Thursday, November 15, 2012

Wonder Bread Faces Liquidation

Wonder Bread, which has been in bankruptcy all year, may go into liquidation as soon as tomorrow. The bankrupt bakery’s CEO said the liquidation was prompted by a strike of one fourth of the company’s workers, but there are larger challenges just around the corner. If the strike ended, it might delay the liquidation by only a matter of days.

The liquidation of Wonder Bread will not be a great surprise. A reorganization plan filed a month ago had so many gaps there was some doubt about whether the bankruptcy court would approve it. It featured an 8 percent cut in worker wages, along with what looked like a 50 percent cut in benefits, but it left Hostess Brands with just a few short months to patch most of the flaws in its business plan.

The fundamental problem for the company that makes Wonder Bread, Twinkies, and other junk food is that consumer habits around junk food are changing. Prices for junk food have to rise because they are energy-intensive products, and perhaps prices have gone up just enough that consumers now see Wonder Bread as a luxury item rather an everyday item. It is not that there is an abrupt movement by consumers away from junk food, it is only a subtle long-term trend, but if more consumers are saving Wonder Bread for special occasions, that does not add up to enough interest in the product to keep a huge national bakery company operating.

The difficulties in selling junk food are also seen in McDonald’s, which today let go its U.S. division president after a 2 percent global decline in sales. McDonald’s is still running off a recession-related burst of consumer interest which boosted its U.S. sales starting in 2008, but which showed signs of beginning to fade by 2009. The novelty value of junk food can’t be maintained year after year, and McDonald’s costs are so high that people can seek out a real-food restaurant lunch for about the same price.

If Wonder Bread can’t find a business model, the whole category of factory-fresh junk food may be done for. That is, it may be too expensive for trucks to deliver fresh junk food to grocery stores more often than once a week. People wanting junk food will mostly be left to choose between items made on-site, like donuts and supermarket cakes, and items that have an extended shelf life, like candy and frozen cakes.

The Wonder Bread and Twinkies brands will surely survive, but they won’t be the same. The recipes will have to change to fit into their buyers’ business plans. The same engineering that makes Wonder Bread (and Hostess Brands’ other products) so fluffy also makes them hard to distribute. There may be plenty of sentimental attachment to the old recipes, but from a nutritional standpoint, they won’t be missed. Human digestion is not meant for food so fluffy, and the mismatch is such that some scientists have argued that these foods have no net nutritional value at all. There is a fair chance, then, the same redesign that makes Wonder Bread easier to distribute will also move it one step closer to being real food.