Friday, November 16, 2012

Ding dong, Hostess is dead

Perhaps the big news of the day is that Hostess Brands is closing its doors after 82 years. Hostess has been attempting a reorganization since its January filing for Chapter 11 bankruptcy, but after a weeklong union strike Hostess said Friday it asked for court permission to close its doors and will lay off most of its 18,500 workers.

The TV news was filed with consumers rushing to buy up what's left of Twinkies and Ding Dongs, some of them hoping to make a quick buck on eBay.

My teenager was sorry to see Twinkies disappear and argued that we should stock up on the sponge cake — because they would store well at least until I'm a grandfather. (Wikipedia says this is an urban legend that may be attributed to a brief Twinkie cameo in the movie WALL-E although the Clinton White House put one in a 100 year time capsule.)

But even the consumers interviewed on TV realize that the brands will be sold to another company. Bloomberg identified at least two possible bidders, Flower Foods and the private equity firm than owns Pabst Brewing.

What went wrong? An Aug. 13 story in Fortune magazine said there’s enough blame to go around, with a mismanaged company, falling demand and high debt since an earlier 2004 bankruptcy filing

But in truth there are no black hats or white knights in this tale. It's about shades of gray, where obstinacy, miscalculation, and lousy luck connived to create corporate catastrophe. Almost none of the parties involved would speak on the record. Still, it's clear from court documents and background interviews with a range of sources that practically nobody involved can shoot straight: The Teamsters remain stuck in a time warp, unwilling to sufficiently adapt in a competitive marketplace. The PE[private equity] firm failed to turn Hostess around after taking it over. The hedges can't see beyond their internal rates of return. Et cetera, et cetera, et cetera.

The critical issue in the bankruptcy is legacy pensions. Hostess has roughly $2 billion in unfunded pension liabilities to its various unions' workers -- the Teamsters but also the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (which has largely chosen not to contest what Hostess wants to do -- that is, to get out of much of that obligation). If the bankruptcy court lets Hostess off the pension hook -- which often happens in these cases -- it only moves the struggle outside the courthouse, and the ante goes up. For the Teamsters can then call a strike -- which its Hostess employees have already ratified by a 9-to-1 margin.
Hostess settled in September with the Teamsters but not with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, who called the fatal strike. The NY Times reported that union decided to play hardball:
Frank Hurt, the union’s president, seemed to lose patience with Hostess’s management, upset that it was in bankruptcy for the second time despite $100 million in labor concessions. He saw little promise that management would turn things around.

“Our members decided they were not going to take any more abuse from a company they have given so much to for so many years,” said Mr. Hurt. “They decided that they were not going to agree to another round of outrageous wage and benefit cuts and give up their pension only to see yet another management team fail and Wall Street vulture capitalists and ‘restructuring specialists’ walk away with untold millions of dollars.”

About a month ago, [CEO Greg] Rayburn said, the bakers union stopped returning the company’s phone calls altogether.
The union workers are gambling they’ll get their jobs back at the same factories under a new owner, but instead the failure looks like the classic lose-lose proposition. It’s clear that they won’t be getting defined benefit pensions or the same salary levels under the new owners, and it’s hard to see how all 18,500 will get their jobs from a new owner seeking to buy only the most profitable assets and to dramatically cut costs.

I think there’s more than just the pressure on high-wage, semi-skilled labor and the public health war on excess sugar. Society has moved to (as Geoff Moore put it) more fractalization of consumer demand, with increasingly specialized products reaching a broad range of tastes. A teenager who might have eaten a Twinkie every day now eats ones once or twice a week, with pretzels, a Larabar or Trader Joe’s fruit wrap the other days. Meanwhile, the Hostess donuts face increased competition from branded donuts, generic store donuts, chain donut stores and a proliferation of bagels everywhere.

Fame is not fortune — in part because the brand is the butt of nonstop jokes (including a tongue-in-cheek TV tribute by longterm union supporter and junk food addict Bob Beckel.) In some ways, the Twinkie (and other aspects of the) brand has become like “spam” — high brand recognition but not high brand equity. Oldtimers even remember the infamous “twinkie defense”, in which Dan White got off with a five year prison term after killing two people (vaulting Diane Feinstein to fame).

So what is the brand worth? Given the company lost $341m on sales of $2.5b (for its last reported fiscal year) with accumulated debts of $800+m, it’s hard to see how the remaining brands will go for even $200m, and more likely much less. By comparison, Zynga is 7 years old, with its main line of business in trouble, lost $404m on sales of $1.1b last year — and still has a $1.7b market cap. (It also has no unions and a 71% gross margin, suggesting a potential upside if it can ever regain scale).

Even when they went into bankruptcy, troubled airlines had a reason for existence, marketable assets, market share and (thanks to frequent flyer programs) switching costs. Hostess has little to recommend it, other than nostalgia (which failed to save Pan Am, TWA, Mercury, Pontiac or Oldsmobile, among others).

Is it worth saving? Two CSU Fullerton professors offer their guidelines as to when brands are worth saving:
While we feel that most brands can be revived, some brands may just not be worth the effort. This is particularly true for brands that suffer from lack of relevant differentiation, low awareness, and a negative image. In such a case, it may be better to kill the brand, than to invest in it.

1 comment:

Kenneth M. Kambara said...

$200M seems low, but the longer product is off the shelves and plants are idle, the worse things get. Despite the talk of gloom and doom, yes, the plants are outdates and the liabilities are massive, I surmise there's value there that hinges on the channel. It's really hard to say without seeing some real numbers, so so much of what's being discussed is rampant speculation.