Recipe for success
Mr. Peterson offered further detail about how the Hostess business model underpins the company’s superior profit margins. Specifically, savings from the warehouse delivery model extend far beyond lower transportation and associated costs.
“The old company had 12 cake and combo bakeries, many of which had redundantly produced the same item,” Mr. Peterson said. “That means Twinkies were produced in six bakeries. We now have one fully automated line that makes all of our Twinkies. It takes 10 people to operate compared to a standard line of 38, and we sell more Twinkies than the old company did. So our margins are heavily impacted by this model.”
He said Hostess is continuing to pour significant sums into capital improvements, including $29 million in the 12 months ending Sept. 30, 2016. That included consolidation of production lines and starting to enable the company’s Indianapolis bakery to produce peanut butter items.
Responding to a question of whether competitors may choose to adopt the Hostess extended shelf life and warehouse delivery model since it is proving so profitable, Mr. Toler said such a shift was highly unlikely. He expressed confidence in this prediction even while acknowledging that the extended shelf life technology Hostess uses essentially would be available to anyone in the industry.
“[Our supplier] could sell other adaptations of [the extended shelf life ingredients],” he said. “And the answer is it doesn’t fit [other bakers’] business model, particularly our two largest competitors … They’re tied to the bread business, and they are going to be in those stores three to four times a week for bread. Sweet goods are an important part of their companies, but it doesn’t drive their infrastructure. Bread drives their infrastructure.”
Mr. Toler also cited a “cultural dynamic” at DSD companies, saying he was very familiar with such a mindset from his time with Nabisco Brands.
Companies who use the DSD model are culturally tied to it. “That’s who they are; that’s how they operate,” he said. “And that’s fine, that’s how they work. And so culturally I will tell you Hostess would have never made the DSD-to-warehouse switch if we hadn’t gone through something as dramatic as Chapter 7. So yes, it is a moat, but it is a moat around culture and complexity and what really drives our competitors.”
Look to Hostess's future in the next segment.