Hostess Brands – The Sweet Taste Of Success, The Bitter Bite Of Failure

It has been said that there are only two ways to learn from mistakes, you can learn from your own mistakes, or you can learn from the mistakes of others; and it is a lot more expensive to learn from your own mistakes…

Twinkies were once the go-to after school snack.

Most everyone is familiar with Hostess Cupcakes, Hostess Twinkies, Dolly Madison Cakes and (anyone over the age of 50, for certain!) Wonder Bread. The baking company which owned the Hostess brand, until March 2013, was Interstate Brands, when they were forced to sell the rights to these iconic products as the company dissolved into bankruptcy.

The entire snack industry generates $60 billion in revenue a year and it is dominated by the top 50 companies which control 90% of the market. The executives at Interstate were among the best. The business executives had ‘baked’ their business into a huge operation with 60 bakeries throughout the United States and accumulated $1.6 billion in assets. The executives at Interstate Brands were incredibly talented and smart. Their hard work and skill took them to the top of the snack mountain for baked snacks with annual sales over $3.5 billion for the company.

Their brands were well known, sales were strong. They clearly knew what they were doing…or so they thought! Yet, it was their failure to see one of the biggest changes in the food industry, in decades, which resulted in Interstate tumbling all the way down the mountain. These executives failed to see, failed to recognize, and failed to respond to the new consumer demand for healthier snack options.

From the Best in the Business to Bankruptcy

When the company filed for bankruptcy in 2004, it claimed in an announcement to the news media, that it had become a victim to changing consumer preferences, specifically, for low-carb snacks.

Newsweek found Interstate’s excuses hard to swallow, writing, “Truth be told, Interstate’s story is really one of lost opportunities. ‘Low-carb is the least of their problems. It’s like blaming the weather,’ says Robert S. Goldin, executive vice-president at food consultant Technomic in Chicago. Indeed, like the quaint nostalgia that its core brands evoke, Interstate had continued to inhabit an outdated world that consumers had moved out of.”

The article continued, “Overriding all this was Interstate’s seeming inability to keep its brands alive. ‘To not innovate is a death sentence, and nostalgia won’t carry you through this,’ says Rick Bozzelli, merchandising manager for McCaffrey’s Markets, a regional supermarket in Langhorne, Pa. Mired in its past glory, Interstate never really reinvented itself. It continued to flood the baked-goods aisle with its low-priced Wonder Bread even as consumers turned to fresh-baked supermarket or specialty breads.

As for Twinkies, Interstate’s other iconic offering, they’re now viewed as junk food—a sugary snack few adults would indulge in and one lacking in appeal to a generation of children who snack on Gogurt. ‘I look back on Dolly Madison and Twinkies fondly and romantically from my childhood, but a lot has changed since then, and the company had a difficult time keeping up with the times,’ says Wendell Perkins, chief investment officer at Johnson Asset Management (The firm owned Interstate stock in the past but had sold it prior to its recent troubles).” September 23, 2004, Newsweek

Healthy is Now the Trend

Healthier snacks now dominate the marketplace.

A marketing research company for the food industry also took note of the changing snack preferences, “Healthier fare is certainly not the only trend in packaged snack foods, but it is by far the most important and widespread one, driven in large part by a heavy national focus on children’s health. Although sales of packaged snack foods in the U.S. topped $61 billion in 2005, this is up only 6% over 2001 sales, since good returns from ‘healthy’ categories like yogurt and fresh fruit have been mostly offset by losses in ‘less healthy’ categories like candy and cookies. Whereas some marketers are well positioned to ride the health wave, others have been rushing to come up with nutritionally enhanced products, while also scrambling to show how even not-so-healthy snacks can still fit into a healthy diet. Health-related trends that continue to gain momentum include portion control, high fiber/whole grains, cutting unhealthy ingredients (trans fats, processed sugar, fat, etc.), and natural/organic, even as product portability and convenience remain a top priority across all categories as more Americans graze more frequently on-the-go. Because kids snack even more than adults do, it is critical that snack makers maintain a hold on this young demographic, and attracting consumers of all ages to healthier snacks without severely cannibalizing sales of more traditional, not-so-healthy ones will be the fine line that marketers will have to walk in the coming years.” July 2006, Marketreseach.com

Another research company, Report Buyer, published a market research report which found that “the majority (61%) of European and US consumers have sought to improve the healthiness of their snacking in 2007. After all, snacking, despite its historically bad reputation and negative health connotations, remains an important component of consumers’ daily eating and drinking behaviors. It is therefore crucial to understand what influences shoppers’ choices for this growing occasion. For daily snacking, healthy options have emerged as the leading choice to satisfy hunger between meals, while less healthy snacks are reserved for more indulgent treating occasions. More than a third (36%) of Europeans and Americans overall consume healthy snacks once a day or more.”

Why the Blindside?

What this shows is that the information needed by Interstate’s management to adapt its business model, before it hurdled into bankruptcy, was available from numerous outside sources. The executives, however, were negligent in taking action, because they were unable to see the warning signs that others could clearly see. How could these executives, who were smart enough to climb to top, miss the biggest shift in the food industry, in decades, the call to provide healthier options? The answer is quite simple, they lacked objectivity!

A business analysis is an inexpensive way to ensure that an owner is not so insulated from the world around him that he is missing a point of view which may be critical to his long-term success.

BOISE, ID: Grocery store shelves empty out as customers buy up Hostess Brand snacks such as Twinkies after Hostess announces it is filing bankruptcy and closing plants, on Friday Nov 16, 2012.  Photo credit/Copyright:   Annette Shaff via Shutterstock

On January 11th, 2012, six years later, Hostess filed for a second bankruptcy reorganization! Additionally, on November 16th, 2012, Hostess announced that it would not be able to emerge from bankruptcy and that it would be going out of business, entirely. The company sputtered out because it never reach out to seek an objective, third-party point of view.

On March 12th, 2013, it was announced that Hostess Brands agreed to sell, which was approved by the bankruptcy court, the rights to its Twinkies, Ding Dongs, HoHos, Sno Balls, and Dolly Madison Zingers to two investment firms with a shared history of corporate turnarounds—Apollo Global Management and Metropoulous & Company. The new owners were able to put the Hostess branded snack treats back onto store shelves on July 15th, 2013.

One of the most interesting things about the return of the Hostess brand to the marketplace, under its new owners, was a statement by its new President, Rick Saben, to the Associated Press that the company is also considering rolling out some “healthier options” such as 100-calorie snack packs, low-sugar snacks, gluten-free and low-sodium cakes to meet the growing consumer interest for healthier snack choices.

The new owners brought a fresh outlook to the snack company, which is what a business analysis, from an outside firm, provides. The new owners knew, in order for the brand to survive, that expanding its offerings to include healthier products would be necessary. It was not seeing and recognizing the importance of the changing consumer preferences for healthier snacks, by the previous management, which had spelled the doom of the company.

Having a business analysis performed is like buying an insurance policy on your judgment as a business owner. Would you consider having your home uninsured, because the risk of major damage from fire, or other hazard, is small? No, of course, you wouldn’t!

For what reason wouldn’t you want to have the security of a business analysis to make certain that your business operations are not vulnerable to a major loss or missing a potential growth opportunity? Hostess executives let their egos block them from seeking out a third-party objective point of view, and paid the ultimate price, failure. It’s why the smart business owner should protect himself from a similar mistake with a business analysis!