Decoding the Hostess Demise; The ‘Twinkie Defense’ Rests

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Home / Decoding the Hostess Demise; The ‘Twinkie Defense’ Rests

Once upon a time, we were all young and naive. We’d race home from school, eager for that afternoon snack. Would it be an apple, a low-fat yogurt or a granola bar? Heck no. Rather, it would be something “fresh and wholesome”, like this:

Never mind that a Hostess Fried Pie had nearly 500 calories (nearly 25% of the recommended daily total calories) or that two Twinkies contributed 300. Disregard the fact that they were both extremely high in sugar, or that one pie carried over a third the recommended daily amount of fat. Ding Dongs were equally fattening. None of the treats had any significant amount of nutritional value, unless you count the fiber accidentally consumed if a portion of the wrapper stuck to the pie itself.

And yet, during those times, those were the types of snacks that Americans often preferred.

Hostess Twinkies remain one of the most well-known snack cakes in the U.S. Photo credit: Mamiejeanjean

How times have changed. Alas, Hostess did not, and that failure to adapt is at the center of last Friday’s news that the iconic 82-year old bakery products-maker was going out of business, laying off its entire 18,500 workforce and selling its brand names to the highest bidders.

Changing Consumer Tastes and the Growing Irrelevancy of the Hostess Brand

As Americans have become more health-conscious, industries have adapted in order to survive. Fast-food restaurants such as McDonalds have begun to reduce the quantity of french fries in its kids’ meals, as well as to include slices of apples or portions of carrots and raisins. For adults, the number of salads offered has expanded over the years, and McDonalds now offers a yogurt parfait and low-calorie chicken snack wrap. This trend has accelerated over the past two decades, not only in the fast food industry, but others as well. The fitness industry has grown steadily for more than two decades and now tops $25 billion in revenues, employing over a half-million people.

Snack alternatives have similarly changed in concert with these long-term trends. Needless to say, a niche for less-than-healthy alternatives still exists, but the laws of supply and demand are unrelenting: if demand remains relatively constant relative to supply, and if an ever-increasing percentage is for healthier choices, then demand for less-healthy alternatives must fall. Those were the macroeconomics facing Hostess, which was being edged out by not only healthier options, but expensive “premium” treats as well as low-cost alternatives. Hostess was caught in the middle, banking on a brand name that no longer carried the cultural impact it once did. Failing to initiate a full reboot of its product lines, the company was forced to decrease its gross margin, leading to losses and, ultimately, its 2004 bankruptcy.

Hostess’ 2004 Bankruptcy and Market Share Strategy

Most companies do not survive a Chapter 11 bankruptcy, as they are unable to present a plan that will receive the requisite approvals of creditors and the court. Those that do emerge are almost invariably leaner and meaner, with much of their debt either restructured or forgiven. Hostess bucked the odds in both respects, coming out of its Chapter 11 bankruptcy laden with even more debt due to money fronted by a private equity firm in an “unusual circumstance that the company justified on expectations of ‘growing’ into its capital structure,” according to David Kaplan at Fortune.

Clearly, the expectations were that the company would be able to recapture enough market share to return to profitability. It did not introduce any significant new products, nor did it attempt to repackage existing products as healthier in any sense, other than to replace the word “fried” with “fruit” in their pies. Clearly, at the center of the new marketing strategy was the iconic brand name itself. For eight decades, it was one of the most recognizable in all of corporate America.

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