Chicago’s sweet tooth keeps cupcake retailers in business

Filed under Innovation, Management, News

By Hallie Busta

— Consumers may have cut back on spending during the recession, but they weren’t necessarily skipping dessert. Out of that indulgence emerged a growing appetite for cupcakes in the Chicago area, experts said.

Red velvet, key lime, chocolate mint, apple cobbler and tiramisu. The combinations seem as endless as the businesses serving them up.

But as the retail market for cupcakes nears saturation, entrepreneurs may need to diversify their offerings or risk being shut out, experts said.

“[There is] a limited amount of potential for cupcake-specific shops,” said Louise Kramer, communications director at the National Association for Specialty Food Trade in New York City. “Consumers will tire of it. There’s a lot of rivalry.”

The right size at the right price

While retailers could branch out by offering other specialty items or by targeting other meal periods during the day, the overall business model is viable, said Darren Tristano, executive vice president at Chicago-based consulting firm Technomic Inc. With cupcakes, he said, “It’s portion size. It’s variety. It’s price point.”

Tiny Dog Cupcake, which opened on Evanston’s Davis Street in November, offers between six and nine of the 15 cupcake flavors that have survived the test process for purchase daily in regular and tiny sizes, said owner Rob Mockard. The store serves coffee and other hot beverages, offers free wireless Internet access aimed at the city’s college student population, and provides outdoor seating during the warmer months, he said.

Although he has seen the cupcake concept do well in other college towns, students from Northwestern University, Mockard’s alma mater, aren’t his only target. “I wanted to be available to the university, but I also wanted to be convenient to the center of town,” he said.

A $100 million market

Tiny Dog joins area cupcake retailers in a small but growing segment of the retail baked goods industry. Technomic estimates that the 200 to 250 cupcake retailers nationwide generate nearly $100 million in revenue annually, Tristano said.

Earlier this month, Chicago welcomed Crumbs Bake Shop, a chain based based in New York City that plans to go public this year. According to co-owner and founder Jason Bauer, Crumbs’ West Madison location brings in more than 250 customers daily whose purchases average $18 to $20, putting it on par with his more established New York City locations, he said. The company’s goal, he said, is to open 200 stores in two years, including five additional locations in Chicago this year.

While Bauer was confident his business model would fit in with the Chicago market, other area entrepreneurs weren’t as certain when they started.

“They’re popping up all over the place and at one point I did feel like … it might not be the best business to get into because there are so many,” said Erika Durham, owner and founder of Yumcakes Inc., a cupcake catering and delivery business that operates out of Kitchen Chicago, a commercial kitchen in the city. Durham, who is also a professional chef, started the company in 2009 offering custom cupcakes.

She said she hopes to establish a storefront in Hyde Park within the next year, citing a lack of cupcake retailers on the city’s South Side. “Even if some fall by the wayside, it’s up to me” to survive, Durham said.

Mari Luangrath opened the Naperville-based Foiled Cupcakes in July 2009 and also works out of Kitchen Chicago. She said she, too, has noticed the growth. “I appreciate the popping up left and right of cupcake shops because that means there’s a need for cupcakes in general,” she said.

Economics of cupcakes

The recession may have done more to help cupcake retailers than hinder them, drawing consumers to the “small, affordable indulgences” and letting entrepreneurs explore their “artistic bent,” Kramer said.

Although cupcakes may not be entirely recession proof, they fare well as a comfort food and are accepted as a regular dessert, Bauer said. Cupcakes made up 78 percent of Crumbs’ $31 million in revenue last year, he said. He expects the proportion of cupcakes will stay the same in the coming year, while the base numbers will grow, he said.

Mockard also is expecting growth. While his shop currently serves more than 100 customers daily, that number could increase five-fold this year as word spreads about the shop and it adds more hours, he said. That means doubling his current eight-person staff over the next six months, he said.

But Mockard won’t be holding on to all his profits. In keeping with the company’s mission, Tiny Dog Cupcake will donate a percent of its profits to three charities that customers help select, Mockard said.

Our “ability to contribute to causes is really driven by, in the end, our ability to provide an enjoyable experience,” he said.

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