Monday, November 19, 2012

Government Twinkies?

By now, everyone should be aware of the impending demise of Hostess Brands. The iconic U.S.-based bakery company is prepared to permanently shut down operations, thus bringing to an end its over eighty-year history. If it happens--the issue is still before a bankruptcy court--over 18,000 employees will lose their jobs...just in time for Thanksgiving and Christmas.

Why is this happening? For a number of reasons, really. Hostess Brands has gone through several iterations since its inception in 1930 as Interstate Baking Corporation. It has moved from being a privately held company to a public one back to a private company then back to a public one and finally back to its current state as a private one. The company has also gone through Chapter 11 twice, in 2004 and again in the beginning of 2012.

This is not a strong company, is not a well-managed company. It's heyday was in the 1970's, the golden age of junk food and 7-11s, when individually wrapped treats became commonplace, when America was less health-conscious, and when food products in the States had little competition from exports. In those years, Twinkies and Ho-Hos became household terms; everyone knew what they were, everyone had enjoyed their creamy goodness at least once. Wonder Bread was perhaps even more well known. Not so anymore.

Competition in the snacks and treats market has increased exponentially since those days. Hostess has been losing market share--and profits--steadily since then. Wonder Bread in particular has gone from major player on the bread aisle of supermarkets to distant afterthought. Yet despite all of this, Hostess has made remarkably few changes to its product lines. It's made a few attempts at healthier snacks, to be sure, but only as added offerings, never as replacements to it's original line-up, a line-up that it kept convincing itself was tried and true.

At the same time, Hostess--like many other firms that have been around since before the sixties--is heavily unionized and had, for many years, a pension plan for its employees. Hostess Brands--the current company--is still funding these plans, many of which extend back decades. These factors drive up costs for the company, making Hostess products among the most expensive in the marketplace. Wonder Bread, for instance, is as costly as most high-end breads that are of far superior quality.

So all in all, what we have here is a poorly run company making less-than popular products, trying to sell them at higher-than-average prices,while trying to deal with unmanageable labor, pension, and healthcare costs. Sound familiar? So where is the U.S. Government? It stepped in to save General Motors which was in a very similar situation. Or is Hostess unlucky enough to not be "too big to fail"?

The real lesson here, however, is that of the marketplace and a simple reality: nothing lasts forever. We have become far too accustomed with believing the opposite, that some companies can last forever and even should last forever. And that's because the modern world is simply not that old; we haven't yet come to terms with how to handle the lack of continuity that must occur within a free market capitalist system because we've only just begun to truly face it.

Hostess Brands should fail; it's time for it to fail. Why? Because that's what the market is dictating. And GM probably should have failed, as well. So should a host of other companies that are currently on life-support. Such failures create opportunity, spur growth and initiative, for that's what capitalism is all about.

Mourn not the death of the Twinkie, applaud it. For it heralds the dawning of a new age is snack foods.

Cheers, all.