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Are Cupcakes Still a Sweet Spot for Business?

By Katie Little, Special to CNBC

NEW YORK ( CNBC) -A handful of big-name players within the cupcake industry are betting that America's cupcake obsession will continue as they embark upon ambitious expansion plans.

Recent data backs up this confectionery gamble -- but with a caveat. Growth within the cake decoration stores industry is expected to slow to 3.7 percent annually over the next five years, according to an October 2011 report from research firm IBISWorld. This forecast represents a dip from the 4.9 percent growth that the industry was predicted to have enjoyed during the past five years.

"The market is becoming more and more saturated as cupcake stores open, but ones like Crumbs (CRMB) or Sprinkles that have a more recognizable brand can succeed," said Mary Nanfelt, the report's author.

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Several high-profile cupcake brands are in the midst of expansions from Boston to Beirut.

Magnolia Bakery -- one of the most recognizable cupcake shops, made famous by the hit TV show "Sex and the City" -- aims to add 200 stores within the next five years, said Bobbie Lloyd, the company's operating partner and president.

One franchise location opened in February 2010 in Dubai while another is currently under construction in Doha, Qatar -- thousands of miles from the company's original New York City location.

"We're working on agreements in other places such as Russia, Japan, Morocco, Turkey and China, so that's the world-domination factor, which is always our internal cupcake joke," Lloyd said.

The cupcake's reputation as a small luxury at an affordable price has fueled growth within the bakery industry.

"I think that when times are tough, people can still afford $2.75 for a cupcake," said Katherine Kallinis, one half of the sister duo who founded Georgetown Cupcake in 2008. "It's a luxury that everyone can afford -- it's not going to break the bank."

Kallinis and her sister Sophie LaMontagne are the stars of TLC's "DC Cupcakes," which is currently in its third season. In February, they opened the company's third location, in New York City's SoHo neighborhood. Another location is set to open in Boston in May.

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