Richard Seban sees Hostess cakes competing toe-to-toe with candy
July 24, 2013
by Eric Schroeder
KANSAS CITY — A move to warehouse distribution and away from direct-store delivery will allow Hostess Brands, L.L.C. to compete toe-to-toe in the market for snack treats, said Richard C. Seban, president. In an interview with Milling & Baking News, Mr. Seban said Hostess is primed to win back its spot on familiar — and new — shelves this summer.
The new distribution approach was one of several significant changes Mr. Seban said will help restore luster to a brand and business diminished by struggles dating back many years. Retail sales of Hostess products resumed July 15 following a hiatus dating back nearly eight months.
As part of its acquisition of the Hostess snack cakes business, private equity firm Metropoulos & Co. and Apollo Global Management L.L.C. netted five plants, and Hostess has poured $30 million into four of these over the past few months. The plants are located at Columbus, Ga.; Schiller Park, Ill.; Indianapolis; and Emporia, Kas. A fifth plant in Los Angeles has not been reopened.
“The (four) plants structurally were among the better plants Hostess operated before for cakes, so the plants were structurally in reasonably good shape, but they did need some upgrades, and we spent about $30 million in opening these four bakeries,” Mr. Seban said. “We did invest in upgrading various systems and processes as well as putting in new equipment. Over the next year, we’re putting another $70 million in, primarily in capital equipment.”
Additionally, Mr. Seban said Hostess is looking at opening a fifth facility that he said will be “more modern, state-of-the-art, and be located in an optimal area for both distribution and logistics.” He declined to specify where the plant will be located.
From D.S.D. to warehouse delivery
Another significant change for Hostess is a shift in its distribution system, from one based on direct-store delivery to one geared toward delivery to warehouses.
“In a D.S.D. system, each stop has to generate a certain amount of revenue to generate profit because we have our own driver in a D.S.D. system stopping,” Mr. Seban said in explaining the differences between the two systems for Hostess. “So if the stops were too small, and we couldn’t service them on a D.S.D. route because they didn’t do enough volume, then we couldn’t service them. For example, there are 150,000 c-stores in the U.S. In November, we were calling on about 50,000 of them, or about a third. Now, because we’re going through a warehouse direct system, we can use independent distributors … to go after literally everywhere that candy bars are sold. … We feel we now have the ability to sell wherever candy sells, and that opens up an additional 100,000 plus operating units for us.”
Mr. Seban said the biggest challenge in moving to warehouse delivery was making the transition to a SAP system.
“When you’re doing D.S.D. your people fill out the order,” he said. “We now have to accept orders from customers. So it really required us to completely reconfigure our infrastructure. But, given the time we had to get our plants started we’ve been able to rebuild that infrastructure with the help of Acosta, our sales agent. They have been instrumental in getting us up to speed and offsetting some of the things we couldn’t do quickly enough to get our infrastructure in shape. They’ve been able to support us in that way. So the warehouse direct system looks like there is an awful lot of upside for us.”
Suppliers, customers remain on board
When Hostess products were pulled from store shelves last fall several companies stepped in to fill the void. Bimbo Bakeries USA introduced a snack cake under the Sara Lee brand in the first quarter of 2013, while McKee Foods ramped up promotion of snack cakes under the Little Debbie brand, including Cloud Cakes, which closely mimic Twinkies.
But “out-of-sight, out-of-mind” apparently is not a phrase that applies to Twinkies. Mr. Seban said Hostess has been able to recapture nearly all its suppliers and customers.
“Virtually every single one of our suppliers — all of the old company’s suppliers — have rejoined and been part of the new company,” he said. “They have been absolutely delighted by the fact that we’ve reopened. They’re all on board … all of them.”
In fact, he said the willingness of suppliers to partner back up with Hostess “was a very important part of our ability to get open as quickly as we are.”
“Our suppliers have been absolutely fabulous in helping us,” he said. “It was an integral part to us getting it done as quickly as we did.”
Similarly, Mr. Seban said Hostess customers have been enthusiastic about the company’s return.
“When we went out of business the category dropped significantly in dollars,” he said. “And, each of our customers has been off significantly in both dollars and profit. When we announced we were coming back, our customers have been absolutely phenomenal. We’ve gotten probably about 90+% of our customers back plus several channels of new customers, particularly in the vending channel and in c-stores and dollar stores. So not only did we regain the vast majority of our old customers we also were able to bring new ones on board, and quite frankly we’ve worked hard with those customers to put programs together to make it possible for them to be able to sell our products and for us to get our shelf space back, so we’re very excited.”
Reinvigorating snack cakes
The return of Twinkies, Ho Hos, Ding Dongs and other Hostess brand snack cakes will no doubt energize the category, but Mr. Seban said the segment already was showing signs of life prior to Hostess ceasing operations last fall.
“First of all, the snack industry as of last November was up both in units and dollars by 2% or 3%, which exceeded where the total grocery store was,” he said. “So the snack cake business wasn’t exactly a weakness — it was a fairly strong business. Secondly, we do look at significant opportunities to grow our business. Most of our consumers are males, 18 to 35 years old, or females that are buying for their families but the primary consumption is their kids or their husband. The industry is way under indexed in women consuming the product. So, we feel like there are opportunities in the new product front to attract women into the snack cake franchise and we feel like there are opportunities to get even greater penetration among the people who are users now.”
Mr. Seban identified two ways in which Hostess plans to achieve that penetration: By offering more healthy and nutritious products to attract women, and offering more indulgent products to attract 18 to 35 year old males. Specifically, he said calories, fiber, whole grains and gluten-free are all important aspects of health and nutrition that Hostess is “going to take a close look at.”
“We have not done anything to prepare the plants to produce gluten-free products at this time, but we’re already examining what our options are,” he said.
In your face marketing
Rather than sit back and hope consumers remember what Twinkies were like, Hostess Brands has been vigorous in its return to store shelves with an aggressive large-scale marketing campaign led by Kansas City-based Bernstein-Rein.
“We are thrilled to be working with Hostess Brands,” said Steve Bernstein, president of Bernstein-Rein. “This is a once-in-a-lifetime opportunity for Hostess to not only re-enter the market bigger than ever, but to come back with a new attitude that’s more clever and engaging, younger — and much bolder.”
The ad agency kicked off the campaign June 24 with a countdown clock at HostessCakes.com. The site’s running clock ticked off the hours, minutes and seconds until the return of Hostess’ products on July 15.
Other promotion efforts include bold outdoor advertisements featuring iconic Hostess products in high-visibility placements in New York (a giant Twinkie billboard in Times Square), Chicago and Los Angeles (a CupCakes billboard), as well as Kansas City. Marketing team members also have been handing out “I saved the Twinkie” buttons, and the ad agency incorporated launch-related packaging — including the tagline “The Sweetest Comeback in the History of Ever” — and point of sale design.
Social media also has played a huge role in Hostess’ latest marketing blitz. Through the web site prepareyourcakeface.com, Hostess is encouraging fans to post Instagram and Vine videos of themselves enjoying their favorite Hostess snack. The company is then using its Twitter feed to push the videos and images out to its fans.
A Twinkies food truck that is set to tour the United States and give out snack cakes debuted on July 15 in New York.
Stand-alone snack cakes
As Twinkies embarks on its latest journey it will do so alone. The bread brands once owned by Hostess were sold to Flowers Foods, Inc., Thomasville, Ga.; Grupo Bimbo S.A.B. de C.V., Mexico City; and United States Bakery, Portland, Ore. Meanwhile, the Drake’s snack cake business was acquired by McKee Foods Corp., Collegedale, Tenn. Mr. Seban sees no downside in Hostess now having a tighter product portfolio.
“One of our biggest competitors only sells sweet baked goods,” he said. “Given our ability to focus on a core demographic that is consistent. Given our ability to really focus on new product development and really focus on this particular industry we feel like there’s lots of opportunities to grow the business and we’re looking forward to it. We’re really excited about it.”
Through all the trials and tribulations of the past year, Mr. Seban expressed gratitude to yet another group: consumers.
“We’re very thankful that the American public has literally spoken loudly that they want these (Twinkies) back,” he said. “They made it possible for us to get the investors into this company and relaunch this brand. So we’re thankful to all the loyal consumers across the United States.”