More than three months before Crumbs Bake Shop closed the doors on its remaining 48 locations in recent weeks, some landlords were hiring brokers to quietly market the troubled cupcake maker’s spaces, sources said.
It’s the sort of step landlords take when a tenant either indicates it wants out of a lease, or the rent is regularly coming in late, explained David Firestein, managing partner at White Plains, N.Y.-based SCG Retail, a division of the Shopping Center Group.
Faced with a crippling $14 million in debt, and posting $23 million in total losses over the last two fiscal years, the biggest cupcake chain in the U.S. had attempted to scale back its operations in the last year by shuttering some of its lowest-performing stores.
“They had far too many locations,” said John Brod, a partner at ABS Partners Real Estate, who served as a real estate consultant for Crumbs at nine stores, including 275 Seventh Avenue, 1379 Third Avenue and 67 Wall Street in Manhattan. “So I worked with them to dispose of the low-hanging fruit.”
Brod said he “encouraged landlords to look around for a new tenant.” At the time, Crumbs was not seeking sublessees, he added.
Yet not all of the early closures went smoothly, signaling more trouble to come.
Crumbs vacated its 1,200-square-foot space at Friedland Properties’ 2814 Broadway in May, for instance, after defaulting on its rent of $17,000 per month and facing eviction, sources said. The rent on that 10-year lease, set to expire in 2021, was $170 per square foot, significantly below the market rents of $220 to $250 per square foot in the Upper West Side neighborhood.
Friedland and Crumbs agreed last year that the landlord would market the space, find a tenant and provide 30 days’ notice to vacate, said Aaron Prince, director of leasing at Friedland Properties. A bank he declined to identify signed a lease in June, he said.
But stopgap measures like this came too late. The once-trendy bakeshop shut down all of its locations across 12 states on July 8.
Now under Chapter 11 bankruptcy protection, Crumbs asked the U.S. Bankruptcy Court judge on the case to reject 21 mostly mall-based leases that it said “represent an unnecessary expense and contribute no value” to its remaining holdings. The request, fairly routine under bankruptcy proceedings as part of efforts to help reduce debts and obligations, did not, however, include any of the 16 Crumbs storefronts across the city.
That leaves the remaining city locations, in all boroughs but the Bronx, stuck in limbo, as landlords, brokers and prospective tenants await news of the company’s next chapter.
Founded on the Upper West Side in 2003, Crumbs grew to as many as 79 stores nationwide. Husband-and-wife founders Jason and Mia Bauer sold the chain in 2011 for $66 million to 57th Street General Acquisition Corp., which took it public. (Jason Bauer went on to launch a brokerage, Voda Bauer Real Estate, with former Douglas Elliman broker Avi Voda in May.)
Brokers attributed the flameout to Crumbs’ overextending its reach and paying “bullish rents” for small ground-floor spaces in pricey neighborhoods, especially in Manhattan. Among the most expensive locales were 254 Park Avenue South, 1675 Broadway and the Grace Building at 43 West 42nd Street.
The spaces were mostly between 800 and 1,200 square feet, with some as large as 1,600 square feet. Crumbs’ rents in the city ranged from $150 to $300 per square foot, brokers said.
“It’s just not sustainable to pay those prices per square foot for cupcakes,” said Friedland Properties’ Prince. “Not testing certain markets first is where they went wrong.”
Competition from Magnolia Bakery, Baked by Melissa, Georgetown Cupcake and other bakeries that jumped on the cupcake trend also played a role. Firestein said Crumbs was also inhibited by its status as a single-dessert business.
Crumbs is poised for a buyout from Chicago millionaire and CNBC host Marcus Lemonis, along with Fischer Enterprises, which pulled Dippin’ Dots ice cream from the bankruptcy scrap heap in 2012. A U.S. bankruptcy judge allowed for Crumbs to hold an Aug. 21 bankruptcy auction, at which Lemonis and Fischer’s $6.5 million credit bid will be in the lead. A hearing to approve the sale is set to occur in Newark, N.J., five days later.
Some of the remaining spaces might reopen under the new ownership, which said it plans to incorporate other brands it owns, like Sweet Pete’s Candy and Green Tea Ice Cream, to create multi-brand dessert shops. Still, that strategy may not work.
“Inserting other concepts is not necessarily a formula for success,” said Josh Siegelman, associate broker at Winick Realty, who has represented Birdbath Bakery in leasing. “It’s likely going to take away from the brand.”
Georgia-based GlassRatner Advisory and Consulting is advising Crumbs on the bankruptcy process. The mass closures were an effort to position the company for restructuring without significant additional expenses such as personnel, rents and inventory, said Peter Schaeffer, principal at GlassRatner and financial adviser to Crumbs.
As for the stores that will become officially vacant, a flurry of coffee and other non-cooking food retailers with a more recurring customer base have expressed interest in the space in almost all the locations, brokers said.
“Ideally it would be someone to profit off the breakfast and lunch trade down there,” said Peter Braus, managing principal at Lee & Associates, who represented the Zamir Equities-developed condo building at 40 Broad Street in its lease with Crumbs.
If the brand does undergo an overhaul, brokers said the company structure should be the first thing to change.
“Assuming it’s funded and managed correctly,” Schaeffer said, “Crumbs could be around for a long time to come.”