Essay: The Hostess brand

The Hostess brand origins date back to the mid-19th Century (“Continental Baking Co.,” 2018), however, it was in 1919 when the Hostess CupCake was first introduced that the brand began to gain public recognition (“Hostess Snack Cakes,” 2018). The CupCake and the Hostess brand name were the creations of Taggart Bakeries. Through series of mergers and acquisitions and ultimately, a combination of Interstate Bakeries Corporation (IBC) and Continental Baking Company, the Hostess brand as it is known today began to take shape. After two bankruptcy proceedings in less than a decade, the company was ripe for a private equity takeover. In 2013, a venture between Apollo Global Management and C. Dean Metropoulos and Company acquired the snack cake business during the liquidation sale. The new Hostess Brands resumed production of Hostess snack cakes in June 2013 (Jargon, 2013). Since the 2013 reintroduction of Hostess Brand cakes, the company has continued to develop and introduce new Hostess branded products in addition to the classic line-up of products (“Hostess Brands, Inc.,” 2018). To understand how Hostess, a successful, widely-recognized brand, could reach the point of filing for bankruptcy twice in less than 10 years, only to be successfully relaunched less than one year later; it is necessary to look at the corporate culture, manufacturing, and distribution of both the past and present Hostess companies.
One of Hostess Brands’ most complex and damaging aspects during its many mergers and leading up to the Apollo-Metropoulos buyout was its company structure and culture. The company experienced an immense number of mergers and acquisitions, each time adding on new products, new management, and an entirely new set of employees to configure into an existing company structure. The results of this were that ultimately over 372 distinct contracts with employee groups existed under the Hostess Brands umbrella, a large facation of which were through labor unions, each carrying their own set of demands and expectations, despite changes in organization or leadership (Worstall, 2016).
Having all of these distinct subsets of employees made cohesion and mission-driven collaboration amongst the merging brands difficult. In addition to those difficulties, there was a palpable fear from labor union employees of the development of new products or improvement of snack formulation that could increase shelf life. Management was eager to capitalize on these profit-generating improvements, which could effectively reduce working hours for employees and restocking trips.
By their second bankruptcy filing, in 2012, Hostess Brands was in the midst of a complex labor union strike. This strike was the direct result of the building tensions between dissatisfied and mismanaged labor union employees and a management team who was unable to unite their divided workforce. Management had ceased paying its unionized employees benefits the previous August due to overwhelming debt obligations on those benefits to its various inherited union contracts, resulting in bankruptcy filing. Ultimately, approximately 8,000 jobs were lost and dissatisfied employees pointed to an under-qualified management team for their troubles (Corkery and Protess, 2016).
By the time the snack cake segment was acquired by the Apollo Group and C. Dean Metropoulos in 2014, there was no question that the company structure would need significant overhaul for future success. The unionized structure of the previous Hostess Brands organization was dissolved during the large job loss of 2012, and a new, union-free labor force emerged that was meant to cut costs for management as well as produce a more limited product array far more efficiently.
Another focus of Hostess’s new management was to improve the work environment and culture of the company and individual factories. The old factories of Hostess were dated production facilities, with dark, stained walls and mismatched furniture, whereas the new facilities are clean and light with high quality production lines that showcase the company’s new efficiencies. Instead of 14 factories and over 9,000 employees (for the snack cake segment alone), three factories and approximately 1,500 employees operating new snack lines, and doing so at much higher production rates. The new factories were modernized through innovative technological improvements that past management had not had the funds to implement. The working conditions of the employees were also brought to the forefront of management’s concerns, improving everything from factory airflow, to uniforms and more comfortable shoes. As Metropoulos noted, “You must improve employee conditions, fix the cracks on the floor and those types of things,” says Metropoulos. “It affects the pride, energy and culture of the plant, and that translates into everything” (Bertoni, 2015). These improvements to the working environment and restructuring of the labor force played crucial roles in the present success of Hostess Brands, that will hopefully keep the coveted snack foods on shelves for another century.
IBC operations were divided into three geographical divisions that ran independently of each other.  (Mohan, 1999) Each division, Eastern, Central, and Western, all had their own manufacturing, accounting, sales, and distribution teams and could make decisions independently of what another division of the company was doing. This was necessary and successful in some ways; selling baked goods at the time required a much faster turnover since products had a shorter shelf life, so having more localized management allowed problems to be addressed faster. Having three divisions addressed a lot of issues other baking companies had at the time, but made IBC inefficient and redundant.
Baked goods were shipped from the three factories to 1,200 distribution centers, where salesmen who delivered their own products would distribute the products to food outlets and stores. Unsold product was picked up and sent to IBC-operated thrift stores where it was sold at a discount for cash. This represented about 11% of total income.
IBC had a much greater variety of products than just those sold under the Hostess name and had products in 90% of geographical US markets. With so much control of the market, IBC had bargaining power over the industries that created the raw materials used in their products, like flower and sugar. The cost of raw materials only accounted for about 20% of the total cost of production, and this was kept so low in part due the large influence IBC had.
Hostess is now headquartered in Kansas City, MO and owns and operates three baking facilities in Kansas, Georgia, and Indianapolis, which are responsible for manufacturing 96% of total assets. Each of the three are responsible for specific product lines with specialized assembly operations.
The Kansas factory is the largest, producing 60% of total output. This factory is the most automated and the most efficient of the three, and produces the same products with little alteration. Twinkies, Donettes, SnoBalls, Brownies, CupCakes, and Coffee Cakes are all produced at this location. The bakery itself is about 350,000 square feet, employs 700 people, and is operating around the clock with nine operating lines to create three million pounds of baked goods weekly.
The Georgia factory produces 28% of total volume, and while it does produce goods specific to that location, is is designed to be adaptable to address any surges in demand. Seasonally, there are noted upticks in the demand for Hostess products, like the beginning of a new school year, and this factory is designed to anticipate and meet that increase. Zingers, Fudge Covered Ding Dongs, Coffee Cakes, and Mini Muffins are produced there.
The Illinois location produces 8% of total volume, and creates exclusively Ho Hos, Suzy Q’s, and Chocolate Peanut Butter Twinkies. This is the only nut using facility, which is significant for the current rise in allergen-conscious consumers.
All hostess manufacturing facilities operate under the “5S” framework. The 5 S’s are Sort, Set in order, Shine, Standardize, and Sustain. Sort, the first S, is goaled to eliminate clutter. When an item in the factory is not touched for a week, a red tag is put on it and the item will be either put out of the way in storage or disposed of. The second S, Set in Order, established a fixed and official place for everything a worker could need while at work. Each item is labeled with a yellow tag that corresponds to a yellow tag somewhere on the floor, and that signifies where the item should be stored when not in use. When operators are able to efficiently locate the tools they need, disruptions in production are reduced. Shine highlights the daily task all operators have of cleaning their workspace at the end of each shift, and the factories goal of efficiency and sustainability. Standards refers to photo guides of what acceptable and unacceptable products look like. These are displayed throughout the respective assembly lines, serving as a reminder of what the standards are.
Through the many acquisitions, Hostess had accumulated countless baked goods brands including Twinkies, Ho Hos, Sno Balls and Wonder Bread, all of which had different shelf lives. Wonder Bread, famous for being the first 1.5 pound loaf on the market, had a significantly shorter shelf life than the snack cake segment that made Hostess famous. In order to ensure fresh deliveries, the company owned and operated 36 bakeries, 565 distribution centers, in excess of 5,500 delivery routes and 570 bakery outlet stores throughout the United States (1). The direct store delivery model required 19,000 employees spread across the United States, trucks, gas and insurance resulting in costs that made up 36% of total sales (2). Shifting from the expensive direct delivery model was nearly impossible for the company as it had 372 different collective bargaining agreements with labor unions as a result of the many acquisitions (3). Simply put, firing the workforce and shifting to an asset-light business model was not an option.
Consumer sentiment of many of the company’s product lines had taken a turn for the worse as parents sought out whole wheat bread options and opted for healthier snacks. In the wake of declining sales, the company failed to target new outlets for its products and remained focused on grocery stores as the main distribution channel.
When Apollo Group and investor C. Dean Metropoulos submitted their bid for the Hostess cake brands to purchase out of bankruptcy, their immediate goal was to overhaul the distribution strategy. Through product innovation and selecting only the cake brands and other products that had long shelf lives, Hostess was able to shed itself of the direct delivery distribution model and transition to an asset light, centralized warehouse model. Deliveries would be outsourced, and a new $25 million SAP system would manage inventory and logistics. As part of the investment group’s bid, of the 36 factories that were up for sale, only three were selected for ongoing operations. The company expected to hire 1,500 employees to operate the factories, a decrease from the 9,000 employees required to operate 14 factories as part of the snack cake segment pre-bankruptcy.
The final focus of the new management team at Hostess was to increase the sales channel diversity beyond grocery stores and into discount stores, convenience stores and super-retail stores such as WalMart. “There is no reason why Hostess can’t be sold in any place that sells candy bars,” stated Andy Jhawar of Apollo Management (2).
Through the new initiatives at the company, delivery costs reduced to account for only 16% of total sales, down from 36%. The increase in channel distribution resulted convenience store allocation increasing from 50,000 convenience stores to 110,000 in the first year following the reorganization (3). The focus on changing the distribution methods for its products is the key driver for the company’s success following the reorganization. With fewer factories and the use of centralized warehouses, delivery costs were slashed and as a result, the need for a large fleet of trucks and employees was resolved. Hostess is now able to deliver to an increasing number of customers beyond the grocery store channel at a decreased cost when compared to the legacy direct delivery distribution model.
At the time Hostess filed for its second bankruptcy in 2012, it was plagued by issues stemming from its outdated direct store delivery distribution model, changing consumer preferences, a failure to expand to alternative distribution channels, outdated and inefficient manufacturing processes, and lack of mission cohesion amongst employees. Existing contracts with labor unions made it nearly impossible for Hostess to make changes to its outdated processes, to innovate  and become profitable. Under the Apollo Global Management and C. Dean Metropoulos and Company acquisition, restructuring, and relaunch of Hostess Brands, they were no longer burdened by labor union contracts. A new management team was able to define a clear mission and a new cohesive labor force was able to execute it. The production process was scaled back and made more efficient. Focus was placed on producing longer shelf life products in an effort to move away from the direct store delivery distribution model. Additionally, the new management seeked to expand to a greater number of sales channels.  The new innovations created value and allowed Hostess Brands to once again become a profitable company.