December 4, 2012

Hostess' failure simmered for years

The company's closure follows a decade of financial trouble and competitive complacency.

By Jessica Hall jhall@pressherald.com
Staff Writer

(Continued from page 1)

Today's poll: Hostess

Who do you think is more at fault for the Hostess bankruptcy, the union or the company’s management?

Management

Union

View Results

click image to enlarge

Striking workers placed a faux coffin lid outside the Hostess bakery in Biddeford after the company announced last month that it would liquidate. In hindsight, an analyst says, both the union and company would have been better off had they tried harder to reach a deal.

2012 Staff FIle Photo/Gregory Rec

STILL USING TWINKIE THE KID

Hostess' marketing was also outdated. Its best-known advertising campaign was in the 1950s when it sponsored television show "Howdy Doody." Its perennial mascot was a bandana-and-cowboy-hat-wearing snackcake called Twinkie the Kid, who was born in 1947 and hadn't changed since.

Still, the Twinkie retained an iconic role in the American lexicon: In 1979, the term the "Twinkie defense" was coined during the trial of Dan White, who binged on junk food -- which he claimed diminished his mental capabilities -- before killing San Francisco Mayor George Mosconi and supervisor Harvey Milk in their City Hall offices.

So what went wrong for Hostess?

Hostess was carrying about $450 million in debt when it filed for its first bankruptcy in 2004. The debt was owned by Silver Point, Monarch and about 20 other lenders.

Throughout its five-year restructuring, Hostess managed to cut labor costs and get an infusion of $130 million from private equity firm Ripplewood Holdings, as well as a secured loan of about $360 million from its lenders.

Lenders also agreed to forgive half of Hostess' $450 million debt and exchange the other half for payment-in-kind loans with high interest rates.

OFFER TO BUY IS REJECTED

At one point in its reorganization, Hostess had the chance to be acquired in a $580 million bid from a group that included rival Bimbo Bakeries USA, a unit of Grupo Bimbo of Mexico, and supermarket giant Ron Burkle. The offer was rejected in 2007.

The company emerged from bankrutpcy in 2009, changed its name from Interstate Bakeries Corp. to Hostess Brands and received an infusion of $490 million in funds. But its debt load had actually risen to $670 million -- higher than when it filed for bankruptcy.

The company also emerged from bankruptcy during the recession, as commodity prices for ingredients such as wheat, sugar and flavorings were rising and consumers were becoming more price conscious and less brand-loyal, analysts said.

"The industry has been challenged by rising commodity costs. There's a delicate balance in managing the impact of cost pressures without passing on those prices and causing negative sales volumes," said Morningstar equity analyst Erin Lash.

Hostess' sales shrank at a time when its rivals were getting stronger and scooping up other assets. In 2011, Grupo Bimbo bought Sara Lee, while Flowers Foods bought Tasty Baking Co.

SNACK SECTOR WAS GROWING

Hostess still had an opportunity to recapture a segment of the market: While the bread industry was stagnant, the snack sector was becoming the fastest growing segment of the food industry. But Hostess failed to capitalize on that demand, analysts said.

"Among the bakeries, price rather than brand drove customer purchase choices. In the snack area -- which is the fastest growing segment of the food industry -- convenience and consumers' constrained budgets helped drive sales. Consumers are financially constrained so they're snacking more as a treat than going out to lunch," Lash said.

"There's been an increased emphasis on product innovation -- reduced calorie packs, variation of products. Product innovation that resonates with the consumers is what drives incremental category growth. For a lot of companies, price is just one of the levers they have -- they adjusted packaging sizes, used different ingredients, introducing new varieties."

Hostess, however, took none of those steps.

MORE CASH, NO RESULTS

As the company burned through its cash, Ripplewood put up $40 million in exchange for a bigger ownership stake and a bigger piece of its debt. Silver Point, Monarch and other lenders coughed up another $30 million in August 2011 to try to avert another bankruptcy filing.

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Today's poll: Hostess

Who do you think is more at fault for the Hostess bankruptcy, the union or the company’s management?

Management

Union

View Results