Why Are There Cronut Scalpers?

A homemade cronut. (Photo: Arnold Gatilao)

Between the din of the cicadas appearing up and down the East Coast and the media frenzy over the government’s mass surveillance programs, you might not have heard much about New Yorkers’ real obsession at the moment: the “cronut.” A cross between a croissant and a donut, the cronut is the invention of baker Dominique Ansel, who operates out of a shop in SoHo. Cronuts are so popular that lines form at 6 a.m. — 2 hours before the shop opens — and Ansel runs out within minutes. Thanks to the wonders of the Internet (and Craigslist) there is even a cronut black market, with unauthorized cronut scalpers charging up to $40 apiece for home delivery (a mark up of 700%). And of course there are cronut knockoffs appearing all over the world. Ansel has even trademarked the name “cronut.”

Which brings up two questions:

1.  Why did it take so long for someone to invent a croissant-donut mash-up?
2. And, perhaps more importantly for those who want to eat them, why do we see a cronut shortage? The genius of capitalism is that it matches supply with demand – and if there’s a lot of demand for cronuts, supply should quickly expand. Especially here. Cronuts aren’t especially hard to make, don’t require expensive equipment, and are currently unregulated (although give Mayor Bloomberg time. )

Let’s take the second question, on scarcity. As the New York Times recently described for concert tickets, the existence of scalpers is an economic puzzle. For cronuts, it is even more so, since while it is more or less impossible to knock off Tom Petty, it is possible—indeed, it is virtually inevitable—that lots of cronut knockoffs are coming. So one logical strategy for Ansel is to simply ramp up supply, or prices, or both, and capture the surplus that currently the cronut-scalpers on Craigslist are taking, at least until the knockoffs arrive. But as he told New York Magazine, he’s not doing that:

I’ve said it once and will say it again: This bakery is not a cronut store. The flagship is very precious to me. You know, my name is on the door, and I don’t want to see it scaled out and lose its charm. There’s an integrity behind businesses that don’t do that, which I believe in. Will we expand? Yes, sure. But in a different and more creative way than just punching out the same model. I believe businesses should have heart behind it. Customers can tell the difference. And as a chef, you want to be able to look at your fellow chefs and stand tall, not feeling like you’ve sold out.

So Ansel is not scaling up or selling out—two common ways to deal with excess demand. The alternative strategy Ansel has pursued is to try to lock up the cronut name, and thereby force other croissant-donut hybrid purveyors to come up with some other name to signify their goodies. In doing so, he can play a long game (assuming that consumers’ ardor for cronuts doesn’t cool—remember Krispy Kreme?) and in the process, raise consumers’ cost of discovering cronut substitutes, build market share and gain fame and glory as the original and presumably best mashup of two great pastries.

The trademark strategy can be effective, but it’s not certain to succeed. Why? Because for a trademark to be valid, it must have “secondary meaning” – that is, it must signal to consumers the source of a particular product or service. When consumers see a can or bottle with Coca-Cola on it, they know that the contents come from a particular source. Trademarks, in short, are information shortcuts that reduce search costs for consumers.

The law considers some types of trademarks to automatically possess the secondary meaning required to in fact reduce search costs.  “Fanciful” marks, like “Exxon”, are considered to automatically point consumers to a particular producer. Why? Because the word is made up – it has no meaning in English other than as a mark for a particular producer’s product – and so is very likely understood by consumers as a term indicating the product’s source.

“Cronut,” on the other hand, is probably what the law calls a “descriptive” mark. “Cronut” describes what a cronut is made of—part croissant, part donut.  And so consumers often simply understand it as explaining what the product is.

It’s possible that “cronut” might be judged to be a “suggestive” mark – i.e., one that does not merely describe the product, but instead requires the consumer to take an imaginative step to associate the mark with the product’s characteristics. The line between suggestive and merely descriptive marks is, like a lot of things in trademark law, awfully blurry. That said, if the mark is deemed suggestive, it is much easier to assert secondary meaning.

We think “cronut” is more likely descriptive. And if that’s right, then to enforce it against competitors Ansel will have to prove that consumers associate cronuts with a particular bakery. That may be the case for a few super-foodies in New York City. But once cronut knockoffs really get going – especially outside New York – proving that everyone thinks they come from or are authorized by Ansel’s bakery will be an increasingly dubious proposition.  People who see cronuts on every corner don’t associate them with a single producer. They become, like the donuts or croissants from which they arise, generic.

Which, on balance, seems like good news. Even without an enforceable trademark, it seems likely to us that Ansel will continue to reap the rewards of his invention – not least because as long as the cronut remains popular, foodies will continue to flock to his Soho bakery to taste the real thing and he will continue to get unbelievable amounts of free press. And for the rest of us who prefer our cronuts cheaper (or closer), the knockoffs will help keep both our bodies and our wallets fat.