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Hostess Financial Bankruptcy Case

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Hostess Bankruptcy Case

What happened?

Almost three years ago, Hostess Brands Inc., creator of iconic American products including Ding Dongs, Ho Hos, Suzy Q’s, Dolly Madison Zingers, Drake’s Ring Dings, Wonder Bread and Twinkies, decided it could no longer survive in the new Atkins-crazed marketplace with its bloated pension funds and financial issues.1

In November 2012, the company filed Chapter 11 bankruptcy to receive permission from the government to close its business and sell off its assets.2 The deal was accepted by the bankruptcy courts and a judge then agreed to hand over all the Hostess Brands foods to different buyers.3

This was not the snack food company’s first bankruptcy. During the 2004–2009 bankruptcy period, Hostess closed nine of its 54 bakeries and more than 300 outlet stores. In addition, Hostess’ work force declined from 32,000 to 22,000 employees. The company also dropped some regional brands and operating agreements, such as the agreement to produce Sunbeam Bread for the northeastern U.S.4

Why did it happen?

A major reason behind the bankruptcy was Hostess’ failure to adapt its product lines to changing consumer tastes when their market shares started decreasing a decade ago.5 Company owners should have adapted more to consumer taste shifts and added new products. It also could have kept its high-performing products, such as the popular Twinkie, but reinvented other products, such as Wonder Bread, to be more natural with added nutritional benefits.6

Even if these measures were made though, it is still unsure if Hostess could have survived. The root of the company’s previous bankruptcy and most of its financial issues had to do with its $2 billion in unfunded pension liabilities that due to its decreased revenue it was unable to pay for the future.5 These large costs brought on my previous expensive union deals put such a large burden on the company, that it would to have exponential sales moving forward to pay for them, due to shifts in consumer tastes however, this was not the case and they were left diminishing sales. 7

Part of the company’s financial issues were due to using pension funds as capital for its current operations.8 In addition, it took out funds from two hedge funds and a private equity firm whom with their disappointing revenues, they were unable to provide any return on their investments for. As Kaplan from Fortune Magazine writes, Hostess had “two root problems—a highly leveraged capital structure that had little margin of safety, and high labor costs.”5

By December 2011, it was reported that Hostess Brands was on the verge of filing for bankruptcy a second time due to financial problems. The company stopped paying future pension benefits after August, thereby breaking its union contracts.8 The company said it employed 19,000 people while carrying more than $860 million in debt., which was an unsustainable ratio unless unions make concessions.9 I n November 2012, Hostess employees nationwide responded by going on strike after rejecting a proposal to restructure pension payments and decrease worker salaries.10

Liquidation of the brand

On November 16, 2012, Hostess announced that it was ceasing plant operations and laying off most of its 18,500 employees. In a statement in its filing, the company said it "is not competitive, primarily due to legacy pension and medical benefit obligations and restrictive work rules." It stated that it intended to sell off all of its assets, including the well known brand names, and liquidate.11

In January 2013, that the United States Bakery bought Sweetheart, Eddy's, Standish Farms and Grandma Emilie's brands, while McKee Foods bought Hostess's Drake's brand, including Ring Dings, Yodels, Devil Dogs.12, 13

In March 2013, Apollo Global Management made the only bid for the snacks business of Hostess Brands, including Twinkies, for $410 million.14

What it means?

Hostess is not alone in the declining market shares issues coupled with bloated costs of production. Big food brands in general have been experiencing an overall industry decline, as consumer preference as shifted away from processed foods to fresher ingredients and healthier choices. According to Forbes Magazine, major packaged-food companies lost $4 billion in market share alone last year, as shoppers swerved to fresh and organic alternatives. An analysis by Credit Suisse analyst found that the top 25 U.S. food and beverage companies have lost an equivalent of $18 billion in market share since 2009. While shoppers still value the convenience that food processing offers, most are more interested in fresh and natural choices.6
In order to avoid liquidation, Hostess would have needed to increase sales and return on investment, which even with new healthier products, was not likely to happen because of large labor costs. There was no real option for the company, but to close its door. As the food environment changes, some brands rather adapt are going to die. I predict that Hostess is not only going to be the only big food brands closing its door in this decade. Moving forward, more large iconic food companies are going to cease to exist to make room for food companies better able to fit evolving consumer desire for fresh, natural foods.

Resources:
Here is an article outlining the bankruptcy of Hostess: hostess-twinkies-b-1.pdf
Here are also a few videos: 1. https://www.youtube.com/watch?v=msstl2yOt98 (Links to an external site.) 2. https://www.youtube.com/watch?v=AnnwjG4szE4 (Links to an external site.) 3. https://www.youtube.com/watch?v=zCr6GMWkEv0 (Links to an external site.) 4. http://fortune.com/2012/07/26/hostess-is-bankrupt-again/ (Links to an external site.) 5. http://blogs.wsj.com/bankruptcy/2012/05/07/hostess-sends-layoff-notices-to-all-workers/ (Links to an external site.)

Works Cited

1. "Hostess Brands is Closed". Hostess Brands. November 16, 2012. Archived from the original on September 27, 2015.

2. Palank, Jacqueline (January 12, 2012). "Twinkies Maker Hostess Files for Chapter 11 Protection". The Wall Street Journal. Retrieved September 27, 2015.

3. McCarty, Dawn (March 19, 2013). "Hostess Judge Approves Asset Sales of Over $800 Million". Business Week. Retrieved September 27, 2015.

4. "Interstate Bakeries' post-bankruptcy funding appears in trouble" Kansas City Star — January 8, 2009. Retrieved September 27, 2015.

5. Kaplan, David (July 26, 2012). "Hostess is bankrupt... again". Fortune. Retrieved November 15, 2012.

6. Kowitt, Beth, Fortune Magazine, The War on Big Food, May 21, 2015, http://fortune.com/2015/05/21/the-war-on-big-food/

7. "Twinkie Maker Hostess to Close". The Wall Street Journal. November 16, 2012. Retrieved November 16, 2012.

8. "Twinkie Maker Hostess to Close". The Wall Street Journal. November 16, 2012. Retrieved November 16, 2012.

9. Mathis, Karen (July 6, 2012). "Hostess: No immediate plans for employee layoffs". Financial News & Daily Record. Retrieved July 7, 2012.

10. Benson, Lisa (November 10, 2012). "Hostess Brand workers hit the picket lines". KSHB-TV. Retrieved November 10, 2012.

11. Hostess Brands Liquidation: Twinkie-Maker Seeks Court Permission To Liquidate". Huffington Post. November 16, 2012. Retrieved November 16, 2012.

12. "Hostess chooses United States Bakery for some Northwest assets". Food Business News. January 29, 2013. Retrieved March 1, 2013.
13. "Hostess picks Little Debbie maker for Drake's". Toledo Blade. January 28, 2013. Retrieved March 1, 2013.

14. Kosman, Josh (March 12, 2013). "Leon Black's Apollo Global new owner of Twinkies, other Hostess snack brands". New York Post. Retrieved March 12, 2013.

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