By: Adam Hartung, Managing Partner, Spark Partners
11/18/12 at 2:09 PM
Hostess Brands filed for liquidation this week. Management blamed its workforce for the failure.
That is scapegoating.
In 1978 Dan White killed San Francisco‘s mayor George Mosconeand 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.
Hostess spent decades fighting the trend
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. Demand statements are irrelevant if you are giving the product away!
In a last, desperate effort to keep the outdated model alive management decided the answer was another bankruptcy filing, and to take draconian cuts to wages and benefits.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 tantamount 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.
Failure was management’s fault.
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 them 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.
This Twinkie Defense of business failure is pervasive.
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 completely misses the shift to on-line news as it tries to defend & extend its print business, but leadership, before and after Mr. Zell invested, refuses to say they simply missed the trends in media 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 atIBM 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.