BOSTON — While still below where the old company was, Hostess Brands, Inc. has made great strides over the past several years to put itself into a position to expand market share, company executives noted during a Sept. 6 presentation at the Barclays Global Consumer Staples Conference in Boston.
William D. Toler, president and chief executive officer of Hostess, described the Kansas City-based company’s theme for 2017 as a “Race for Space.”
|William Toler, president and c.e.o. of Hostess|
“Our goal was to get five new items in,” Mr. Toler said. “We had a couple of items that we discontinued ourselves to keep the category fresh and keep the products moving. We’ve gained about that number of net items that we expected to gain, 10% growth in total distribution points this year. And to continue to drive that penetration in channels that is enabled by the warehouse model. That’s your downscale C-stores, the bodega-type outlets. Those are places where we believe we can be very effective. So those are all areas that we’re working on to get out there.”
In 2017, Hostess has about 22 items on average in stores, Mr. Toler said, which compared to about 26 or 27 that the old Hostess had.
“So, we’ve still got some room to go there,” he said. “But more importantly, it’s not just the items, it’s the productivity of the items, it’s the velocity of the items. And we’ve been able to put out new innovation, new products, line extensions, new brands, sub-brands that are adding to the breadth and depth of the company and something that we’re very proud of. We now sell more Twinkies than (the old Hostess) ever did, and it’s a product and a business that essentially is the signature of the company and a product that we believe has enormous equity within consumers today.”
The company’s innovation in 2017 has included cinnamon sugar crunch Donettes, white fudge Ding Dongs, chocolate peanut butter Twinkies, chocolate cake Twinkies, Golden CupCakes and peanut butter Ho Hos.
“In ‘17, it’s important in (consumer packaged goods) to innovate,” Mr. Toler explained. “It’s equally important to renovate as you make sure each of your products on the shelf represents the best offering you can make to consumers. The Chocodile, we’ve replaced and upgraded the quality of that product, both with the coating and the size of the cake underneath. We’ve moved our pies to a one-out single-serve 100-calorie offering. We’re working the brownies. We’re moving out of the Mars relationship and moving into a relationship with Nestle on Butterfinger and also one with Mondelez on Oreo.”
Another area of opportunity for Hostess lies within the Suzy Q brand. Mr. Toler said the company launched Suzy Q with a certain baking format that worked out “okay,” but he acknowledged that Hostess probably should have made the product the way the old Hostess did.
“We’re going back to that (old formula) in January,” he said. “We should have a great Suzy Q year next year.”
As the company looks to expand market share it will be important to continue to drive penetration in channels that have been unlocked by Hostess’ warehouse model, including food service, small format stores, and in the in-store bakery, Mr. Toler said. The in-store bakery, especially, holds intrigue for Hostess in part because it’s about an $8 billion category.
“It’s actually growing faster than sweet baked goods is in the packaged cake aisle,” he said. “Seventy-two per cent of that is desserts and sweets, and opportunities for us. We’ve got products like the CupCake cookie, which has the signature squiggle on essentially a black-and-white type cookie… under the Hostess Bake Shop.”
Hostess also is offering “a big Twinkie,” which is a 17-oz Twinkie that’s being offered to in-store bakery customers in a format that Mr. Toler said the company thinks is going to be “quite interesting” at retail.
Another new offering that just launched in Costco stores, primarily on the West coast, is Donettes in a tub.
“This category has not had much packaging work in the last 15 years, and so I’m excited to bring out better, more innovative upscale packaging,” he said.
In addition to innovation, Hostess has its sights set on mergers and acquisitions. Mr. Toler said the company is focused on potential targets that meet the following criteria:
• leverage Hostess brand and/or warehouse model
• expand baking capabilities, including further into in-store bakery, or move into attractive, adjacent categories
• facilitate building Hostess’ scale as broader snacking platform
• provide cash flow and earnings-per-share accretion.
During the presentation, C. Dean Metropoulos, executive chairman of Hostess Brands, provided more detail on the company’s M.&A. strategy.
|C. Dean Metropoulos, executive chairman of Hostess Brands|
“We’re highly, highly focused on executing an M.&A. strategy,” Mr. Metropoulos said. “We’ve looked at two or three deals this year. Rather than get into details, we passed one where we had an exclusive on and our advisers found a challenge that allowed us to pass. We’re looking at a couple of things as we speak. We’ll look at things that are very close … into our existing sweet goods category.
“We made a small acquisition (Superior Cake Products) about a year ago in the very large in-store baking section. … That deal we bought at around 10x, but we knew going in that we would have some very significant synergies. This year, we’ve bet 10x with synergies within 6-month delivering those synergies. It’s averaging about 6x to 7x multiple on that deal. We’re trying to understand and learn that in-store baking section more. We had to make a management change, which we did a few months ago. In-store baking is highly fragmented. We learned that a brand may not have quite the momentum that we would like to think Hostess would have, but I think it’s a much more hearty, more organic place to sell, and I think we’re going to see that as a growing opportunity in our focus as we go forward. It’s a highly fragmented business, probably about 100-plus suppliers to that category, including the in-store baking. We will continue to look at that. We are looking at some close-in ideas that are branded, and I think we will be looking at something like that in a very short period of time.“We looked at a food service business that we passed on not too long ago, partly because … we thought it would dilute the efforts of the overall company. But we’re all over the acquisitions. I can assure you when the time is right and we have the right opportunity, we will be disciplined. We will deliver when we speak about it. And delivering for us is a six-month play, not a two-year play. So clearly, acquisitions will be an important part of the future while also focusing on organic growth.”