THOMASVILLE, GA. — Effective merchandising and broader distribution, rather than aggressive price discounting, have been keys to the revival of Hostess snack cakes after the brand’s near-death experience in 2012-13, said an executive at a major Hostess competitor.
Allen L. Shiver, chief executive officer of Flowers Foods, Inc., was asked repeatedly about the Hostess Brands L.L.C. business during a conference call with Wall Street analysts Aug. 12. Weak snack cake sales at Flowers contributed to lower earnings and sales at the company in the second quarter ended July 12 and were a factor in a downward revision in earnings and sales guidance for 2014.
Flowers competes in the snack cake category principally through its direct-store delivery brand Tastykake and its warehouse delivery brand Mrs. Freshley’s, and the challenges Flowers is facing (sales down 12% in the second quarter from the second quarter of the year before), led several analysts to ask probing questions, digging deeper into snack cake market dynamics.
“The cake category is very much of an impulse driven category,” Mr. Shiver said in response to one query. “And with the news of Hostess’ reintroduction to the marketplace, they have done a good job getting off rack displays. And most of the cake is sold on off rack displays, certainly the incremental cake. And in most supermarkets there is only going to be one, possibly two, off rack displays of cake.
“So with the Hostess reintroduction, our Tastykake brand, and also our Mrs. Freshley’s brand, was really not included on display as often as we would have liked. From a pricing standpoint there really is not a pricing problem in the cake category. It is really a function of the news of Hostess’ reintroduction to the marketplace and how that affects displays and presence in the supermarkets.”
Mr. Shiver said Flowers is “working very hard to regain” the off rack displays and predicted the Flowers D.S.D. distribution model will prove to be a meaningful competitive advantage, versus warehouse delivery system employed at Hostess.
“We are very confident,” he said. “Our independent distributors, they are excited about selling the Tastykake brand. We’ve got several new items that we continue to introduce, new items under Tastykake to keep the brand alive and well.
“So it is really a function of the news of Hostess coming back. They did a good job getting distribution. And now I think our strength — our D.S.D. strength over the long term — will prove out.”
Nearer term, Hostess has been helped by successfully penetrating additional channels, Mr. Shiver said.
“The real change this past quarter is that they expanded distribution in probably more channels than what we’ve seen in the past,” he said. “So in addition to supermarkets, the mass merchandisers, and also there is some expansion from Hostess into the convenience store channel. So more than anything else looking back at last quarter it was more of an increase in distribution.”
Asked whether, with the benefit of hindsight, Flowers should have bid on the Hostess snack cake brand, in addition to the Hostess bread assets, Mr. Shiver said he has “no regrets.”
“Our focus is building our Tastykake brand,” he said. “Monday morning quarterback, you can look back (and ask), ‘Would it have been a good move to buy Hostess Cake?’ I'm very comfortable with the decision that we made and long term our D.S.D. structure will help us build Tastykake into a very strong national brand.
“So looking back on it — no regrets here. Anytime you have a major competitor come back in the market like Hostess there is going to be an impact. I think in our deck we have a nice comparison of a three-year comparison of where we were prior to the Hostess reintroduction.
“And also remember that Hostess built their brand through direct-store delivery over many, many years. And that is exactly what we’re doing with Tastykake, building our brand on our D.S.D. route. So I am very optimistic about the future of Tastykake.”
Asked about aggressive pricing in the marketplace in what the analyst said was expected to be a more “rational” environment, Mr. Shiver agreed and said improvement would be forthcoming.
“You are exactly right, with consolidation in the industry, the categories should become more rational,” Mr. Shiver said. “Eventually we feel that we will see that. We are hopeful that it happens in the back half. We are focused on making sure that we don’t have excessive promotional activity and that the promotions that we are running are effective.”
Mr. Shiver went on to note that, in contrast to other food categories, consumers are not able to “pantry load” with bread, because of its relatively short shelf life.“So this is a category that has some unique characteristics,” he said. “And I’m really optimistic as retailers focus more on category management they have a better understanding that price promotion to an excessive degree is not good for anyone here.”