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Walmart/Kroger in Hunt for Twinkies Exclusive?

December 14, 2012

Two surprise names — Walmart and Kroger — have reportedly turned up among the bidders for Hostess Brands Inc., the bankrupt maker of Wonder Bread and Twinkies.

According to Bloomberg News, more than two dozen bidders, including Walmart and Kroger, are bidding for Hostess, which moved to liquidate last month after failing to reach an agreement with its unions. According to Bloomberg, a person familiar with the case said some bidders are looking to acquire "all the assets, some are for just the cakes or breads businesses, and others are interested in individual Hostess plants."

Items for sale include Hostess, Drakes and Dolly Madison, which make cake products such as Twinkies, CupCakes, Ding Dongs, Ho Ho's, Sno Balls and Donettes. Bread brands to be sold include Wonder, Nature's Pride, Merita, Home Pride, Butternut, and Beefsteak.

Some reports said it would be unusual for a retailer to step in because they wouldn't likely sell the brands in competing stores. Even with their own stores overseas, they'd also be less likely to fully benefit from foreign sales. But other reports said an exclusive on a brand like Twinkies could prove to be a traffic draw and differentiator for a chain.

Walmart could outsource production to some of the partners it already has private label arrangements with. In doing so, they'd avoid buying Hostess' plants and some of the inherent problems that led to the liquidation.

"Outsourcing to someone else to make this stuff makes sense," Colin McGranahan, a Sanford Bernstein analyst, told Forbes. "I would guess Wal-Mart would not be the actual manufacturer. And that sounds like that was the real problem with the business anyways."

Kroger, where store brands represented approximately 26 percent of grocery department sales dollars in the third quarter, already owns nine factories as well as 37 food-processing plants.

Hostess is also said to be attracting other food suppliers as well as financial buyers. The buyer reportedly wouldn't have to absorb any of the union or pension funds liabilities. Interest in the properties is said to be stoked by nostalgic Americans rushing out to stores after hearing the plants were shutting down.

FINANCIALS:     [NYSE:KRO] [ NYSE:WMT] [ ]

Discussion Questions:

Does it make sense for a retailer to acquire Hostess Brands or parts of its business? Is gaining a brand exclusive becoming more meaningful in the food category? Who do you think would be the ideal buyer(s) for Hostess Brands?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Do you think buying Hostess Brands would be a smart move for Walmart or Kroger?

Comments:

Certainly an interesting twist on the "exclusive" store-brand concept, albeit with a formerly national brand and wide name recognition. This *could* be a draw for Walmart stores, although one with arguably limited appeal (especially once Twinkies' 15 minutes are over). Interesting idea; let's see what comes next.

Fabien Tiburce, CEO, Compliantia, Retail Audit & Task Management Software

This is hilarious! Despite all the mourning over the death of Twinkies, I don't think anyone actually eats the things. Still a clever move.

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Paula Rosenblum, Managing Partner, RSR Research

I would think it would be great for the retailer assuming the price is right and it makes financial sense. I'm happy, as long as I can get my cupcakes and Devil Dogs. Kroger would be a great choice—and could license to areas of the country where they aren't if cross-shipping is controllable.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

If the financials are workable, this could be a great deal for Walmart, as their demographics must match up perfectly with Twinkie and Wonder Bread purchasers. If they can buy the brands, outsource the production, and bypass the unions, they have hit a home run. Seems to me that Dollar General, Family Dollar, and perhaps Target should go for it as well. How often does an opportunity to take iconic national brands and turn them into private labels come along?

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Al McClain, CEO, Founder, RetailWire.com

Let's see...do Walmart and Ding Dongs, Twinkies, et al go together? Like a horse and carriage. A hand with a glove. A kiss with a squeeze. Like RetailWire with a BrainTrust.

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Ian Percy, President, The Ian Percy Corporation

Retailer bids for the Hostess brand seemed inevitable, and probably smart as well. The winning bidder (Walmart, Kroger, or other) will be able to farm out the production and benefit from the brand as an exclusive.

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Matt Schmitt, President, Chief Strategy & Innovation Officer, Reflect

Hostess Twinkies and the Hostess catalog of brand names could certainly be a marketing differentiator for either retailer—Walmart or Kroger. Hostess is an iconic American brand and either retailer can leverage the 'Made in America' and revitalization of American business value of this brand well beyond just the business value of the actual product itself. The Walmart brand and its identity would be a better fit in both business and marketing value terms.

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Adrian Weidmann, Principal, StoreStream Metrics, LLC

Twinkies and the other Hostess/Drakes brands are very well known and enjoyed good sales volume before all the recent scarcity foolishness. One of the underlying issues that plagued the company was simply that the snack brand could not be distributed on the same trucks with the bread and therefore the cost of delivery was too high for both.

It could make good sense for either Walmart or Kroger to buy the brand. Both have a way to get the products made and have large retail networks in which to sell them. Kroger not only has its supermarkets but operates almost 800 c-stores. How much value there would be in an exclusive would would depend on the price they had to pay to get the brands.

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Steve Montgomery, President, b2b Solutions, LLC

This is a real headscratcher—on one hand the products fit the demographics of Walmart better than Kroger; on the other hand the ability to manufacture lies with Kroger. Either way there is probably not enough volume to keep the items exclusive to one chain. This looks like a prime opportunity for a store brand baker to diversify their products, maximize production efficiency and maybe change the distribution model from DSD to warehouse.

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J. Peter Deeb, Managing Partner, Deeb MacDonald & Associates, L.L.C.

Why not? Private brands are gaining in the market, and to have a private brand that is well known will certainly drive traffic into stores. If it makes financial sense, perhaps retailers will look at other brands that are for sale and make them exclusive to their stores as well. The question is: how long will Twinkies remain the hot topic? Once this cultural phenomenon cools down, will the sales cool down as well?

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Zel Bianco, President, founder and CEO, Interactive Edge

Everyone is talking about what a great deal this would be for Walmart (though I think Kroger is a better fit for actually managing the business due to their experience in running company owned bakeries)—but that's not the real question here.

The problem with the "buy the brand and outsource the manufacturing" scenario is that it is the worst deal for Hostess. And as long as there are viable bidders for "the whole shebang"—that's probably where they are going to go.

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Ben Ball, Senior Vice President, Dechert-Hampe

A national retailer buying the Hostess brand would be a brilliant move. Very surprised Target is not in the mix. Kroger and Walmart are ideal retailers to scoop up this brand and keep it exclusive to their stores. Twinkies, CupCakes and Ding Dong's all have the opportunity to be a destination brand. This exclusive is stronger than any Private Label brand I can think of. It makes me wonder if retailers will start seriously looking at other iconic brands to buy and keep exclusive.

From the CPG side, Pepperidge Farms (Campbell's) or Entenmann's (Bimbo Bakery) would be an ideal buyers since they have the DSD network already in place.

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John Boccuzzi, Jr., Managing Partner, Boccuzzi, LLC

There is an interesting (sad?) commentary to all this which says that the "marketing," the brand name and its franchise, is worth more than the people and plants which produced these products for so many years.

I think in today's world of vast "sameness" that anything a retailer can do to differentiate themselves is a help. Having two iconic brands is one way to accomplish this. I guess the challenge becomes whether you want to make them available to your competitors? There is probably a range of thinking here, everywhere from keeping them exclusive to making the brands their own profit center and selling them both externally and internally. For some people, it may not be possible to reach a desirable price point without the economies of scale provided by external sales.

Obviously there is some risk and the price that must be paid is critical, but it seems Kroger would be in the best position to take advantage of this opportunity. The incremental cost of producing a few new products on existing production lines should not be significant and the differentiation these brands would provide at store level will be worth it.

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Bill Bittner, Principal, BWH Consulting

Hostess Brands fits the Walmart shopper profile and makes sense as a retailer—owned brand. Hostess has always been perceived as a slice (no pun intended) of Americana. This would make for an attractive Walmart-only portfolio of brands. The brands have residual value and are probably why the Hostess management and unions never resolved their differences.

The Hostess' cost of goods sold was a profitability issue and generated significant pricing pressure for the company. Unfortunately, the real losers in this scenario are the workers in the Hostess bakeries. I doubt if anyone will purchase Hostess for anything other than its brand equity.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

It seems plausable for a retailer. But what is the upside for sales? I am having a problem justifying the ROI.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

I think Walmart buying Hostess would be brilliant.

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Joel Rubinson, President, Rubinson Partners, Inc.

Interesting indeed...I don't know of any national brand ever becoming a house brand (though of course that may say more for my ignorance than the singularity of the event). Anyway, the article correctly highlights the dilemma: the advantage of exclusivity vs. giving up sales thru other sellers.

Anyone giving odds on which product won't make the cut ? Regardless of who ends up the buyer...my money is on Wonder Bread.

'notcom'

I really like this idea; getting a name-brand exclusive in your store vs having to create a 'new' brand.

If I had to pick a retailer it would be Walmart, as they have the biggest reach and could create other channels with the brand. I'm not sure what the breakeven distribution would be if it was unique to one retailer.

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

Why not? The consumer match is like cake and creme. As retailers are looking for any points of true differentiation, having exclusivity to iconic brands like Twinkies and Devil Dogs could go a long way. The numbers have to work of course, but with WM traffic shifts to other discounter channels (Dollar), it may be a good bet place.

Carpe Diem.

Peter Muratore, Vice President, WSL Strategic Retail

There are numerous operating systems that are common to manufacturers and retailers. Added Private Label opportunities, experienced work force, equipment and physical plants are but a few of the capital points that might be of interest to Walmart and Kroger.

In addition, having a peek at these operating points offers Walmart and Kroger with a sound financial comparative to their current practices.

Breaking up the dysfunctional remnants of Hostess will prove to be best for buyers, most of the baking side of Hostess, as well as for the Hostess employees who are interested in maintaining a career.

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Roger Saunders, Managing Director, Prosper Business Development

Makes for great PR and reputation building.

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Jerry Gelsomino, Principal, FutureBest

This could be a nice move for Walmart. Hostess products would be a well known instant house brand and fit their market. And sales through Sam's Club can result in nice business with all those thousands of gas/convenience store operators who come in, pick their own palette load of goods and do the "distribution" themselves. These small stores were selling a lot of Hostess products by my observation. This scenario wouldn't bring back many of the jobs lost, but the Occupy Walmart protestors would have one more point to argue. And I could get my SuzyQs again. And maybe Walmart would see fit to distribute Drake's cakes in areas other than the Northeast.

Thomas Muscarello, Chief Strategist, Make It Happen Now

I think there is more at play for Kroger. This was their provider of private label bread in at least a few divisions I am aware of (about half of Smiths, and all of Dillons, for example, and I am sure quite a few other spots). They may actually see value in some of the bread plants and the physical locations as they could use them to produce house brand bread.

Then there is the Hostess brand itself. I would not put it past Kroger to purchase this brand and sell the products to other retailers. Looking at what they have done with the Turkey Hill brand, while I am not too sure about it, they have managed to get that brand on ice cream and tea into a lot of other retailers in the plains states...and even out here in the west, some convenience stores (Jacksons and Maverik) that they do not own have started to carry a limited mix of the tea. I have yet to see it at any grocery store out west other than Kroger divisions, but back in the plains states I have seen it at Albertsons LLC, Hy Vee, and various Associated Wholesale Grocers customers.

'storewanderer'

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