Seeing Charlize Theron, Twinkies, and Return on Assets
I saw Charlize Theron at the grocery store.
I was in the liquor department (not a surprise for me) and turned to see a tall, beautiful blond in her mid-40s. It was startling- so good looking that she seemed out of place in the suburbs of St. Louis.
A check of the world-wide interwebs told me that Charlize (we’re on a first name basis now that I saw her) is 5-10 and 48 years old. I didn’t say anything to her, but I’m convinced she was in town- for some reason.
Other things I enjoy seeing at the grocery store include Twinkies, Ho Hos, Ding Dongs, and Cup Cakes- all delicious products from Hostess Brands (the stock’s symbol is TWNK- pretty clever). Hostess is a great business story to explain return on assets, which I’ll get to shortly.
What happened at Hostess?
If you sense that Hostess products disappeared for awhile and came back, you’re right. This great Wall Street Journal article explains that ten years ago:
“Hostess Brands declared bankruptcy for the second time in a decade. Two investment firms rescued the snack cakes, paying $410 million for Hostess’s brands and kicking off a decade long fix-up job. Then came a dogged quest for efficiency and a determined search for the next Twinkie, all of which culminated this week in a deal to sell Hostess to J.M. Smucker for $4.6 billion.”
In spite of an increasing number of consumers focusing on health, Hostess treats still can thrive.
The article explains that consumers are taking a “balance-sheet approach” to snacking, choosing healthy snacks sometimes and treating themselves to sweets at other times.
Scarcity played a role in the Hostess resurgence.
The Magic of Scarcity
My brother-in-law always bought the newest tech device when it came out. Turns out the same desire applies to snacks. From the article:
“Hostess said it would go out of business in 2012 after the company failed to strike a labor deal with its bakers’ union.
For the next eight months, Twinkies couldn’t be found in supermarkets, and the scarce delicacies began to fetch Sotheby’s prices on eBay.
‘Nobody could gauge demand and the amount of product that we needed because nobody does this,’ said the current CEO, who is partial to Ho Hos. ‘You never go off the shelves and come back on.”
Turns out consumers loved the product- it reminds lots of people of their lunchboxes during childhood.
So how did Hostess recover from financial trouble?
Sharply lower costs
Hostess shifted from “34,000 employees when it entered bankruptcy in 2004 to 19,000 jobs when it entered liquidation in 2012 to roughly 3,000 today. The new owners operated just three of the company’s prior 14 plants.”
This brings us to return on assets (ROA), which is defined as (net income divided by total assets).
Here’s an ROA example:
Let’s say that a plumber buys a $30,000 truck and carries $15,000 in equipment to plumbing job sites. He uses $45,000 in assets to generate revenue from plumbing work. The more revenue he can generate from the truck and equipment, the higher ROA he generates.
Operating 3 plants- instead of 14- sharply lowers the Hostess in investment in assets. The denominator in the ROA formula (assets) is lower, and the ratio can increase- creating a higher return.
Longer shelf life- improved supply chain
Twinkies aren’t nuclear waste- but they’re close.
I always figured that a Twinkie could sit on the shelf forever. Turns out that’s not true:
“By using enzyme and mold-inhibitor technology to adjust the moisture of the product, Hostess ultimately prolonged the shelf life of Twinkies to 65 days, from 26. (Twinkies don’t actually last forever. But now they last closer to forever.)”
The accounting impact?
Hostess can store inventory in warehouses longer and make fewer total shipments to stores. This simplifies the supply chain, lowers cost, and reduces the labor expense paid to drivers and staff.
The lesson
Take a close look at the assets used to operate a business, and the net income (return) earned on the assets.
And have a Twinkie- life is too short.