Hostess Twinkie Case Study: The fall of an American Icon.
Using conventional business theories such as Michael Porter's Five Forces and Jim Collins's How the Mighty Fall, I performed an in-depth analysis of the specific events leading to the bankruptcy of the beloved brand after which I identified five high level turn-around strategies specifically for the Twinkie brand:
Implement Efficient Work Practices – Lean
Slight modifications to ingredients – Jump to simple ingredient trend
Increase advertising spending – Leverage the nostalgia
Pass on Cost Increases
What lead to the Bankruptcy?
Despite American's love for Hostess' snacks, the brand struggled financially throughout the past few decades. Even before its multiple change of management/ownership “its problems were deep-rooted” reported CEO of Ralston. Its flux in sales and passing of ownership are evidence of this. It finally caved as a result of labor unions relentless attack on the brand for consideration of reducing worker’s comp, a cost that was eating away at the business’s financial ability to survive.
What’s ironic is that the high labor expenses of which would have eventually brought down the company were they not cut, did lead to the brand’s demise but because they were cut; it was a lose/lose situation regardless.
As Jim Collins’ explains in his book How the Mighty Fall, in the third stage of Denial and Risk, early warnings signs are ignored and Hostess Inc. reacted no different in their situation. When they went around grumbling up bakeries in the 60’s they neglected to face the high expenses that were going to be incurred as a result of all those acquisitions.
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Turn Around Business Strategies
- One Implement Lean Work Practices
After the disaster that was the union strike, the first strategy would involve implementing efficient work practices. Due to corresponding high ratio of wages to revenue, workplace efficiency is a main factor of determining production speed and volumes. Tactically this would involve lean operation models automating their bakeries relying less on human labor.
Included in this strategy is evaluating operations and distribution for maximum efficiency. 33 Hostess factories were shut down during the liquidation process affecting 18,500 jobs. This could have been avoided had they followed the value chain principal. The shelf life of Twinkies was surprisingly small – appx. 3 weeks –which opens up risk for disposing of inventory and dollars lost. All products will be frozen prior to transporting to retailers to maximize shelf life, thus allowing for higher bulk sales and increased margins.
- Slight modifications to ingredients – Jump to simple ingredient trend
Current CEO C. Dean Metropoulos is hinting at a reformulation of the snack cake to appeal to the health craze. But can you really make a dessert healthy and at what costs? “Evidence suggests it's not usually worth the effort--or the cost.”10 For example, whole grains have unsaturated fats that are unstable and thus require chemical additives to maintain the shelf life consumer’s have come to expect. However, what could be changed is simplifying of the ingredients to include real sugar, real butter, real cream and supplemented with minor packaging changes to promote this.
- Increase advertising spending – Leverage the nostalgia
The third strategy involves the re-establishment of the brand. The advertising, having the awareness objective, would be a pull strategy leveraging the positive sentiments associated with the age-old brand.
Brand recognition and popularity is critical for firms that want to obtain greater shelf-space in supermarkets and grocery stores. When Hostess reintroduced its iconic Twinkies snack cake, July 2013, along with other beloved desserts the buzz surround the brand was unheard of. The love for Twinkie is already there, it just needs to be top of mind for customers to seek it out.
Using the revenue generated from the reintroduction/awareness campaign of Twinkie, the fourth strategy would be funneling those funds into R&D of a new product. As demonstrated in the Kineopolis Megaplex case study, Value Innovation thinks beyond the competition, and in terms of total solution customers seek. As far as Twinkie goes, product offerings that demonstrate value innovation could include a premium line extension of baked goods. Consumers are demanding homemade quality from the prepackaged baked goods category like one would find at a local specialty bakery. Hostess could innovate a line of just this, perhaps a caramel bacon iced doughnette. It would have to be limited in its distribution giving way to exclusivity as it’s introduced to the market.
Pass on Cost Increases
After re-establishing the Twinkie tribe and reformulating ingredients, its time to pass on the cost increases to the consumer. Successful firms are able to pass on high input costs such as wheat and sugar to the final consumer to maintain profitability. With the success of the previous strategies, Hostess should see revenues spike. With the increased demand and consumer perception, it will be appropriate to raise the prices by 10-15% over the next year. This should put a large enough fiscal gap between Twinkie and copy cat private labels reducing them as a threat.