The Twinkie Debacle

Location Date: 
November 20, 2012

With the election over, everyone can go back to work – well, not everyone. The news of the demise of Hostess Inc. may potentially increase the ranks of unemployed workers in the U.S. by 18,000. Last-ditch mediation is underway today to stave off a sale of assets. Hostess is the manufacturer and distributor of popular brands like Twinkies, Ding Dongs, Sno Balls and Wonder Bread. The news of its demise has sent America’s Boomer generation into deep soul-searching and longing for its fix of the good old days. 

This bankruptcy in many ways would serve as a good Harvard Business School case study. Daft management, union brinksmanship, heavy debt loads and poor government policy have all conspired to sink these “iconic” American brands. Management blames intransigent unions for uncompetitive wages and impossible work place rules (e.g. different truck drivers for different brands). This is true for many unionized bakery firms and it has resulted in increasing consolidation in the business (e.g. Weston and Sara Lee’s sales to Groupo Bimbo of Mexico). The unions blame the last six management teams (including the one that presided over the bankruptcy of Interstate Bakery (predecessor company to Hostess in 2004)) with incompetence and failing to introduce any new products to better suit the changing tastes of America. Sure, some new product lines like Nature’s Pride were introduced and other products reformulated so as to reduce artificial ingredients and fat content but seriously, could you market a light version of Ho Hos or Ding Dongs? Maybe the unions are referring to “The Twinkies Cookbook” which introduced (soon-to-be-forgotten) recipes like Twinkie Sushi and Pigs in a Twinkie – you cannot make this stuff up! Others blame the ‘vulture’ private equity and hedge fund companies. But these guys had invested and loaned over $950 million to the company and if the assets/brands etc. are sold today they will be lucky to get 50¢ on the dollar. An excellent summary of the timeline to bankruptcy can be found here (Click here to read). Click on the graphic below for a more in depth look at the players involved, taken from the same article. 


Finally, some also blame government policy, such as import barriers on sugar, that forced up key input prices.

Like the 2008 subprime and banking crisis, there is plenty of blame to go around. And like any crisis, both the right and the left will battle it out to “prove” their case much to everyone else’s embarrassment. Take for example the November 18th Op Ed by Paul Krugman in the New York Times entitled “The Twinkie Manifesto” (Click here to read). Krugman equates the Twinkie with the golden age of the 50s, a time when “you could have prosperity without demeaning workers and coddling the rich.... the top bracket faced a marginal tax rate of 91%.... roughly a third of Americans workers were union workers.... and (where) the typical executive, Fortune claimed, lived in a smallish suburban house”. He goes on to state that between then and now “we’ve forgotten something important – namely that economic justice and economic growth aren’t incompatible.” Wow – what a Ho Ho. Daniel Kahneman, a deserving Nobel Laureate, noted that “When our attention is called to an event, associative memory will look for its cause – more precisely, activation will automatically spread to any cause that is already stored in memory.”1 In other words, correlation does not mean causation. While apparent to anyone that the 1950s and 2000s are highly different times, Krugman tugs on our memories rather than our brains to make his point.

In the opposite version, from the right’s perspective it is all the fault of greedy unions. But how does a company in bankruptcy petition a bankruptcy judge to approve and guarantee then-CEO’s Brian Driscoll’s “base annual salary of $1.5 million, plus cash incentives and "long-term incentive" compensation of up to $2 million? If Hostess liquidated or Driscoll were fired without cause, he'd still get severance pay of $1.95 million as long as he honored a noncompete agreement.”2This is just wrong on so many fronts. It seems like Mr. Driscoll is incented to make some serious money by avoiding a merger. Oh, and the idea of offering more money for a no-results Ding Dong executive makes a mockery of executive compensation.

Interestingly, there is a Canadian twist to this story. The Hostess “Twinkie” brand has been owned for decades by Saputo Inc. based in Montreal (through its Vachon subsidiary – a venerable Quebec-based baking company they bought in 1999). However, Canadian Twinkie sales are dwarfed by Vachon classics such as Jos Louis (my favourite), Ah Caramel, Half Moon (Lune Moon for us veterans) and other delicious chemically-based treats. For our American friends, there is no need to pay $50 a box for Twinkies on eBay – just cross the border and get your fix here! Or better yet, try a Jos Louis!

The Hostess situation, at the end of the day, is a toxic mix of bad decisions and a changing consumer. Assuming the bankruptcy laws are applied, the brands will be saved and likely some portion of the workforce will find employment. Neither nostalgia nor CEO payoffs fix the problems at Hostess. I will sign off with the funny parody of Bruno Mars hit song on the fate of Hostess. Enjoy!

James McGovern

1. “Thinking Fast & Slow”, Daniel Kahenman, page 182
2. Mathew Yglesias, MoneyBox blog post, on Nov. 19, 2012