Smallcakes Goes Bigtime

A large, high-end dry display case for showcasing the day's fresh-baked goods, along with a reach-in cooler offering milks, juices, sodas and other drinks greets customers as they enter each location. Patrons can order their cupcakes to go or they can enjoy their treats on site at the wooden tables and chairs that offer seating for about 20.

In addition to providing a place to nosh, these seats offer restaurants an additional revenue opportunity: On Saturdays and Sunday's most stand-alone Smallcakes units host five to six children's birthday parties where guests receive cupcakes and a decorating lesson from one of the store bakers.

The back of the house at Smallcakes shares this simple yet completely functional nature. There are just 3 major pieces of back-of-the-house equipment: a walk-in refrigerator that stores milk, eggs, butter and other perishable cupcake ingredients; a 50-quart floor mixer; and a large convection oven capable of cooking up to 20 dozen cupcakes at a time. The rest of the E&S includes a worktable or two, smallwares such as whisks, bowls, spatulas and scales, and shelving for dry storage.

With such a simple lineup of equipment, Martin doesn't work with a set foodservice equipment dealer, preferring to buy from whomever can offer him the best price when it comes time to make a purchase. Similarly, he relies on neither an interior designer nor a kitchen designer/consultant, handling those aspects of the operation himself.

Franchising

Notably, though, Martin gladly outsources one aspect of his business: Smallcakes' franchise infrastructure. Like so much of Smallcakes' success, this can be traced to the chain's early television exposure.

Around the same time Martin was starting Smallcakes, David Rutkauskas was grappling with a different challenge. As founder, president and CEO of Tulsa, Okla.-based Beautiful Brands International, Rutkauskas was already operating and franchising a number of restaurant concepts, which today include Camille's Sidewalk Café, My Camille's: Your Food Your Way, Rex's Chicken and the previously mentioned FreshBerry.

In the midst of a steep recession, when banks weren't lending to small businesses, Rutkauskas was finding growth difficult to achieve. Considering the regular calls and e-mails he would get from the owners of small concepts looking for advice on how to franchise, Rutkauskas realized he could establish an entirely new line of business: franchise development and consulting.

While franchise sales firms have been around for years, BBI's franchise consulting work takes the idea several steps further. In essence, restaurant concepts seeking to move beyond just a handful of corporate-owned units can outsource their franchising infrastructure to BBI. In exchange, BBI typically receives part of the franchise fee for each unit it helps establish or a cut of the revenues from those stores.

During the early days of this venture, Rutkauskas saw Martin's appearance on "Cupcake Wars." Impressed by Martin's passion and seeing potential in the concept,

Rutkauskas invited Martin to Tulsa to discuss a partnership. The two hit it off, and had a deal inked in just a few short weeks after their first meeting. It is through this partnership that Smallcakes has franchised all eight of its stand-alone units.

"It's our typical consulting deal," said Rutkauskas. "We're handling franchise development, we're handling real estate, we're overseeing construction — everything that goes on pre-opening. Once the franchisee opens their doors, Smallcakes and their teams handle everything from there on out."

According to Rutkauskas, one fact that makes Smallcakes so appealing from a potential franchisee's perspective is the low start-up and operational cost. With units measuring just 900 to 1,000 square feet, rent and construction costs are low. The cost of opening a new store is just $80,000 to $120,000 with the equipment package accounting for just $15,000 of that total.

While these numbers would be appealing in any economic environment, they have been particularly compelling over the past few years, says Rutkauskas. During the depths of the recession and even continuing into today, entrepreneurs and small businesses have struggled to get bank loans. "What we've started focusing on since the economy went sideways are brands that people can get into for a reasonable number, like Smallcakes," he says. "A mom and pop can put up $40,000 or $50,000, get a loan for $100,000, and then open a business and create jobs and stimulate the economy."

Rutkauskas, in fact, is among those who find the Smallcakes value proposition compelling. During the past two years, he has paired his yogurt concept FreshBerry with Smallcakes to create the approximately 15 co-branded units mentioned earlier. These units, which are co-owned by BBI and

Smallcakes, offer 16 flavors of self-serve frozen yogurt and about 10 different types of cupcakes baked onsite each day.

The low investment and small footprint needed to offer cupcakes, says Rutkauskas, makes Smallcakes ideal for co-branding and an easy way to grow top-line revenue. What's more, the pairing of cupcakes and yogurt is a natural fit: Patrons can combine the two, adding frozen yogurt to a cupcake and can even order a cupcake milkshake.

The co-branding partnership also helps distinguish both concepts. Partnering Smallcakes with FreshBerry has helped the cupcake chain get into new markets that it likely would not have entered for some time, Martin says, while pairing yogurt with cupcakes helps both concepts distinguish themselves in their crowded fields.

Whether and how long the cupcake segment remains a crowded one is an open question, though. While business is booming for Smallcakes, the cupcake moment may well pass, yielding to a newer, hotter concept. While Martin acknowledges this, he believes Smallcakes is well positioned to survive and thrive, no matter the status of the overall segment: the brand, with its media exposure, strong marketing, and great variety of offerings, will help the company carry the day.

"Cupcakes have always been around; they just haven't been that big in the market," Martin says. "Now everyone asks me how long it's going to last and what happens when it's over. I think the ones that will stick around are the brands. Cupcakes will always be around, you just have to do something to distinguish yourself. We're always coming up with new ways to keep it fresh."

Key Players

  • Owner: Jeff Martin
  • Franchising: David Rutkauskas, founder, president & CEO Beautiful Brands International

 Key Facts

  • Founded: 2008
  • Headquarters: Overland Park, Kan.
  • Menu Signatures: 15 to 20 cupcake styles baked daily
  • Number of Units: 10 stand-alone (8 franchised and 2 company-owned); approximately 15 co-branded with FreshBerry Frozen Yogurt Café
  • Current Locations: Stand-alone units in Florida, Georgia, Kansas, Missouri, North Carolina, and Oklahoma; co-branded unit locations include California, Florida, Georgia, North Carolina, South Dakota, and Venezuela.
  • Typical Unit Size: 900 to 1,000 square feet (400 to 450 square feet BOH)
  • Franchise Fees & Royalties: $25,000 franchise fee; 6 percent royalties
  • Unit Start-up Costs: $80,000 to $120,000, including $15,000 for foodservice equipment
  • Average Check: $14
  • Average Unit Sales: $60,000 to $80,000 per month
  • Key Expansion Markets: California, Florida, Georgia, Missouri, North Carolina, South Carolina
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