Plan: Hostess will close five plants

by Josh Sosland
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IRVING, TEXAS – As part of its reorganization, Hostess Brands, Inc. plans to close five baking plants, the company said in its reorganization plan.

The 150-page plan includes a wide range of initiatives aimed at putting the company on a sustainable path toward profitability. The plan was filed Oct. 10 with the U.S. Bankruptcy Court, Southern District of New York, in White Plains.

“Due to among other things, significant overcapacity in the baking industry, the debtors’ baking facilities currently operate at only 65% of baking capacity (compared with a ‘best in class’ 85% target utilization),” Hostess said. “Additionally, as a result of the debtors’ inability to invest in information technology and automated baking systems, the debtors’ plants fall far short of industry benchmarks for efficiency. As part of the revised turnaround plan, the debtors have identified a number of initiatives to reduce excess baking capacity and improve efficiency.”

These initiatives include:

• outsourcing production of low volume and seasonal products such as hamburger buns to third-party bakeries;
• investing in new information technology capabilities to streamline baking processes;
• automating certain product lines;
• and updating packaging equipment to improve line efficiency and enable new package configurations.

The plan also calls for the closing and/or consolidation of numerous depots (distribution hubs) to “maximize the efficiency of the distribution network.”

Hostess currently operates 36 baking plants, 560 distribution centers and 5,600 delivery routes across the United States.

The 36 plants represent a marked reduction from the 55 operating when the company first filed for bankruptcy in September 2004. Within months of that filing, the company had shuttered or announced plans to close seven plants. In the mid-1990s, the company operated as many as 63 plants.

To deal with a deteriorating transportation fleet, the plan says Hostess is considering replacing a portion of company-owned vehicles with leased equipment. Hostess said the company’s fleet has an average age of 18 years, resulting in “increasing costs related to the maintenance and performance of these vehicles.”

Under the plan, 600 route vehicles, 200 tractors and 300 trailers would be leased over the next four years.

“The debtors will reduce costs associated with the vehicle fleet by, among other things, increasing the frequency and effectiveness of maintenance inspections and engine replacements and increasing fuel efficiency by replacing older vehicles,” Hostess said.

Other initiatives include closing many of the company’s 527 retail outlets. Hostess says unprofitable stores will be closed, and the company will “focus the remaining retail outlet stores on the sale of Hostess brand products approaching their expiration date,” the plan said.

“The debtors will also upgrade their information technology systems to optimize their agility to identify and recover products nearing expiration,” Hostess said. “Finally, the debtors will modify their pricing strategy to increase retail outlet margins.”

Also included in the plan is a “Wheat Bread Initiative,” citing three new wheat bread products across four the company’s brands. In July, Hostess announced a series of whole grain products introductions under the Wonder brand -- 100% Whole Wheat, Honey Wheat and Wheat Sandwich. Earlier that month, Wonder Smartwhite for Kids was introduced. It is a white bread with added fiber and calcium. New whole grain products were introduced under the Nature’s Pride brand in 2011.

Cuts in selling, general and administrative costs also are detailed in the plan. Hostess said it already has instituted a 10% reduction, across-the-board, in the number of management and other non-union employees, effected through layoffs and attrition. In its next phase of cost cutting, Hostess said it will cut the number of regional accounting offices to 5 from 23, reduce the number of business units to 3 from 4, outsource certain human resources functions and consolidate upper middle management personnel.

Increases in the middle management headcount are planned and needed, the company said, “to complete as a viable long-term entity in the baking industry.”

Other steps described in the plan include the restoration of annual advertising and marketing, again, to make the company “competitive with their peers;” reduced trade spending; and a 66% increase in research and development spending, to $5 million per year.

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