What Can Be Learned From Hostess Brands' Bankruptcy?

Includes: AMZN, CPB, MCD
by: Andrew Boral

When Irving, Texas-based Hostess Brands filed for Chapter 11 protection in U.S. Bankruptcy Court in New York, many parents cheered. Even though a Chapter 11 filing means reorganization and not liquidation, Hostess Brands will be forced to rethink its corporate strategy. Naturally, Hostess Brands will continue manufacturing, running outlet stores, and delivering goods throughout the bankruptcy hearing.

For the past several years, Hostess Brands has been living in a bubble.

There has been a dramatic shift toward healthy eating in the United States. Campbell Soup (NYSE:CPB) has identified the demographic transition by revitalizing its V-8 brands with good tasting products like Fusion and Splash. Whole Foods (WFM) has specialized in distributing organic foods. These grocery markets are usually filled with customers.

In contrast, Hostess Brands has not changed its food lineup much in its 100-year history. Hostess Brands makes bread and snack cakes such as Hostess Cupcakes, Twinkies, Ho Hos, Drake's Devil Dogs and Ding Dongs. Hopefully this bankruptcy filing will allow Hostess to update its flagship products. Other Hostess Brands are its flagship snack cakes and sweet goods baked and distributed by Hostess®, Drake's®, and Dolly Madison. None of these brands have a reputation for being leaders in the health-food markets.

McDonald's (NYSE:MCD) used to have the same problem. Now McDonald's is currently a darling of Wall Street. It had to overcome some major hurdles.The company overcame the negative publicity of Morgan Spurlock in his 2004 movie "Super Size Me". Taking its cue from Starbucks (NASDAQ:SBUX), McDonald's has revamped its coffee selection. The nutritional content of its products have been enhanced. Salads are now on the menu. The traditional McNugets have been improved. McDonald's has been offering better slices of meat through its Chicken Selects products. McDonald's didn't stop at improving the food. The atmosphere of remodeled McDonald's has also improved tremendously. In summation, McDonald's understood the shift in consumer tastes.

In contrast, Hostess Brands' management excuses the poor performance of its brands on the high cost of unions. Yet, it is obvious that the nation is transforming into healthier consumers. Hostess has been floundering for two decades being in and out of bankruptcy several times. Hostess refuses to make healthy snacks. There are numerous food retailers which understand the cultural shift. Kellogg Company (NYSE:K), Kraft Foods (KFT), and Group Danone (OTCQX:DANOY) all have a balanced view on taste and nutritional value. After five years in bankruptcy, Hostess Brands finally emerged from bankruptcy in 2009. After only two years as a going concern, Hostess anticipates a $340 million loss. This resulted in the company again filing for bankruptcy protection. Their primary argument against profitability is its unionized labor force.

Even being a capitalist, I find the reason management presented for a faltering brand misguided. Most American manufacturers deal with unions in their workforce. Brian J. Driscoll is out of touch with the average American dietary needs. Blaming the unions for the lack of product demand misdiagnoses the issue. The problem lies squarely on the company's leadership. Most consumers understand the need to have a healthy diet. That is why Hostess Brands has spent most of the past decade in bankruptcy while food retailers such as Whole Foods, Campbell Soup, Kellogg Company, Kraft Foods and Danone have been stable companies. Social responsibility does pay off in the long run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.