Y&H reader, Sean Hackbarth, obviously doesn’t get much sleep, perhaps because he stays up thinking about the profit margins of gourmet cupcake shops.

Hackbarth wrote to Y&H at 12:15 this morning to throw cold water on the theory that these cupcakeries are living on small margins, as implied or downright postulated by a recent New York Times article and local pastry chef David Guas.

Wrote Hackbarth:

I did a quick calculation of the profit margin of the Lovely Confections Bakery cupcake. It comes to an 18.3% profit margin. That’s a higher margin* than the railroad industry, the cigarette industry, and gas utilities. That’s almost as good a profit margin at the drug manufacturers. And it’s way higher than the 8.3% of the restaurants industry.

I’m not saying a bakery isn’t a tough business, but there are lots of businesses that would kill for 18% profit margins.

*http://biz.yahoo.com/p/sum_qpmd.html

Y&H was impressed with Hackbarth’s initiative and his unwillingness to accept liberal blog fodder at face value (maybe because he’s conservative and works for a Republican Senator?). I wrote him back to ask how he calculated the percentage. He responded:

I did a gross margin calculation:

Gross Margin Percentage = (Revenue-Cost of Sales)/Revenue

$0.55/$3.00 * 100 = 18.3%

http://en.wikipedia.org/wiki/Gross_margin

Now, some volume will need to be involved. If the bakery only sells 5 $3 cupcakes, it won’t cover costs. Some minimum needs to be sold. That’s where the demand for $3 cupcakes comes in. But as Starbucks has shown, Americans are willing to pay for what many consider to be a generic product.

Retailers survive on mid- to low-single digit margins by selling mass quantities and making it up in volume.