Monopolistic Competition: Cupcakes
The year was 2009, the GDP was sinking and unemployment soared to 10.1%. And yet, cupcakeries were proliferating.
Why? And why now, with the economy far healthier and the consumer far happier, are gourmet cupcake sales down?
Let’s start in 2009 with one cupcake entrepreneur who said a $3.00 cupcake cost her $2.45 to make.
- ingredients: 60 cents
- labor: 48 cents
- packaging and merchant fees: 18 cents
- marketing: 24 cents
- mortgage payments, utilities: 57 cents
- loan repayment: 16 cents
- insurance: 4 cents
- miscellaneous: 18 cents
She also needed $300,000 to purchase her 1400 sq. ft. store, got a $50,000 loan, and used $62,500 to set up and equip her storefront.
In a 2009 news article, a businessman predicted that cupcake stores would replace the ice cream store. Correspondingly, one market research firm cited a ripple of store openings beyond the “cupcake meccas” of NY and LA in Austn, Tex., Denver and Boston.
Fast forward to 2013.
Headlines shouted that the gourmet cupcake business was crumbling. Their example was Crumbs. The cupcake chain that was publicly owned and listed on Nasdaq as CRMB, Crumbs, went public during 2011. With the stock reflecting the trajectory of the business, during 2011 it hit a high just above $13.00 a share and now the stock is close to $1.30.
What happened? Sales are down. According to the firm, some stores were affected by Hurricane Sandy and there is more competition from individual bakers who can easily enter the market. In addition, one analyst cited “gourmet-cupcake burnout.”
Sounds like the cupcake business is coping with monopolistic competition. On the supply side we have lots of small businesses, easy market entry and exit, little freedom to determine prices. Add diminished demand and you can see the problem.