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How Hostess Has Adapted Even the Twinkie to a Changing World

Companies / Corporate News Jul 13, 2016 - 11:49 AM GMT

By: Rodney_Johnson

Companies In 2004, Hostess Brands declared bankruptcy. At the time, I wrote that the maker of Twinkies, Ho Hos, and Snoballs was suffering because of demographic trends.

As millennials aged past elementary and middle school, they quit munching on such snacks. With fewer kids in the younger age cohorts, slower Twinkie sales seemed inevitable

But that wasn’t the end of the not-so-good-for-you sponge cake.

The company quickly exited bankruptcy back then, only to find itself on the financial rocks again in 2011.

While the second go-round wasn’t as quick as the first, Twinkies reappeared on store shelves by 2013. Part of the reason for the snack’s troubles are demographic, but its return is almost completely due to the painful process of deflation.

In 2004, Hostess might have been bankrupt, but it wasn’t about to end operations. Instead, the company reorganized. It renegotiated contracts and demanded concessions from its unions, which included both bakery workers and delivery drivers.

The moves put Hostess back on track, at least for a little while, but the financial crisis and healthier eating habits proved insurmountable.

The company filed for bankruptcy again in 2012, after sales fell 20% in 2011. But this time, management did things a little differently. Leading up to the bankruptcy they stopped contributing to the workers’ pension fund while granting themselves pay raises and bonuses.

All the moves were legal, even if distasteful. When it came time to negotiate the reorganization, union members were irate, particularly those of the Bakery, Confectionary, Tobacco, and Grain Millers Union.

They had kept their jobs in 2004, but only after agreeing to pay cuts and bigger pension contributions. In their eyes, management had squeezed the lifeblood out of the company and the workers, and now wanted more.

Negotiations dragged on for months. The Teamsters, representing the delivery drivers, agreed to a new contract, but the baker workers refused the company’s overtures as too stingy.

The two sides never found common ground.

The company thought the employees would sacrifice again to keep their jobs, while the workers thought the company would give in to keep the bakeries humming.

In the end, the bankruptcy judge ordered the liquidation of the company to pay creditors.

The Twinkie died in 2012, taking with it more than 18,000 jobs as Hostess shut down 36 bakeries, 242 depots, 216 retail stores, and 311 other facilities. This happened across the country, from New Jersey to Alaska.

Dean Metropoulos, an American billionaire who at one time owned Pabst Blue Ribbon beer, bought some, but not all, of the Hostess assets out of bankruptcy. He intended to revive the iconic snack, but without the baggage of the previous company.

By mid-2013, Americans could get their fix of Twinkies and other Hostess snacks, but the displaced workers weren’t back at their jobs.

Instead, Metropoulos took the recipes to new, automated bakeries and delivered them through non-unionized means. The results are undeniable. Hostess is on the verge of going public again as a healthy, growing company. One company plant employs 500 people and produces more than 1 million Twinkies a day, representing 80% of total output.

Under the old regime, this took 14 plants and 9,000 employees. The company is on the verge of automating the process for cupcakes as well, which will also enhance profitability… and employ fewer people.

Hostess was forced to deal with demographic trends, financial realities, and changing consumer tastes. Management tried to do this by making changes at the margin, but basically keeping the old system of manufacturing and delivery intact.

It wasn’t possible.

The business model was based on sales and pricing from years past. To compete in today’s market required using innovative techniques and cheaper resources, which are deflationary (lower cost) by nature. The snacks couldn’t survive based on the system developed in the 1930s and ’40s, but they are thriving in their new environment.

The biggest group of losers in this story is workers – the bakers, drivers, and others who lost their jobs in 2012 or took significant pay reductions. This is the same story we’ve told many times, including companies Harley Davidson and Mott’s Juice.

Companies have to adapt to the changing business environment. When deflationary forces are at work, like now, costs must come down or companies can’t compete. With labor comprising the largest expense for many companies, workers are a natural target.

This goes a long way in explaining stagnant wages and the recent “gig economy” phenomenon, and doesn’t paint a bright future for employment over the next several years.

It’s enough to make you want to eat a Twinkie.


Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

Copyright © 2016 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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