Hostess: Reverse Tipping Point?

Hostess—owner of iconic American brands of baked goods, including Hostess Cupcakes, Twinkies and Wonder Bread—is being liquidated. Potential buyers are circling looking to purchase the brands and get them back on the shelves as soon as possible. Yet, are these brands really worth resurrecting? The automatic assumption is that iconic brands like these are very valuable. But just having a well-known brand does not mean it can be turned around and returned to its former glory. While there have been many attempts to turn around declining brands, the record of success is decidedly mixed. For every story like Cadillac, which GM brought back from the brink (after investing countless billions), there are many more of attempts that have failed.

If you have a fading brand, the key is to determine whether or not it can be salvaged. Doing so requires considering these four questions:

  • Is it too late? A well-known phenomenon sociologists have studied for decades called “cascading” is the idea that once a critical mass of people decide on something or take some action, then just about everyone else will join in. Malcolm Gladwell covered this in his popular book The Tipping Point. However most examples of the cascading effect, including Gladwell’s, focus on the spectacular growth of something new, e.g. the adoption of smartphones (iPhone), social networks (Facebook), new apparel brands (Uniqlo), or videos (PSY's “Gangnam Style”). Often what is not considered is a reverse tipping point, when a fading brand reaches a threshold point where so many people reject it that nearly everyone else follows suit. Up to that point it’s possible to reverse the trend; after that point it’s almost impossible. As a very rough rule of thumb taken from the world of politics, when 30 percent to 40 percent of a brand’s users stop using it then it’s most likely too late for a turnaround. 
  • How bad is the damage? Assuming the tipping point hasn’t been reached, you need to figure out the extent of the damage. With somewhat stable categories like food, an assessment can be done fairly easily since relative benchmarks—other similar products—typically change slowly over time. In highly dynamic categories like smartphone or tablets, the challenge is that by the time the damage is determined it’s often too late. And in the service sector, the definition of what the brand actually is can be so nuanced as to be very difficult to assess. Ideally a brand tracker is in place to give some sense of trends and potential problem areas. There are also a host of research techniques such as net promoter scores that can provide insight into the relative strengths and weaknesses and the future outlook for the brand. Quickly and deeply analyzing new products and brands in even these faster evolving categories can give you just enough time to respond.
  • What to do next? Every situation is different but a good starting point in most cases is to go back to the roots of the brand. In other words, identify what it originally stood for and then build from that foundation. Any faded brand did something right in the past but over time that focus can be lost as products and services bulk up with new features and capabilities obscuring the core. Returning to the core will more than likely capture some of the energy that powered the brand as it ascended and bring focus to the efforts to rejuvenate it. But be mindful that while the core ideas may still be valid, more than likely they must be changed to make them attractive to today's consumer. Many fashion brands from Coach to Burberry to Nike along with auto brands like Cadillac have successfully kept true to their roots while updating products and marketing to stay relevant.
  • Can we afford it? Financial theory (grossly over simplified) says that if the return on investment exceeds borrowing costs then you should invest. The real world is quite different given the realities of paying dividends to stockholders, cash to fund the business, never ending efforts to improve margin, various types and levels of risk, and finite funds available to invest. The key here is to use the amount of money you have to invest to find the areas customers (current, past and future) value most and determine what it takes to fix them. Quantitative research, not used nearly enough in these situations, is essential in making such determinations.
    With this information, calculate the expected return-on-investment. Although there are many ways to forecast economic return, simpler calculations will often suffice given the inherent unknowns. And if the return is outrageously high (to offset known and unknown risks plus the option of investing funds in other brands and areas of the business) then go ahead and spend. Once the financial analysis is done, the objective can end up being different than a turnaround, which is what most people assume at the start they should pursue. Sometimes the best return can be to slow a decline and not reverse it, leading to a slowdown rather than a turnaround. Other times you may still choose to spend despite relatively low short–term returns for strategic reasons, e.g. to prevent a competitor from entering leading to greater margin pressures in the future. At the end of the day, the objective should be supported by the numbers.

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