This is a great week for America. Like a Phoenix rising from the ashes, the Hostess Twinkie hits store shelves this week across the U.S.
The return of the iconic yellow cream-filled cakes comes after production was suspended in late 2012 when the former parent company Hostess went bankrupt. Earlier this year, C. Dean Metropoulos and private equity firm Apollo Global Management purchased the division of Hostess that includes the Twinkies brand.
The new owners vowed the price of a box of 10 Twinkies would remain $3.99. That’s an amazing statement given the market dynamics that influence the price of Twinkies and other consumer-packages goods (CPGs). In the past few years, rising consumer demand drastically increased the price volatility for commodity and raw product costs. Think about the products that go into our iconic Twinkie: Sugar, Wheat, Corn, and Soybean Oil (to name a few). Each of these products is traded on global market exchanges and their prices are greatly impacted by various factors including global demand, weather, and market speculators. And that’s not even getting into the packaging costs. Products like paper and poly-ethylene (LLDPE, to be exact) are heavily used in making the plastics and paper packaging that a Twinkie comes in. 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.
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.
The 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.
capSpire can help. With our proven team of CPG experts we can help CPG organizations understand exposures, design and execute hedging programs, and implement systems that work seamlessly with their existing IT systems to manage price volatility and optimize margins.
capSpire, there is a better way.
About capSpire
capSpire is a global consulting and solutions company serving the Commodity Trade and Risk Management sector of the energy industry. Headquartered in the growing technology hub of Fayetteville, Arkansas, with an office in Tulsa, Oklahoma, capSpire has served over two dozen clients across North America and Europe. capSpire provides its clients with deep business and system expertise to simplify and streamline its commodity management functions for crude, natural gas, refined products, NGLs, coal, iron ore, agriculture and freight. Chief among its service offerings are IT strategy and planning, system selection, bespoke software development, implementation services, systems integration, complex enterprise content management and ongoing support.
