“When it's between my career or a Twinkie, the Twinkie always wins.” That's what Jason Alexander, of Seinfeld fame, (George Costanza) had to say in 1996 about the cream-filled cake that has been all over the news lately.
A few years after that, President Bill Clinton included the Twinkie in the National Millenium Time Capsule as an “object of enduring American symbolism.”
A little more than a decade and three corporate bankruptcies later, you might have thought that the future of this American icon is in doubt with the liquidation of its maker, Hostess Brands Inc. That's what the hype and hyperbole have been suggesting.
That the Twinkie will survive while Hostess won't (except maybe in name only) makes for a story that is both interesting and illustrative of American capitalism.
The story starts out in 1930, when the Continental Baking Co. was looking for an inexpensive bakery product that would appeal to Depression era consumers. Bakery manager James Dewar, who had started his career 10 years earlier working for the company outside Chicago driving a horse-drawn pound cake wagon, created the recipe for the original Twinkie.
He took strawberry shortcakes that the bakery had previously made and injected them with banana cream filling. The name Twinkie was, according to Dewar, inspired by a billboard he saw advertising “Twinkle Toe Shoes,” which he shortened to make the name “a little zippier for the kids.”
Unlike strawberries, which were available only seasonally at the time, bananas could be sold year round. He and the bakery had a hit.
Continental Baking was acquired by ITT Corp. in 1968 and Ralston Purina in 1984 before being purchased by its competitor Interstate Bakeries Corp., in 1995.
Interstate Bakeries was itself the product of over a dozen corporate mergers and acquisitions, adding and dropping products and brands and changing names several times along the way.
Interstate Bakeries filed for bankruptcy in 2004, and in 2009, when the surviving company came out of bankruptcy, it was known as Hostess Brands Inc. and was owned by Ripplewood Holdings, a private equity firm.
But the company proved not to be viable.
In January, Hostess again filed for Chapter 11 bankruptcy proceedings, listing $982 million in assets and $1.43 billion in debt, most of that owed to union pension plans.
In legal papers, management cited a contract dispute and related strike by Hostess's unionized workers starting Nov. 9 as the reason for the recently commenced liquidation. But there were a lot of possible reasons, depending on point of view, why the company's finances were stretched so thin: high sugar costs, inflexible unions, too much debt brought on by corporate transactions, and poor management, among others.
The result was the same no matter what the cause: 18,000 jobs lost and about $130 million lost by Ripplewood's investors.
The tortuous path Hostess took over the years to an abrupt, and for some, painful end is really a classic American story: no government bailouts, and most Americans will barely bat an eye at Hostess's passing.
It is part of the story of how capitalism works; what Austrian economist Joseph Schumpeter called “creative destruction.”
According to the Concise Encyclopedia of Economics, creative destruction suggests that “lost jobs, ruined companies and vanishing industries are inherent parts of the growth system.”
If creative destruction sounds a bit Darwinian, that's because it is. But if it's cruel to some, it's probably also necessary: out from the economic wreckage caused by creative destruction come new companies and new industries that create new and better products and technologies that make us healthier and improve our standards of living.
Think of Twinkie baker James Dewar's horse-drawn pound cake wagon — if you're waiting for one of those to come along today, you may be waiting a long time.
Throughout the corporate turmoil, the Twinkie continued to sell as if nothing was happening. According to The Wall Street Journal, about 36 million packages of Twinkies were sold in 2011, not including sales from Wal-Mart and Sam's Club. And Twinkies themselves have remained pretty much the same — except for the switch from banana cream filling to vanilla (some would say “white”) cream during World War II, and a few tweaks like the green filling promoting the movie “Shrek” and the recent chocolate filling variety.
Just like it did all the prior corporate events, the Twinkie will survive its maker's liquidation. Corporate bankruptcy is almost like a snapshot accounting for creative destruction.
The products that a company makes that have value are separated from those that don't; the former are perpetuated and the latter retired (a fact that sometimes designates those who will keep their jobs from those who won't).
Twinkies will survive because enough people still want to eat them. Similarly, the name “Hostess” will survive if it has value as a brand.
But not even the Twinkie is immune to capitalism's laws. For now, it is safe. But tastes may evolve, something better may come along, or sugary snack cakes may fall out of favor with a more health-conscious public. But should that happen, it won't be a bad thing.