Market Risk and Snack Cakes: capSpire Discusses the Fall and Rise of the Hostess Twinkie

Posted by on April 29, 2013 in News | Comments Off

This is a great week for America. Like a Phoenix rising from the ashes, the Twinkie snack cake hits store shelves this week across the country after its former parent company Hostess filed for bankruptcy in late 2012.

A sweet surprise for Twinkie lovers as the iconic snack cake returns to store shelves this week — the brand’s new owners vow the price of a box of ten cakes will remain an affordable $3.99. With volatile market dynamics that influence the price of Twinkies and other consumer-packaged goods (CPG), a promise to begin production and distribution of the famous brand without budging prices is an amazing statement from the new owners.

Historically, CPGs thought of these inputs as supply costs and nothing more, but given market changes, they must begin to recognize and manage the risk implicit with the new market order.

In the past few years, rising consumer demand drastically increased the price volatility for commodity and raw product costs. Products used to create each Twinkie, such as sugar, wheat, corn, and soybean oil, are traded on global market exchanges and their prices are greatly impacted by various factors including global demand, weather, and market speculators. That’s not even addressing packaging costs. Products like paper and poly-ethylene are heavily used in making the plastics and paper packaging that surround each Twinkie. If the plastic used in manufacturing a year’s worth of supply was rolled out, it would cover over 40,000 miles. That’s a huge exposure in the petrochemicals market.

Additionally, increased fluctuations in energy prices have also strongly influenced the costs to manufacture and transport goods to consumers. From the natural gas and electricity used to run plants to the diesel fuel used in the trucks that transport Twinkies to their point of distribution, energy fluctuations can severely impact margin.

capSpire Director Larry Loocke says increased costs and price volatility is a call to action for CPG companies to manage their margins.

“Traditionally a CPG company, such as Hostess, would lock in the sales price of a case of Twinkies on a term contract for 12-24 months. So how can a CPG control and limit cost exposure for commodity, raw material, and transportation costs? Historically, CPGs thought of these inputs as supply costs and nothing more, but given market changes, they must begin to recognize and manage the risk implicit with the new market order,” Loocke explains.

In total, between 2002 and 2007, CPGs only passed on a 15% price increase on average to consumers, yet their costs increased by 40%. Since 2007, this extreme volatility in commodity and energy prices has been sustained in the market. Global consulting and solutions companies like capSpire can help CPG companies understand exposures, design and execute hedging programs, and implement systems that work seamlessly with existing IT systems to manage price volatility and optimize margins.

To learn more about capSpire and the firm’s proven team of CPG experts, visit www.capspire.com.

About capSpire
capSpire is a global consulting and solutions company that creates, customizes, and implements meaningful technology for commodity trading organizations. With a focus on commodities trading, risk management, and complex enterprise content management; capSpire also creates valuable business process and technical solutions, such as the capSpire Gravitate Portal. capSpire offers an unparalleled level of services including IT strategy and planning; system selection and integration; and ongoing production support. Headquartered in Northwest Arkansas, with an office in Tulsa, Oklahoma, capSpire serves Fortune 500 companies in the Americas and Europe. Visit http://www.capspire.com/ for more information.