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Hostess Brands, makers of Twinkies, Wonder Bread and many other relatively “junkie” foods, filed Chapter 7 bankruptcy liquidation papers recently. The company had revenues of nearly $3 billion, and was bought and sold by private equity funds twice in the last 10 years. After loading the company up with debt, Hostess twice filed for Chapter 11 bankruptcy in order to restructure. Six different management teams in the last eight years, each presumably more highly compensated than its predecessor, failed to change the company’s product offerings to respond to the market’s demand for healthier products.

The liquidation was triggered by a nationwide strike by the 5,600 employees who were members of the Bakery, Confectionery, Tobacco Workers and Grain Millers Union (BCTWG). 92% of that union’s employees rejected a new collective-bargaining proposal in September. The company’s offer included an 8% wage cut in the first year, a 17% increase in employee health-care costs and changes to workers’ pension plans that could have reduced payouts. Hostess long had said it couldn’t survive without cutting labor costs, even as it enraged workers by increasing top executives’ pay by 60% earlier this year. In a move reminiscent of Russian Roulette, the bakers union workers essentially pulled the trigger for all of the company’s workers…and lost.

Teamsters, which with 6800 employee members was the company’s largest union, narrowly voted to accept the company’s proposed deal. Teamster President Jimmy Hoffa said his team “switched gears” from trying to preserve all 18,000 Hostess jobs, a prospect he viewed as “off the table,” and instead was trying to drum up buyers for “bits and pieces” of the business. ¬†Average pay for union workers was $16 an hour for the bakers and $20 an hour for the Teamsters. Frank Hurt, President of the BCTWG, called the company’s proposed 8% wage cuts “draconian” even as his members received 100% wage cuts from loss of their jobs. For this inspired leadership, he is paid about $250,000/year.

Hostess Chief Executive Gregory Rayburn had a different vision of how the bankruptcy auction process would play out. “Nobody wants to have anything to do with these old plants or these unions or these contracts,” Mr. Rayburn said. The company had hunted for buyers for the last several years as it tried to avoid a second trip into bankruptcy, but no buyer came forward. Potential buyers have made clear that their interest partly is because a liquidated Hostess would be free of its collective-bargaining agreements. A buyer might yet pick up a few of Hostess’s plants. Alternatively, the union(s) can now buy the assets in bankruptcy and reconstitute the company as a workers paradise without management sucking out all the benefits.

At the time of this bankruptcy, Hostess, with dozens of plants, had 372 collective bargaining pacts, 80 health and benefits plans, 40 pension plans and $100 million in retiree health benefits. The company had asked the unions to take the pay cuts and increase in benefits costs in exchange for a 25% share in the company and an interest-bearing $100 million note.

It appears that the bakers were operating with relative efficiency, and it is possible that some of the 33 plants producing the Hostess products will be purchased and their workers reemployed. The Teamsters, who were on average better compensated, had tied logistics into knots for years with negotiated work rules. As an example, Twinkies and Wonder Bread that were produced in the same facility and destined for the same customer had to be delivered by separate trucks, and put into warehouse or store shelves by different union workers.

18,000 workers are a large group of people. Unfortunately for these workers, they are strategically unimportant to the US economy. Hostess plants were scattered around the country and the shutdowns will not inordinately affect any one state or section of the country. With average annual wages of less than $40,000/worker these were jobs held by relatively unskilled laborers. Unlike autoworkers who are cogs in a complicated supply chain, other industrial workers do not heavily depend upon the Hostess products output. Most of the forgone Hostess products will be quickly and easily substituted with the output of Hostess’s many competitors.

What is the lesson to be learned here? Is this a case of unionism run amok? Was it a case of internecine union warfare with the bakers tired of getting a worse deal than the Teamsters? Were the workers justified in finally pulling the plug on a company whose management(s) repeatedly failed them? Or was it but another example of “creative destruction“? Diogenes suspects it is all of the above. It remains a tragedy in human terms. Many, if not most of those workers will likely face an extended period of unemployment. If and when they do find new jobs, that work will likely pay less and offer fewer benefits. The union operation was a success. Unfortunately, the patient died.

One Comment

  1. avatar

    david r says:

    I agree with Diogenes. As a ‘child of the 1950′s’ I recall with fondness the various Hostess offerings. One of my wife’s secret sins is a “bologna sandwich on WonderBread.”

    Sadly, the 1950′s are gone. While these various brands are iconic, the actual offerings are counter-cultural today. This company might have lasted longer with fewer union problems and better management, but I think the whole product line was doomed.

    Despite my fond memories, I haven’t bought any Hostess products in decades.

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