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Low-carb blamed for Twinkies' undoing

By DAVID TWIDDY
The Associated Press

ORLIN WAGNER / AP Twinkies snacks sit on shelves at a Wonder Bread outlet store in Lawrence, Kan. Interstate Bakeries, which has been struggling for months, filed for bankruptcy protection yesterday.

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KANSAS CITY, Mo. — Interstate Bakeries, the purveyor of lunch-box staples Wonder Bread and Twinkies, filed for bankruptcy protection yesterday, felled by the combination of a more health-conscious public and smothering operational costs.

The nation's largest wholesale baker, which had shown signs of financial weakness for months, filed for Chapter 11 reorganization and installed new management, saying it intended to survive. The company said it would continue operating its bakeries, outlet stores and distribution centers.

Tony Alvarez, the head of turnaround firm Alvarez & Marsal and the baker's new chief executive, said the company had no immediate plans to lay off additional personnel.

But, he added, "It's very rare in this country that anyone goes through Chapter 11 and is layoff-free."

For more than a year, Interstate Bakeries has struggled with declining sales of its bread and sweet-goods products, a drop the company and analysts blame on the popularity of high-protein, low-carb diets such as Atkins and South Beach.

Thomas Morabito, a food analyst at Longbow Research in Cleveland, said the company was hurt by what he called a "lack of innovation" in responding to the low-carb market; it didn't release a low-carb product until February.

He said the diet trend, combined with the company's high debt and large overhead costs, led to yesterday's filing.

"I think the low-carb phenomenon was just a final blow to [Interstate Bakeries]," Morabito said.

The Kansas City-based company listed assets of $1.6 billion and liabilities of $1.3 billion in its court filings. In those filings, it said chairman and CEO James Elsesser had resigned, effective yesterday. Joining Alvarez from his firm is John Suckow, who was named Interstate Bakeries' chief restructuring officer.
 
The company also said J.P. Morgan Chase had agreed to provide the bakery with $200 million to pay employees, vendors and other expenses during the reorganization, provided officials got approval from a bankruptcy judge. A hearing was scheduled for today in U.S. Bankruptcy Court in Kansas City.

Interstate Bakeries and its subsidiaries employ 32,000 people at 54 bakeries and 2,200 distribution centers and outlet stores across the country. In the past two years, the company has laid off about 800 employees as it closed several bakeries.

The company operates two production facilities in the Puget Sound area including a Wonder Bread factory in Tacoma and a Hostess bakery in Seattle. The Tacoma plant opened to replace a historic Wonder Bread factory built in 1931 on South Main Street in Seattle that closed in 1999 to consolidate the company's operations in the Northwest.

Interstate Bakeries also operates several outlet stores here that sell Wonder Bread, Hostess and Marie Callender's products.

While Alvarez said he remained optimistic when speaking with employees yesterday, he acknowledged in an interview that it could be weeks before he and his management team can study the company's operation and determine its future.

"After two days, I have more questions than answers," he said. "We're in an industry that is challenged because of consumer tastes. We have to come up with strategies to offset the revenue issues and strategies to reduce our cost base. It's way premature to tell what that may be."

Gary Hindes, who manages Deltec Asset Management in New York, a firm that works with distressed companies, predicted the solution would be far from complex, centered on responding to a market that is less tolerant of sugar and carbohydrates.

"Fixing this company is not rocket science," Hindes said. "Their costs are too high. What they're going to do is sell off bakeries, renegotiate union contracts. I think it will come out a lot leaner and profitable operation."

The first sign the company was in serious financial trouble came when it missed an Aug. 30 deadline to file an annual report for the fiscal year that ended May 29.

That report was initially delayed because of an ongoing internal investigation into $40 million the company placed into its reserve for workers' compensation claims. Following the review, the company said it would have to restate earnings for parts of 2003. Meanwhile, the Securities and Exchange Commission said it had started its own investigation into the workers' compensation issue.

Interstate Bakeries hasn't issued a report on its finances since April. Last month, it said it was having trouble putting out figures for the most recent quarter because of computer troubles.

At the same time, the company said it might not be in compliance with its loan agreements and that its external auditors might have to add language to the annual report expressing doubts about whether Interstate Bakeries could continue as "a going concern."

While the future of the company was unclear yesterday, analysts said its famous brands — Hostess, Wonder, Baker's Inn and Home Pride — are unlikely to disappear from store shelves.

"Someone is going to want to get their hands on the Twinkie brand," he said.

Seattle Times business reporter Blanca Torres contributed to this report.