According to the urban legend (and a few zombie movies), Twinkies can be expected to last forever. But thanks to labor issues, longstanding financial difficulties, and changing consumer preferences, Twinkie manufacturer Hostess Brands Inc. might not be quite as indestructible.
The bakery company has shut three plants and laid off 627 workers following labor strikes. According to the Wall Street Journal, CEO Gregory Rayburn said on Monday that the company’s next step might be liquidation. Is Hostess, the venerable manufacturer of cakey sugary Twinkies, Suzy Q’s, and Ho Hos, doomed?
The strikes are being led by the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union. The union is protesting a labor agreement a bankruptcy judge upheld last month after 92% of members rejected it in September that would cut pay by 8% and make workers pay 20% more in health care costs.
In a statement, the union president took issue with the CEO’s assertion that the strikes were behind the closures of facilities in Cincinnati, Seattle and St. Louis, saying that Hostess had already planned to close several plants as part of its bankruptcy restructuring — the company’s second Chapter 11 filing in less than a decade.
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Do Twinkie fans need to start stockpiling? It’s impossible to say. What’s clear is that a worker strike isn’t the only headache for Hostess.
PrivCo, a company that researches privately-held firms, estimates that at the end of 2011, Hostess had $40.3 million in cash and $1.43 billion in liabilities, including $303 million in debt that came due this year. PrivCo CEO Sam Hamadeh calls these figures a “recipe for a disaster in the making.”
Hamadeh says the company’s “onerous union contracts and its massively unfunded pension obligations” are a big part of the problem. “As of January 2012, Hostess’ pension fund was approximately $2 billion underfunded,” he says.
Hostess is trying to shed some of these obligations via bankruptcy proceedings, but management is finding out that unionized rank-and-file workers aren’t on board with these concessions and want the company to uphold its collective bargaining agreements made in better times. The rising cost of ingredients like flour and sugar also put a squeeze on Hostess’s bottom line.
The company wasn’t always in such dire straits, of course. Founded in 1930 as the Interstate Bakeries Corporation, it expanded through the decades, and bought the manufacturer of Hostess snack cakes and Wonder Bread from then-owner Ralston Purina in 1995. It changed its name to Hostess Brands in 2009 after emerging from a 2004 bankruptcy with $130 million in private equity funding and $110 million in labor concessions.
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Perhaps not surprisingly, identifying itself with cakes wrapped in plastic didn’t go over so well in an Atkins-diet, gluten-free marketplace. “With respect to marketing, their overwhelming image is sugar and starch,” says MIT Sloan School of Management professor John Little.
“The baby boomers are desperately trying to lose weight to live longer. Their echo, Gen Y, is just as desperately trying to not to gain weight,” Little says. “Hostess needs some new or repositioned products to serve these markets.” Sales of Twinkies fell 2% last year from the previous year.
Hostess does own the more health-conscious Nature’s Pride bread line, but back in Januar,y when rumors of a forthcoming bankruptcy were swirling, an analyst quoted by the Wall Street Journal said that that too wasn’t selling well.
PrivCo estimates that Hostess Brands’ revenue dropped more than half a billion dollars over the past five years and is down to about $2.5 billion. “As Americans both cut back spending on baked goods, as well as began moving to healthier eating options, Hostess was hit harder than its peers as it failed to innovate to offer fresher, healthier baked goods,” Hamadeh says.
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The big question is whether these problems are baked in too deeply for the company to turn itself around.