On Small Businesses

So last Wednesday I was in the library, studying for my chem exam on the third floor. I was sitting next to some dudes who started talking about business stuff. Although I was entranced with reviewing for chemistry, I had no choice but to eavesdrop. They talked about the Cupcake Cafe, a small cafe that sells cupcakes in Rexburg, and wondered how it stayed in business and discussed how profitable that kind of business could be and how long something like that could last.

I was on the internet today, reading, and found this article in the New York Times:

http://boss.blogs.nytimes.com/2009/11/25/are-cupcakes-a-viable-business/

Are Cupcakes a Viable Business?

We just published a story by Elizabeth Olson that takes a look at the Great Cupcake Rush of ‘09, an almost inexplicable spread of cupcakeries around the country. As Ms. Olson reports, a handful of chains — Magnolia Bakery in New York, Sprinkles Cupcakes in Beverly Hills — seem to be thriving but for many others it’s a struggle.

Porche Lovely, for example, opened Lovely Confections Bakery in a gentrifying district of Denver. Ms. Olson writes:

For each cupcake she sells, Ms. Lovely figures she spends 60 cents on ingredients, 57 cents on mortgage payments and utilities, 48 cents on labor, 18 cents on packaging and merchant fees, 16 cents on loan repayment, 24 cents for marketing, 18 cents for miscellaneous expenses and 4 cents for insurance. That totals $2.45, leaving a potential profit of 55 cents on each $3 cupcake.

So far, that profit margin is theoretical because Ms. Lovely is still paying off her start-up costs. She’s reluctant to predict when she may become profitable in part because of the economy — but also because cupcake competitors have been opening in her neighborhood.

What is it that makes this business so attractive to would-be owners? What chances do they have of succeeding?

I liked comment number 5:

When I saw estimated costs per unit in the original article my instantaneous reaction was that there was no way that Ms. Lovely will succeed in the marketplace. Breaking down the numbers reveals shocking poor cost control, take for instance that she estimated that it cost her 48 cents per cupcake. Lets assume that she is paying her employees $15 an hour, at 48 cents per unit each employee is responsible for roughly 30 cupcakes an hour! Either she is overstaffed, overpaying or underselling. There is no way that her current business model will succeed, plus how big is the market for $3 cupcakes? It seems like people get into this business out of some sense of comfort and reconnection, undoubtedly they fondly remember baking cupcakes with there family and want those senses to translate to there business ventures.

— Ryan
Also number 9 and 10:

Yet another fad. In a few years, when there are cupcake bakeries everywhere and some mega-franchise, they will have the same fate as all the Curves gym locations around here: boarded up.

— JenofNJAs someone who bakes, it takes more time to make a cupcake than it does to bake a double layer cake- don't kid yourselves, it also has to do with our sugar addiction - we're paying more for someone else giving us portion control, like those little 100 calorie snacks - about one of the worst ways to eat green around.....as for a business model -- there are some who will always thrive because they can spot future trends and some will die out....the darwinian cupcake model-Laura Greenberg
I've wondered about this kind of thing too: how the heck do small businesses stay in business with the low profit margin? I remember that the people I was sitting next to mentioned Walmart, and how they didn't make money from the price of the items that they sold, but from the amount of items that they sold. I've also had a friend tell me that because Walmart is so large (or something like that), they buy things in large quantities, and when you buy things in large quantities, they're cheaper. Also, everyone wants to sell to Walmart, because Walmart sells to everyone, and if Walmart doesn't like the price that the seller is offering, they are more able to negotiate it lower, since the seller would make a lot of money from Walmart either way, and if the seller went to a smaller business, they would make less money. 

Isn't that interesting? I can't wait until I get to learn about this stuff.

On a side note, I dissected the turkey today. I found a major artery that extended down its spine, I found its spinal cord, I found what I think is either the pulmonary artery or the aorta, I found its scapulas (they're weirdly shaped), I found a tendon that moved the wing. I scraped off nearly all of the meat and fat and tendons and ligaments, and I cut into a few of the bones with a saw. I even boiled the bones to try and get everything off of them. Nobody was near as excited as I was; in fact, everyone but dad was grossed out. Lamesauces. It was cool. It was really cool. I learned about bird and human anatomy.

Happy Thanksgiving! I'm going to go read more stuff.