We’re not talking baked goods quality, we’re talking quality of the earnings baked into stock market valuations.
And, the answer may surprise you.
Krispy Kreme Doughnuts went on a tear in the 1990s with lines around the block in many locations … then the company IPO’ed … overextended itself … got nailed for some accounting irregularities … ran into some nutrition-dissing… and it’s stock price plummeted.
Hold that thought for a second.
Coincidental to Krispy’s slide was the rise of gourmet cupcakes.
Post-2000, “gourmet cupcakes became a cultural and economic phenomenon … with gourmet cupcake shops proliferating across the country, selling increasingly elaborate and expensive concoctions.”
But, according to the WSJ, the craze for $4 gourmet cupcakes appears to be peaking … demand at some bakeries has flattened.
Some chains are suffering from a larger problem: gourmet-cupcake burnout.
And, competition has been intensifying.
As a business, making cupcakes has a relatively low barrier to entry and the field has become saturated with competitors, including individual bakeries, chains and grocery stores.
“The novelty has worn off … and quite frankly, people can bake cupcakes.”
And, homemade cupcakes are guaranteed fresh.
A former assistant manager at one chain says “While the company says its cupcakes are baked fresh daily, “it doesn’t mean the cupcake you’re eating was made that day.”
Then, there’s the question of market saturation and critical mass ...
“There are only 15 to 20 metro areas in the country where the gourmet cupcake concept works … the market is only so large.”
One proxy for the gourmet cupcake industry’s financial performance is the share price of Crumbs Bake Shop … one of the largest public chains.
The company’s shares did a Krispy Kreme in 2011.
Still, some industry players dispute the notion that gourmet cupcakes are losing their appeal, saying “This category isn’t going away, the category is here to stay.”
One still thriving chain has re-diversified its product portfolio: less than half of its sales are cupcakes the rest are desserts such as cheesecakes, pies and pudding.
Based on the lines, it looks like Georgetown Cupcakes is still doing ok.
And, Krispy Kreme?
You guessed it.
The stock has been surging the past couple of years.
Maybe in a weak economy people substitute cheap doughnuts for expensive cupcakes … you know, the chained CPI thing.
Or maybe, just maybe, Krispy Kreme doughnuts just taste better than gourmet cupcakes.