Hostess puts industry back on the hot seat

by Eric Schroeder
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Hostess is back, and the sweet goods industry is feeling the impact.

In the 18 months since Apollo Global Management L.L.C. and Metropoulos & Co. purchased selected Hostess assets out of bankruptcy the sweet goods industry has been turned on its head … twice, in fact.

Initially, the departure of such iconic brands as Twinkies, Cup Cakes, HoHos and Ding Dongs from store shelves back in early 2013 provided an opening for McKee Foods Corp., Flowers Foods, Inc., Bimbo Bakeries USA and other sweet goods manufacturers to fill the void. The companies responded, with Flowers ramping up production of its Tastykake and Mrs. Freshley’s brands, and Bimbo Bakeries introducing snack cakes under the Sara Lee brand.

The efforts paid off throughout much of 2013. In the 52 weeks ended Nov. 3, 2013, dollar sales at McKee Foods Corp., the Collegedale, Tenn.-based maker of Little Debbie snack cakes, were up 26% over the prior year, while Tasty Baking Co. sales were up 31% and Bimbo Bakeries sales increased 20%, according to Information Resources, Inc., a Chicago-based market research firm.

Hostess, meanwhile, saw sales fall to $173,843,700 in the period, down 75% from the same period a year earlier. The company not only battled to regain market share, it also worked at a breakneck pace to do so while implementing a new warehouse distribution strategy geared toward expanding the brand’s reach through more channels than ever before.

In late November 2013, Dollar General Corp., which operates more than 11,000 stores in 40 states, concluded the roll-out of five Hostess products. Then, in February 2014, Big Lots, North America’s largest broad line closeout retailer operating 1,526 stores in the United States and 5 stores in Canada, signed on to be the official “thrift store outlet” for Hostess Brands, L.L.C. The moves were important to the brand’s reintroduction to the market after Hostess had closed its 600 Hostess brand thrift store outlets as part of the 2012 bankruptcy of the former Hostess Brands, Inc.

With Hostess fully engaged in the marketplace, power in the sweet goods category once again has shifted.

In the 52 weeks ended Nov. 30, 2014, dollar sales in the bakery snacks category totaled $2,993,609,728, up 12% from the same period a year ago, according to I.R.I. Category leader McKee Foods saw dollar sales inch up less than 1% during the period, while Tasty Baking sustained a loss of 4%, Bimbo Bakeries fell 2% and private label declined 3%.

Meanwhile, Hostess Brands’ dollar sales soared to $544,547,264 in the 52 weeks ended Nov. 30, 2014, and the company quickly regained an 18% share of the bakery snacks category, according to I.R.I.

New management at Hostess has looked beyond the brand’s traditional distribution outlets to spur the growth. In addition to Dollar General and Big Lots, Hostess in October said it would sharpen its focus on its convenience store offerings, rolling out eight new single-serve breakfast items. The items will be sold in individual single-serve packs for a suggested retail price of $1.79 nationwide at convenience stores, grocery, drug, dollar and mass retail outlets starting in January 2015.

Over the past 18 months, executives at the major sweet goods companies have said all along that Hostess is a formidable brand and would likely recover, although even they may not have expected it to happen this quickly. The rebound has led some to reflect on their own situation in the segment.

Following a third quarter in which the company’s cake sales were down 8.3%, Allen L. Shiver, president and chief executive officer of Thomasville, Ga.-based Flowers, maintained an optimistic view of the category for the company. In a Nov. 12 conference call with analysts he identified a number of paths toward growth for Flowers in cake.

“We continue to invest in improved packaging,” Mr. Shiver said. “We’re developing new items. We’re very bullish on growing our cake business over the long haul. There are areas of the United States where we do not have D.S.D. distribution that offer opportunities for expanding our cake business.”

Additionally, Mr. Shiver said the company already has seen evidence that Flowers’ D.S.D. network offers competitive advantages producing results.

“Single-serve Tastykakes are doing exceptionally well,” he said. “It really works well with our independent distributor model, because in many cases there are incremental sales that can certainly help their business as well as ours.”

McKee Foods’ confidence in the category may be seen through its expansion efforts. In October, the company said it will invest $34 million to expand production at its manufacturing facility in Stuarts Draft, Va. McKee last expanded the Stuarts Draft plant in August 2012 when it announced an investment of $19 million to add equipment to produce the company’s mini-donuts. The plant also makes a variety of Little Debbie products.

McKee also is on the same page as Hostess in targeting convenience stores. The company recently introduced single-serve premium muffins under the Little Debbie brand. The company said the product is designed specifically for convenience-store shoppers seeking an “on-the-go snack.”

After launching snack cakes under the Sara Lee brand in 2013, Grupo Bimbo is tackling another project through its Canada Bread Co., Ltd., subsidiary. The company on Dec. 18 announced it has agreed to acquire Saputo Bakery Inc., a subsidiary of Saputo Inc., for C$120 million ($103 million) (See related story on Page 10.) Saputo Bakery is the largest manufacturer of snack cakes in Canada and also sells, on a small scale, in the United States. Its products are sold almost exclusively in the retail market under such brands as Vachon, Jos Louis, Ah Caramel, Passion Flakie and May West.
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