re: WSJ: How Smuckers Screwed up Hostess

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Tucker Marshall

See you can’t?

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Crassic...

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Would you be kind enough to expand on this point?

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Sure.
In the 1980’s PE got a bad reputation for buying into companies, selling off chunks of it, cutting jobs to the bone, and then selling the resulting profitable company which turned out to be a zombie due to the cuts.

This reputation was undeserved. Much of what is cited in the paragraph above did indeed happen, but it happened because American businesses, nearly devoid of competition in the post WW2 era, had become bloated and inefficient. PE was one of the main instruments that whipped American business back into shape and allowed us to have explosive growth over the next decades. That model still happens from time to time but it is rare.

I was part of an ownership team that was courted by numerous PE firms. I’ve met with at least a dozen in that capacity. With only one exception, they astounded me with their intimate knowledge of our business and our industry, often giving us insight into our own business that we never would have developed on our own.

As an investor, I have invested alongside PE, in PE led acquisitions, and I’ve sat in investor meetings and management meetings for those companies. In each case PE has been a patient, wise partner that has taken unsophisticated owners/founders and leveraged them into performance levels that would have been completely unattainable without the PE input.

In the few cases in which these have not gone well, it has been an unfortunate turn in the industry or a fatal flaw in the management team that has led to the demise.

PE has not only served as a great incubator of business, but it has also served to facilitate the flow of capital to sectors of the American economy that we badly need to be supercharged. When we are short of oil PE, motivated by the price rise, will rush in and accelerate the exploration and production of oil to the consumers’ convenience. This role, performed for private companies so well by PE, is performed by the stock markets for public companies.

I came from the ownership and operations side of business, and my considerable experience with PE has developed in me a very strong respect and appreciation of that industry. There are some yo-yos out there. But they will underperform and the market tends to winnow them out.

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These deals are always about the money, right? Why would you not want a finance guy in charge?

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Because cheapening the process and ingredients.. which for "finance" people will be goal #1... always makes the end product worse. And worse products begin a death spiral for those products if it's not corrected.

Look at when the bean counters get the final say in manufacturing. You get the billions of dollars of recalls because it was cheaper to delete that extra few bolts or source a critical part from a Chinese sweatshop.

When the engineers ran GM, you got the rock solid small block GM engine, you got reasonable and exciting cars like the GTO, when the engineers ran Boeing, you didn't have a 737 decide to just crash on its own whim..

Long story but, to my mind, a decent example of the big picture problem with most PE. I’m friends with a fairly big time PE guy here in NY. Good guy that I see often since he’s married to my cousin.

Anyway, I own a record shop and he’s been a few times. He came by one day and we went to get a drink afterwards. He commented on how impressive the shop was. We talked about sales numbers and expenses and about other shops around the city. Said he had been thinking about putting me in contact with some of his friends that would be interested in investing. I could basically operate a chain of these shops. He talked about how this could streamline costs and that would facilitate buying out other shops and expanding.

He’s a really good guy and there’s nothing intentionally bad spirited about that idea. He was mainly trying to help me since this wouldn't even be a blip on his radar financially and I sincerely appreciate it. However, my immediate thoughts were:

1) All these shops are cool and popular because they’re unique and 100% run by owners “on the ground,” who rise or fall on how well that shop keeps customers coming in. Sure, some of the business is simply a person wants a record but a whole lot more is that they want the shop experience.

2) The upshot of his plan is that I make a lot more money (salary with incentives) along with the investors making profits. However, when you think about it, that money mainly is just transferred from current shop owners and the employees that would certainly be paid less than I pay them. None of it necessarily meant more records would be sold as much as it would merely redistribute the profits. If more records were sold in the entire market, that money would go to the investors and perhaps create more retail jobs at minimum wage.

This plan seemed to be exactly what I find to be such a problem all over the country today:

You take numerous decent jobs (shop owners, long time managers, employees, suppliers) and squeeze those for investor profits.

You streamline costs by squeezing other people that are making a decent living but not getting rich operating record pressing plants, distros, specialized supplies etc. If you’re really successful, it likely means those small businesses are also bought out. Tellingly, what never came up was that records would be cheaper for the customers.

You also turn something unique that people really enjoy into a bland, well-oiled machine at best.

He’s a good guy and I know him well enough to say that I really appreciated the advice but it really wasn’t the world I want to live in even if I personally make more money doing it.

Smuckers has acquired multiple billion dollar brands and cuts the quality on them. They don't know how to run multi billion dollar brands.

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It turns out Smuckers did what corporations do when they buy other companies: They screw things up.

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They fire the people who were successful in building the brand and replace them with their own people who know nothing of that industry. Every single time.

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Hostess products require quicker delivery than Smucker’s.

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One of the reasons why the trucking company I work for cut ties with Hostess - they started demanding team drivers to quicken the delivery times from warehouse to distributor where before it was solo drivers. They thought they could get us to use team drivers to get from Kansas City to the four corners of the country in less than 36 hours while paying rates that barely covered the cost of diesel. lol no good luck.

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Campbells has done the same to Pepperidge Farm

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I remember...