Hostess’ Twinkie Defense Is a Failure

by | Nov 18, 2012 | Current Affairs, Defend & Extend, Food and Drink, In the Whirlpool, Leadership

Hostess Brands filed for liquidation this week.  Management blamed its workforce for the failure.  That is straightforward scapegoating.

In 1978 Dan White killed San Francisco's mayor George Moscone and city supervisor Harvey Milk.  The press labeled his defense the "Twinkie Defense" because he claimed eating sugary junk food – like Twinkies – caused diminished capacity.  Amazingly the jury bought it, and convicted him of manslaughter instead of murder saying he really wasn't responsible for his own actions.  An outraged city rioted.

Nobody is rioting, but management's claim that unions caused Hostess failure is just as outrageous. 

Founded in 1930 as Interstate Bakeries Co. (IBC) the company did fine for years. But changing consumer tastes, including nutrition desires, changed how much Wonder Bread, Twinkies, HoHos and Honey Buns people would buy — and most especially affected the price – which was wholly unable to keep up with inflation. This trend was clear in the early 1980s, as prices were stagnant and margins kept declining due to higher costs for grain and petroleum to fuel the country's largest truck fleet delivering daily baked goods to grocers.

IBC kept focusing on operating improvements and better fleet optimization to control rising costs, but the company was unwilling to do anything about the product line.  To keep funding lower margins the company added debt, piling on $450M by 2004 when forced to file bankruptcy due to its inability to pay bills.  For 5 years financial engineers from consultancies and investment banks worked to find a way out of bankruptcy, and settled on adding even MORE debt, so that – perversely – in 2009 the renamed Hostess had $670M of debt – at least 2/3 the total asset value!

Since then, still trying to sell the same products, margins continued declining.  Hostess lost a combined $250M over the last 3 years. 

The obvious problem is leadership kept trying to sell the same products, using roughly the same business model, long, long, long after the products had become irrelevant.  "Demand was never an issue" a company spokesman said.  Yes, people bought Twinkies but NOT at a price which would cover costs (including debt service) and return a profit. 

In a last, desperate effort to keep the outdated model alive management decided the answer was another bankruptcy filing, and to take draconian cuts to wages and benefits.  This is tanatamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price – or to petroleum companies they expect to buy gasoline for $2.25/gallon.  Labor, like other suppliers, has a "market rate."  That management was unable to run a company which could pay the market rate for its labor is not the fault of the union.

By constantly trying to defend and extend its old business, leadership at Hostess killed the company.  But not realizing changing trends in foods made their products irrelevant – if not obsolete – and not changing Hostess leaders allowed margins to disintegrate.  Rather than developing new products which would be more marketable, priced for higher margin and provide growth that covered all costs Hostess leadership kept trying to financial engineer a solution to make their horse and buggy competitive with automobiles. 

And when they failed, management decided to scapegoat someone else.  Maybe eating too many Twinkies made the do it.  It's a Wonder the Ding Dongs running the company kept this Honey Bun alive by convincing HoHos to loan it money!  Blaming the unions is simply an inability of management to take responsibility for a complete failure to understand the marketplace, trends and the absolute requirement for new products.

We see this Twinkie Defense of businesses everywhere.  Sears has 23 consecutive quarters of declining same-store sales – but leadership blames everyone but themselves for not recognizing the shifting retail market and adjusting effectively. McDonald's returns to declining sales – a situation they were in 9 years ago – as the long-term trend to healthier eating in more stylish locations progresses; but the blame is not on management for missing the trend while constantly working to defend and extend the old business with actions like taking a slice of cheese off the 99cent burger.  Tribune completey misses the shift to on-line news as it tries to defend & extend its print business, but leadership, before and afater Mr. Zell invested, refuses to say they simply missed the trend and let competitors make Tribune obsolete and unable to cover costs. 

Businesses can adapt to trends.  It is possible to stop the never-ending chase for lower costs and better efficiency and instead invest in new products that meet emerging needs at higher margins.  Like the famous turnarounds at IBM and Apple, it is possible for leadership to change the company. 

But for too many leadership teams, it's a lot easier to blame it on the Twinkies.  Unfortunately, when that happens everyone loses.

 

Why GM won’t survive very long

by | Apr 28, 2009 | Defend & Extend, In the Whirlpool, Innovation, Leadership

"Chrysler Avoids Bankruptcy as GM steps toward it" is the Marketwatch.com headline.  According to the article, Chrysler has a deal to manage its debt while Ford has never been as close to the edge as its two brethren.  But GM is trying to get bondholders to take a 60% value reduction AND exchange the bond value for equity value – which of course has no assurance and could easily go to zero.  The bondholders are squawking, and it's unclear they will agree.  Which would plunge GM into bankruptcy.  Are the bondholders just greedy?  Or do they see the chance of getting some of their money back better via liquidation?

Ford has some of the most popular and fuel efficient vehicles in the world.  They just aren't sold in the USA.  But they've long had high share in Europe, where Ford has built smaller cars with both diesel and gasoline engines that have met market needs.  Now Ford is preparing to build and sell those cars in the USA, which would move them a lot closer to recent market shifts than the worn out Lincoln line and the renamed 500 (rebadged as Taurus under the guise of the name making all the difference.)  These European cars offer an opportunity for Ford to Disrupt the U.S. market and regain a positive footing.

Meanwhile, Chrysler has some of the most innovative cars on the market.  Its 300, Charger and Challenger cars use technology that allows V8 engines to shut off 4 when not needed – allowing them to achieve over 30 MPG in a "large" and "performance" format.  Further, for those seeking safety and control, the 300 and selected other models are available in all wheel drive, which has been proven to be the #1 safety enhancer possible.  And of great value in northern climates where foul weather (rain and especially snow or ice) makes driving treacherous.  All included in dramatic styling that appeals to American consumer tastes.

But GM?  "GM to focus on four keeper brands" is the MediaPost.com headline.  Most GM innovation is concentrated in Pontiac, Hummer, Saturn and Saab.  The first of these is to be closed down for sure, and the latter 3 either sold or closed.  As the CEO says "the company will focus on four brands it defines as core: Chevrolet, Buick, Cadillac and GMC." Anytime the CEO of a failing company says he plans to save the place by "focusing on the core" and thereby cutting back to some aged part of the company RUN, RUN, RUN.  The past is the past, and you NEVER regain it.  Making these brands exciting is about as likely as making Holiday Inn a high-end hotel chain.

Think about it.  Remember Izod with those alligators on the breast plate?  Would you consider buying those shirts in Macy's?  Or how about resurrecting Howard Johnson's as the place to stay and eat while traveling?  Or shopping at KMart?  Or taking instant photos on a Polaroid?  When the market moves on, it's moved on.  No business can recapture past profit levels by "focusing" on old brands and products that were once great.  The clock never runs backward. T he market has shifted, and companies have to shift with it – not try to pretend "focusing on the core" will create profits simply because they are dedicated and focused.

It's Ford's offshore innovation that may save the company.  It's Chrysler's engine, drive train and styling innovations that may save it.  But GM is getting rid of anything that looks like innovation – and anything that might look like a Disruption or White Space.  It has no hope of ever regaining market strength.  It's plan is faulty, and won't work.  Even if bondholders accept the swap of debt for equity, in short order GM sales will continue declining (as will profits), and there's no way bondholders can sell all that equity in order to recover their invested value in the bonds.