuts
and implementation of a disciplined strategy.
Advisers who specialize in bankruptcy consulting
have learned what works and can implement a
systematic plan that best fits a struggling business
For more information, please contact
Boris Benic, CPA,
at 516-248-7361, or click here to email Boris.
He would be happy to address any questions you may