Interstate Bakeries' Twinkie Defense


By Pallavi Gogoi Wonder Bread and Twinkies have fallen victim to the low-carb craze. At least that's the idea Interstate Bakeries (IBC), the maker of those iconic products, put forth on Sept. 22, when it filed for Chapter 11 bankruptcy protection.

Truth be told, Interstate's story is really one of lost opportunities. "Low-carb is the least of their problems. It's like blaming the weather," says Robert S. Goldin, executive vice-president at food consultant Technomic in Chicago. Indeed, like the quaint nostalgia that its core brands evoke, Interstate had continued to inhabit an outdated world that consumers had moved out of.

THE GOGURT GENERATION. The Kansas City (Mo.) baker has been delivering sliced bread and other products since the 1930s. In its bankruptcy filing, Interstate cited liquidity issues resulting from declining sales, a high fixed-cost structure, and increased costs for ingredients and power. It obviously didn't help that its antiquated bakeries consumed too much energy.

Overriding all this was Interstate's seeming inability to keep its brands alive. "To not innovate is a death sentence, and nostalgia won't carry you through this," says Rick Bozzelli, merchandising manager for McCaffrey's Markets, a regional supermarket in Langhorne, Pa. Mired in its past glory, Interstate never really reinvented itself. It continued to flood the baked-goods aisle with its low-priced Wonder Bread even as consumers turned to fresh-baked supermarket or specialty breads.

As for Twinkies, Interstate's other iconic offering, they're now viewed as junk food -- a sugary snack few adults would indulge in and one lacking in appeal to a generation of children who snack on Gogurt. "I look back on Dolly Madison and Twinkies fondly and romantically from my childhood, but a lot has changed since then, and the company had a difficult time keeping up with the times," says Wendell Perkins, chief investment officer at Johnson Asset Management. (The firm owned Interstate stock in the past but had sold it prior to its recent troubles.)

CASH INFUSION. It appears that Interstate recently started to recognize the challenges it faced. In its third-quarter results, filed on Apr. 15, then-Interstate CEO James R. Elsesser said he believed that consumers were focused on "seeking out low-carb alternatives." The company had introduced a line of low-carb breads under the "Home Pride Carb Action" name during the third quarter, Elsesser pointed out at the time. But that move was too little, too late.

Interstate had delayed filing its fourth-quarter results and its annual report for various reasons. These include several investigations into its reserve fund for workers' compensation claims and the likelihood auditors would include a paragraph in the report saying "there may be substantial doubt about the company's ability to continue as a going concern," according to Interstate.

Investors who were lured by the nostalgia of well-known brands have been severely punished. Its stock price closed at $2.05 on Sept. 22, off $1.22, or 37%, since the prior close. That's down from $15 in September, 2003.

TURNAROUND HELP. With annual sales of $3.5 billion, Interstate operates more than 50 bakeries and has about 34,000 employees nationwide. Though it closed two bakeries recently, Interstate spokeswoman Maya Pogoda says the outfit plans to continue operating the rest of its bakeries and distribution centers. It has a commitment, subject to bankruptcy court approval, from JP Morgan Chase Bank (JPM) to provide $200 million to operating costs, including paying suppliers and employees.

Elsesser resigned from his positions as CEO and chairman on Sept. 22, and the board named Tony Alvarez as CEO, with John Suckow as chief restructuring officer. Both are with Alvarez & Marsal, a turnaround management firm founded and headed by Alvarez. That firm was hired in late August to help come up with a strategy for Interstate. Alvarez & Marsal was recently credited for turning around lingerie concern Warnaco Group (WRNC) in New York.

One can only hope that Alvarez & Co. will look beyond the low-carb trend to fix this former Wonder of a company. Gogoi is a reporter for BusinessWeek Online in New York


Race, Class, and the Future of Ferguson
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus