What is the “next act” for Kansas City, MO-based Hostess Brands, LLC?
The company’s recovery from its dramatic 2012 collapse has been heralded as an unlikely but extraordinary success story. Dubbed by Hostess as the “sweetest comeback in the history of ever,” the restoration of Twinkies, HoHos and the company’s other popular snack cakes into retail channels nine months after operations were halted, and its subsequent success at reclaiming market share from tough competitors, has been likened to a return from the dead.
With this monumental achievement in the rearview mirror, what’s next?
For the past 20 months, William D. Toler, president and chief executive officer of Hostess Brands, has been hard at work writing the next chapter in this company’s amazing story.
In an interview with Baking & Snack magazine, Mr. Toler described the progress Hostess has made on the great comeback and his plans for the future while also sharing his perspectives on what transpired at Hostess before Chairman C. Dean Metropoulos recruited him to run the business beginning in May 2014.
“The Hostess story is about the power of a great brand,” Mr. Toler said. “It’s a 96-year-old American icon that has a unique connection with consumers. I’ve been in the food and C.P.G. industry for 35 years, and I’ve sold a lot of incredible brands … each brand had a unique connection in the American psyche, but seeing how Hostess is received by customers and consumers has truly been a unique experience.”
The opportunity to lead Hostess was similarly one-of-a-kind.
“I’ve known Dean — we’ve been friends for 15 years,” Mr. Toler said. “I was working in the meat business and a different private equity shop, and I said to him, ‘I want to be a part of history, here. I want to be part of helping you and some other friends working here get this done in a really big and fun way.’ It’s an exciting place to be. It’s a once-in-a-lifetime type of opportunity with the brand, and where we can make history together.”
With this romantic story has come plenty of hard work. Sales growth and product innovation have been Mr. Toler’s principal priorities since he joined Hostess, and progress has been considerable on both fronts, he said. In the 10 months the company operated before his arrival, critical building pieces had been put in place.
“We had come out with the ‘blocking and tackling’ of the basic S.K.U.s — as we say Twinks and Cups, pies and muffins and a few other things,” Mr. Toler said. “And the owner said, ‘We want to take that great start and accelerate with further distribution gains and innovation.’ And that’s what we’ve been able to do.”
A tailwind helping Hostess in its ambitions is overall annual growth of 3 to 4% in the $6 billion snack cake category, an impressive figure considering the lackluster performance these days for most center-of-store products.
“It’s good growth in an industry that’s very flat — which is usually a marketer’s way of saying it’s really down,” Mr. Toler said. “This is an exciting category. And it’s good margin for the retailers. It’s fun for the consumers. It’s highly impulsive. Display drives a lot of growth and upsell, which is why we spend so much time and effort on driving display.”
What went into the “blocking and tackling” to return Hostess snack cakes to the market was nothing shy of extraordinary, Mr. Toler said.
The story began in November 2012 when Hostess Brands Inc., years into a protracted labor battle and serious financial woes, abruptly ceased operations in bankruptcy. Five months later, HB Holdings LLC, an affiliate of private equity groups Metropoulos & Co. and Apollo Global Management LLC, paid $410 million for the Hostess snack cake business. Hostess products already had been off the shelves for five months at that point. While the Wonder bread and other components of the Hostess business were absorbed into existing companies, HB Holdings relaunched the snack cake business as a stand-alone company. The architect of the comeback was Mr. Metropoulos, who brought considerable turnaround experience to the task. Still, Mr. Toler said Hostess represented a fundamentally different kind of challenge.
“I have been involved in a handful of companies that have restructured themselves,” Mr. Toler said. “Most of them were Chapter 11, sort of ‘balance sheet restructuring.’ This was a very different scenario where the products went off the shelf for a 9-month period. It’s a restart.
“When Dean first got here, we didn’t have a customer,” he continued. “We didn’t have a product on the shelf. We didn’t really have a consumer even eating a Twinkie. It’s a bigger challenge when you have to recreate a distribution system, open up plants that had been totally idle and invest in the technology and equipment to make that happen.”
The new Hostess required the resurrection of four baking plants (one that has since been shuttered) and more than $200 million in capital investments, including two new lines installed at the Emporia, KS facility.
The effort paid off.
“I wouldn’t recommend as a business strategy taking your product off the shelf to see if the category goes down, but since Hostess went through it, we learned we are the category driver,” Mr. Toler said.
After breathing life back into the business through people, processes and technology, Hostess has been set on infiltrating every retail outlet from Wal-Mart to c-stores.
“We’ve essentially employed a model where we want to be sold everywhere a candy bar is sold,” Mr. Toler said. “If there’s a Snickers or Hershey bar there, we want to be right beside it.”
The new model
Among the more radical decisions made by the new owners was the adoption of a warehouse delivery model replacing the direct-store-delivery (D.S.D.) system that had been intrinsic to Hostess for decades.
In this respect, Hostess is pioneering a new standard for getting fresh baked foods into retail outlets. The company’s warehouse model is enabling large-scale growth, in many ways by going small.
“Our biggest channel is grocery, but our strongest channels are c-store and drug, in terms of market share,” Mr. Toler explained. “The smaller format is our strongest business.”
Without the hands-on involvement of D.S.D. drivers, the question was whether Hostess would effectively meet the service needs of its retail customers with a warehouse model. Mr. Toler said the question has been definitively and affirmatively answered.
“A lot of it has been around our ability to get display execution,” he explained. “We have pallet display execution. We have large shippers. We have a number of different corrugated type shippers that go into stores very efficiently and easily. To put — particularly a pallet execution — on a D.S.D. truck is very difficult. They don’t have hand trucks or the ability to handle that. So using the scale and efficiency in distribution of the industry’s warehouse system is a good way to get nice levels of display and good compliance with headquarters.”
The success Hostess has enjoyed with these displays has been acknowledged by the company’s competitors, commenting on the steady market share gains achieved by Hostess in 2014 and 2015. This success was hard won, Mr. Toler said.
The warehouse delivery model and packaging configurations also played a major role with regard to what may be the company’s most audacious recent innovation — a decision to begin marketing bread under the Hostess brand. It was customers who nudged Hostess into the bread market, Mr. Toler said.
He recounted, “They were saying, ‘You’re providing us sweet baked goods, but you’re not providing us bread. We’d like you to be a full-line supplier for these kinds of bakery products. Can you do bread?’ So we investigated our capability of doing it. We developed that, and it’s doing very well.”
While bread and snack cakes are complementary, Mr. Toler said it’s important to recognize key differences, particularly in how consumers shop for the two categories.
“Bread is a staple, so people think about it differently,” he said. “It’s always on the shopping list. It’s not as impulsive as sweet goods. That’s the need versus the want. You need to pack a sandwich for your kid, but the treat is more discretionary.”
While other brand names were considered, Mr. Toler said the company has been pleased by the response to selling the bread under the Hostess brand. In fact, he said several customers thought bread had been sold under the Hostess brand pre-bankruptcy (it had not).
Once the decision was made to explore entering the bread market, tweaks rather than a “reinvention of the wheel” were required to make Hostess bread a reality. Shelf life needed to be extended to a period of time closer to that of snack cakes. Sixty day shelf life was achieved. Co-packers were engaged.
“Obviously, there’s a lot of bread knowledge in the company,” he said. “Many of our executives and ops and products development people had come out of the bread side of the business. So when this idea came up, they were quick to develop, with similar technology and product development, the bread analog to the snack cakes. And we were actually very pleased at how well it has performed in terms of its stability, taste and volume in the stores.”
Whatever its relative merits in supermarkets, D.S.D. is distinctly disadvantaged when it comes to supplying shorter-shelf life products like bread to smaller-format stores like c-stores, Mr. Toler said. He said Hostess bread is doing well, in part because it’s always in stock at these smaller stores. The company’s model allows its bread and sweet baked goods to move through the system with enough sell-through time to be on the shelf, purchased and at home with enough life to still be eaten and enjoyed.
“D.S.D. bread in a small-format store never works,” he said. “You’re either staling out, or you’re out of stock. And warehouse is very consistent. You sold four last week, so you order eight for next week, and it has the code to still be on the shelf. It’s a much easier execution for the stores.”
The development of new packaging, which required the installation of case erectors at the co-packers baking Hostess bread, may have been a greater challenge in the bread roll-out than the formulation, Mr. Toler said.
“This sounds really simple, but old Hostess had never put a product into a case,” he said. “It was always in trays. So getting the physical shipping case, the corrugate, that will keep the bread from being crushed or the Twinkies from being smashed — and getting them through the system, that’s culturally very different than just putting a bunch of racks on the back of a D.S.D. truck.
“I’ve been in the warehouse supply business nearly my entire career, and I was surprised it was such a big deal. But it’s just like anything else — if you’ve never done it, it’s going to be different.”
For the time being, Hostess is continuing to pursue opportunities for bread and rolls, principally at smaller format stores, but Mr. Toler said some exploration with supermarkets and mass merchandisers is ongoing.
From warehouse to white space
While he declined to share specific figures, Mr. Toler said Hostess' annual sales have nearly reached pre-bankruptcy levels, despite fierce efforts, including new product introductions, by the company’s competitors.
“We are well on our way toward establishing the brand back in its traditional channels,” he said.
Increasingly, the company is focusing on white space opportunities, Mr. Toler said.
“This space includes international distribution and deeper c-store and grocery distribution,” he said. “It also includes food service as a channel we haven’t had before. These are areas that other snack food and bakery companies compete in, and our new model enables us to go there.”
Few would debate that sweet baked goods is a fun category, one that is impulse driven and lends itself well to expandable consumption — two of Mr. Toler’s favorite words in the food business.
“The things we are driving for growth will continue to expand the consumption base in this category,” he said. Whether it’s line extensions on the current known brands (think “I ‘heart’ You” CupCakes during Valentine’s Day) or totally new product developments such as brownies, Danishes and muffins, Hostess’ unexplored white space seems vast and ripe with opportunity.
Mr. Toler identified food service as an area with considerable untapped potential. Building on the state fair success its products have enjoyed for many years, Hostess is working on developing a frozen fried Twinkie for food service customers. Co-branded inclusions for ice cream shops represent another possibility he cited.
As Hostess plans for growth, white space is certainly not limited to the confines of U.S. borders. With current expansions in Canada, Mexico and parts of Western Europe, the company continues to look for more global opportunities.
“With our product formulation and ability to freeze and thaw, this will be a very important part of business going forward,” Mr. Toler said, indicating that international is one of the fastest-growing parts of the business, thanks in part to global brand recognition.
Authenticity of an icon
When fully restarting a century-old bakery, brand equity is critical to reeling customers and consumers back in, but it’s not without drawbacks. The Hostess revitalization has taken place within a broader food transformation, where consumers are seeking to know food manufacturers — and the products they make — on a much deeper level.
“Millennials are cautious about ingredients and the health profile of foods,” Mr. Toler said. “Even though the category is growing faster than many others, we need to be cognizant of the ingredient profile of the business and go from there.”
Asked to elaborate, Mr. Toler described a fine line between tweaking a product formulation and preserving authenticity.
“You need to be who you are,” he said. “We are an indulgent sweet baked good, and there’s nothing wrong with that. We’re not going to act like we’re selling something we’re not.”
That said, opportunities for change are being thoughtfully explored.
“We make sure everything in there is necessary, or there’s not a better way to make the products,” he said. “Our goal is to be genuine and authentic, smart and sensible about our products and ingredient statements, and to simplify them wherever possible.”
And staying true to the company’s core identity is a defining characteristic of this iconic bakery. With nearly 100 years of brand equity that’s reaching global proportions, Hostess has not let go of that entrepreneurial, startup mentality.
“We enjoy — try to avoid — the ‘big company’ look and feel,” Mr. Toler said of Hostess, which has reached a billion dollars in retail sales. “We like to think of ourselves as nimble, fleet of foot and able to react, change and innovate.”
Almost two years into the job, the experience has fully met Mr. Toler’s expectations to help the Hostess brand “live happily ever after.”“Dean had the vision, took the risk,” he said. “I sort of had the easy job. He dove into this, and he has an incredible sense of business and brands, and he knows when there’s value to be created. It’s funny, he said this, and I have, too. People, literally friends, will come up and thank us for saving the Twinkie. Well, nobody ever thanked us for saving the Vlasic Pickle. But the Twinkie, people care about!”