November 21, 2012
by Hank Cardello
It ultimately doesn't matter that the mediationbetween Hostess and its bakery union failed yesterday. Any settlement would have been only a temporary step back from the cliff. The real problem: Hostess' management never figured out how to transition its product portfolio amid a sea change in consumer tastes, to have the kind of product-line evolution that companies such as Coca-Cola, General Mills, and Danone all mastered.
So any wage concessions would have just postponed the judgment day, Hostess blamed its bakers for its problems, and many commentators have been quick to cite other reasons such as unsustainable operating costs, private-equity backers that loaded Hostess with too much debt, and increasingly health-conscious consumers who no longer want Twinkies, Ho Hos, and Donettes. All true enough. But like a prominent hostess whose drunken family members ruin her fundraiser, Hostess could have found a way to save its reputation and keep the party going.
Its failure was not preordained. The company should have sensed emerging changes in consumer eating habits many years ago and begun reinventing its product line with new offerings that appealed to health-conscious consumers. Such a portfolio transition wouldn't have required the company to stop making the impossibly yellow, cream-filled Twinkies that made it famous and still have plenty of fans.
In fact, many of the world's biggest food and beverage companies that, like Hostess, sold a nutritional rogue's gallery of products, have thrived by adding health-conscious ones while still keeping around their less-healthy classics (which still have a fan base). Consider that the Coca-Cola Company is now securely on top of the soft drink industry, in large part thanks to the growth of Diet Coke, which accounted fornearly 10% of the $76 billion in soft drinks sold in the U.S. in 2011 and is the No. 2 soft drink, ahead of even regular Pepsi.
As a marketing director at CocaCola, I was involved in the Diet Coke launch in 1983, when the company was savvy enough to bet that consumers would buy a no-calorie soda that tasted better than Tab. In the nearly 30 years since then, Coca-Cola has added CocaCola Zero, vitamin water, and bottled water to its portfolio.
Today Coca-Cola continues to deliver the highest operating profits in the industry, 22%. General Mills began a similar highly profitable transition in its product portfolio in 2005. That year it committed to substantially improving the nutritional profile of two-thirds of its products by 2012, a goal it met by adding more whole grains and other better-for-you products. Those moves boosted sales 21% and profits 57% between 2007 and 2012.
When I worked at General Mills, in the late 1970s, the company added the Yoplait brand to its portfolio, a move that seemed odd at the time, given the then-tiny market for yogurt. But Yoplait today is a $1.5 billion brand in the U.S., and General Mills is pumping new life into it by introducing a 100-calorie Greek yogurt product. A decade ago Danone made the strategic decision to jettison its less healthy product businesses like beer, candy, cookies, and biscuits and concentrate on better-for-you products such as yogurt, bottled water, and infant nutrition. Between 2007 and 2011, Danone's sales outpaced its peers' by 3 to 1, and its operating profit grew 61.4%.
If Hostess' management had tweaked its portfolio in all those years and comeup with healthier versions or new offerings, the company not only could have survived, it could have thrived. Coca-Cola, General Mills, and Danone provethat. Why didn't Hostess seize the opportunity? The company is privately held, so its business strategies are hard to divine. But baking businesses tend to be run by hidebound managers who concentrate on operations and distribution rather than on marketing and new products. Also, Hostess' management may have been blinded by consumers' fierce loyalty to their core brands.
Sure, plenty of people who love Hostess products, but there needed to be new ones to reach emerging market segments that wanted to cut calories and fat. Hostess did begin selling 100-calorie Twinkie Bites some time ago, but that was not nearly enough. Hostess should have taken a page from Nabisco, which in 1988 (as RJR Nabisco) faced its barbarians at the gate and was taken over by the leveraged buyout firm KKR, for a record $25 billion.
Like Hostess, RJR Nabisco was saddled with crushing debt. But since then Nabisco has grown its top line by smartly extending its iconic brands such as Fig Newtons and Oreos, adding choices that packed less of a calorie wallop. It now makes 46 variations of Oreo products, including a low-fat cookie. Between May 2010 and May 2011, Kraft, which owns Nabisco, sold more than $1.5 billion in cookies, the most in brands. Hostess' management should have reshaped the company into one that sold not only Twinkies and Ding-Dongs but also the healthier snacks people want now. Hostess' core market includes many who don't care about calories—the Natural Marketing Institute calls them the eat, drink and be merries—but the company ignored the one third of consumers who are jumping on the healthier food bandwagon.
They are where the growth lies. The market for indulgent food is declining, and demand for healthier alternatives is growing. Hostess's management ignored this fact, and that is why 18,500 people are losing their jobs. It was as avoidable as filling your whole cart in the snack food aisle.
Hank Cardello is a Hudson Institute Senior Fellow and Director of the Obesity Solutions Initiative.
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