Snack cake category misses big opportunities
Feb. 1, 2014
by Charlotte Atchley
Sometimes people don’t realize how much they love something until it’s gone. Public outcry at the disappearance of Twinkies, CupCakes, Ho Hos and Ding Dongs when old Hostess Brands, Inc. declared bankruptcy in November 2012 illustrated that truth. With predominant trends for the bakery industry centering on health and whole grains in the past few years, snack cakes seemed to have fallen by the wayside for consumers … until they were no longer there.
For nearly seven months until Twinkies were reintroduced to the market in the summer of 2013, the vacuum from old Hostess’ swift departure created an opportunity for other companies — specifically Flowers Foods, Thomasville, GA; Bimbo Bakeries USA (BBU), Horsham, PA; and McKee Foods, Collegedale, TN — to gain some sales traction with their snack cake brands. In some cases, they rolled out knock-offs of the popular Twinkie. Flowers Foods, for example, launched its Tastykake Dreamies while McKee Foods’ Little Debbie Cloud Cakes stepped up to the plate. Meanwhile, BBU launched a line of snack cakes under its Sara Lee brand in the first quarter of 2013.
Now, the data is revealing the impact of the collapse of old Hostess Brands and the snack cake category. In the 52 weeks ending Nov. 3, 2013, bakery snack sales were down nearly 4%, according to data from IRI, a Chicago-based market research firm. However, Tasty Baking Co., owned by Flowers Foods, was up 31%, McKee Foods 26%, and Bimbo Bakeries was up 20%.
Rich Seban, president of the new Hostess Brands, Kansas City, MO, isn’t worried. According to Mr. Seban, the entire category declined by 8% during the Hostess hiatus. Since then, he said, the category is growing at upwards of 3%. “There’s been more than an 11 percentage point positive swing,” he said. “That’s a clear indication of the strength of the Hostess brand and its importance to the category.” The company is now owned by the private equity firm Metropoulous & Co. and Apollo Global Management and encompasses the iconic Twinkies, Ho Hos and Ding Dongs brands. Hostess Brands returned to the market, carrying a roar of media coverage with what it called “The Sweetest Comeback in the History of Ever.”
Too big to fail
News of Hostess’ bankruptcy and imminent departure from the marketplace at the end of 2012 not only shocked the baking industry but also consumers. Americans emptied the shelves at Wal-Marts, Targets, Albertsons and Safeways of their Twinkies, CupCakes, Ding Dongs and Sno Balls. This mad rush to stock up on sweet goods indicated that while sales may have been down, Hostess brands were still a force in the nation’s psyche.
Lynn Dornblaser, director, innovation and insight, Mintel, Chicago, suggested that this public outcry was a combination of nostalgia for the brand and a possessive attitude toward the products.
“It doesn’t matter that we don’t buy it; you can’t take it away from us,” she said, describing consumers’ attitude toward Twinkies. “I think the fact that the company did shut down the brands tells the tale that they weren’t selling, but they weren’t trying to sell them either. Sales were clearly lagging, and there were missteps in promotion if it took production stopping for consumers to buy it.”
Despite consumers’ anxiety over Hostess’ products’ potential departure from the market, the brands were never in danger of permanently disappearing. Twinkies, Hostess and Ding Dongs had too much value on the national stage for that to be the case.
“Someone would see the brand and not necessarily the other issues that were burdening Hostess from a plant or employee standpoint,” said George Latella, visiting professor of food marketing at Saint Joseph’s University, Philadelphia. “Hostess would make a comeback, but being off the market for a while certainly created additional demand.”
In the gap that would be Hostess’ absence, the company’s competitors had a golden opportunity to not just fill the void but overflow it. McKee Foods bought Drake’s, a regional brand in the Northeast that included Ring Dings, Devil Dogs, Yankee Doodles, Sunny Doodles and Coffee Cake. Flowers and BBU reportedly went after Hostess’ bread brands but lost out in the bidding war. Flowers, which had acquired Tasty Baking Co. in 2011 and its brand Tastykake, was ready to invest heavily in this category, positioning Tastykake as its premium snack cakes and Mrs. Freshley’s as its value line.
However, none of the companies did much in going above or beyond mere imitation of Hostess’ missing products, according to industry observers. By not innovating to revolutionize the category, Flowers, BBU and McKee missed out on the opportunity to make Hostess’ return more difficult, and when the new Hostess Brands returned in July 2013, it was no surprise that consumers went back to their beloved Twinkies.
“The problem with a Twinkies knock-off is you can’t call it Twinkies,” Mr. Latella said. “Tastykake’s version of Twinkies isn’t a Twinkie. Other companies can make things that look like Twinkies and may even taste better in a blind taste test, but consumers don’t buy blind. They buy brands.”
Lacking the innovative drive
With nearly a 4% decrease in sales last year, the snack cake category is losing ground, and the absence of innovation is a major factor in the lack of consumer interest. Such a hesitation to innovate stems from a focus on running the business from a manufacturing standpoint rather than a marketing angle. “When you look at the line and dedicated equipment and demands, most people are hard-pressed to innovate,” Mr. Latella said, remembering his 20-plus years at Tasty Baking. “Everyone is reluctant to make that huge capital investment on a product that may or may not work.”
To keep their product lines fresh but still minimize the investment necessary for new product development, most efforts these days revolve around seasonal and limited edition varieties, a strategy Tastykake, a regional brand in the mid-Atlantic, often used before being purchased by Flowers Foods, according to Mr. Latella. Without the distribution capabilities of a national company, however, these varieties found it difficult to gain footing. “We did some seasonal products and had some innovative stuff, but we just didn’t have the scale to get it off the ground,” he said.
With new owner Flowers Foods now backing Tastykake and the larger company’s experience in innovation, the brand just might have what it takes to become a national competitor. Looking at Tastykake’s product portfolio combined with Flowers Foods’ distribution capabilities, Ms. Dornblaser noted the brand has the potential to become Hostess’ biggest threat when it comes to new products.
While Flowers, McKee and Bimbo may have snatched up extra revenue in Hostess’ absence, they missed out on sustainable growth by not revolutionizing the category in light of a missing major player. “Hostess’ competitors totally lost the opportunity to do something different,” Ms. Dornblaser said. “Hostess also needs to think about these missed opportunities.” She pointed out two major areas for growth that snack cake producers could be missing: health and adult/premium snacks.
The health-and-wellness trend sweeping the food industry would seem to be a silver bullet for bakery snacks. Ms. Dornblaser sees it as an opportunity. “Is there a way these products can be a treat with less fat or sugar or added protein,” she suggested, “or maybe it’s just a clean label so it’s more attractive to moms?”
While Mr. Latella disagreed that changing the product’s formulation to adapt to the health trend is necessary, he did suggest portion control as a way for snack cakes to adapt to people’s growing concern over obesity. By offering single-serve packaging or bite-sized cakes, the brands can remain true to their indulgent selves and meet consumers’ needs for a guilt-free, on-the-go treat.
As a category most often seen as the indulgent treat tucked in a child’s lunchbox, Ms. Dornblaser also suggested that snack cake manufacturers reach out to the rest of the family with premium products angled at adults. For example, in the midst of Oreo’s colorful, flavorful varieties appealing to children sits a smaller package of higher-priced fudge-covered sandwich cookies just for grown-ups. “The product is still in the family, but it’s more adult,” she said. “It’s a smart way to expand a narrow brand.”
Finding other avenues
With the turbulent 2013 behind them now, snack cake companies can look to the future and meet their challengers for consumer dollars head-on. As Americans move away from three eating occasions — breakfast, lunch and dinner — toward snacking around the clock, snack cakes find themselves up against some new competition, namely cookies, crackers and candy.
“Twenty years ago, the competition for snack cakes was snack cakes,” Mr. Latella said. “There were no single-serve Oreo cookies or Pepperidge Farm. Snackwell’s was in its infancy. There were no 100-Cal packs. Now, snack cakes’ competition is cookies, crackers, chips and candy.”
Despite the health trend, consumers continue to want poppable, portable indulgences, as Mr. Latella described the snack cake category. Unfortunately for these brands, other categories are jumping on that bandwagon.
“You have a barrage of candy companies that have hit that portable trend,” he observed. “A lot of these other companies have positioned their products equally to snack cakes as being a meal replacement or snack opportunity.”
For consumers looking for a healthy, on-the-go snack, cereal and granola bars are also nipping at snack cakes’ heels. With so many challengers surrounding this category, companies need to up the ante on new product development as well as look to new outlets for growth if they want to thrive, let alone survive.
One thing snack cake companies are doing is casting a wider net in distribution outlets in an effort to catch more sales dollars. While conventional supermarkets may lock in dollars from parents purchasing multi-packs for their children’s lunchboxes, convenient stores, an ever-growing outlet for groceries, snatch up men ages 18 to 35, a strong demographic for this category. Hostess partnered with Aunt Millie’s Bakeries, Fort Wayne, IN, for DSD routes to convenience stores.
Hostess also recently turned to Dollar General as a new distribution point. Dollar General rolled out Twinkies, CupCakes, Ding Dongs, Zingers and Donettes in November 2013. As consumers begin to see dollar stores as a legitimate alternative for groceries, snack cake companies have begun to see the advantage to play in that channel.
“Dollar stores are much stronger today than even five years ago and certainly something to be reckoned with,” Mr. Latella said. “I would argue you shouldn’t change the quality of your product though; you just have to present a different package. That’s always a challenge, I think. Consumers have to see value.”
To avoid sacrificing quality and still meet the dollar store price point, Hostess and other brands will have to downsize multi-packs or offer single-serve. The push and pull between quality and value is another constant battle for snack cakes, according to Ms. Dornblaser, one that won’t go away. “In many cases, the snack cake category is typified by low-cost products, which isn’t to say that’s bad. It serves a very important need, but sometimes that can squeeze out the potential for a greater focus on quality,” she said. Quality ingredients will always command a higher price, and that can be difficult for a line of products valued for being inexpensive.
Besieged by bankruptcy upheavals, new product stagnation and new competition, snack cake companies are faced with some tough decisions. Innovation could revitalize the category but not without risk. New distribution channels and deals offer the potential for regional brands to make it big and national brands to find new consumers.
In the end, however, the road does not look to be easy for snack cakes nor the sailing smooth. The companies in this category need to take control of their own destiny in order to be in driver’s seat in this competitive market.