Hostess Brands, Inc., which bestowed the Twinkie upon mankind, filed for bankruptcy last week. They survived one previous brush with bankruptcy in 2009, but if this one puts them down for good, it will become much harder to find a Twinkie after the zombie apocalypse. (Warning: not-safe-for-work language in the video embedded below.)
There is no mystery surrounding the death of the Twinkie. In its bankruptcy filing, Hostess reported a net loss of $341 million last year. The company blamed reduced demand from a more health-conscious customer base, and rising costs for ingredients like sugar and flour… but above all, the cause of death was an overdose of collective bargaining. The Wall Street Journal reports that Hostess will use bankruptcy to “confront the ‘increasing burden’ of its giant union workforce,” a claim backed up by reviewing the company’s list of unsecured creditors:
The top unsecured creditor on the list, filed in bankruptcy court but which you can view here, is the pension fund for one of Hostess’s main unions. The Bakery & Confectionery Union & Industry International Pension Fund is owed $944.16 million.
Union benefit funds, including health and pensions, account for 16 of the 40 top unsecured claims. Some of those pension funds include Central States, Southeast and Southwest Areas Pension Plan, owed $11.82 million; Twin Cities Bakery Drivers Pension Fund, owed $9.36 million; Western Conference of Teamsters Pension Plan, owed $7 million; and New England Teamsters & Trucking Industry Pension Fund, owed $4.77 million.
(Emphasis mine.) Sources told the New York Post that Hostess has its work cut out for it during those union negotiations:
Talks to restructure Hostess, the maker of Twinkies and Wonder Bread, are expected to start distastefully, The Post has learned.
The company, which filed for Chapter 11 protection Jan. 11 due in part to high labor costs, will ask its 20,000 mostly unionized workers to accept stiff concessions, which may include new rules that will force drivers to load their own trucks, adding a couple of hours to the work day and having workers pay more for health insurance.
There could also be demands for thousands of layoffs, including some in the New York metro area.
A person close to the situation who would like to see the union members accept serious concessions says he believes there is only a 50 percent chance that they will.
The unions did not accept a somewhat similar proposal last year from Hostess — prompting last week’s bankruptcy filing.
A union member assured the Post that “any significant concessions demanded from route people will be overwhelmingly rejected.” The mind-shattering horror of asking drivers to load their own trucks will be avoided by putting them all out of work.
How did Hostess survive its previous bankruptcy in 2009? It was bought up by one of those heartless, greedy, unspeakably evil private equity companies, Ripplewood Holdings – the same type of financial empire that Darth Romney once served. The Wall Street Journal dryly notes this was “the kind of decision that, were Ripplewood’s principals ever to run for office, would get them savaged in an ad.”
But guess what? Ripplewood also bought the company, Hostess Brands, out of bankruptcy three years ago, when it was called Interstate Bakeries. Ripplewood is just the latest manager to wrestle unsuccessfully with the company's fundamental problem, a unionized workforce in an industry where competitors aren't unionized.
Next time you're choosing a fattening indulgence in the checkout line, ask yourself if you're willing to pay extra so Twinkies and Wonder Bread (made by the same company) can arrive at the store on different trucks? So the driver can be excused from helping to unload? So the company can pay workers-comp costs way out of line the industry's? So a company with just 19,000 employees can administer 40 different pension plans?
It might be a bit tricky finding new investors to pull Hostess out of the union sinkhole this time, especially if the unions adamantly refuse to make any concessions.
Successful businesses are dynamic. They react to changing market conditions. Sometimes this involves exploring new opportunities. Other times it requires making painful adjustments to find profit in reduced demand. Today’s cuts might help a business survive to pursue tomorrow’s growth opportunities.
Calcified collective bargaining agreements from intransigent unions destroy that dynamism. Venture capital investment illuminates it. The crew at Ripplewood Holdings thought they had a reasonable chance of finding profit somewhere in Hostess Brands’ $2 billion annual sales. It is profoundly unreasonable that they could not. There remains a substantial demand for those Twinkies, but Hostess cannot survive if no one else wants to take a shot at reviving it… unless they want to get with the Obamanomics program and lobby for a taxpayer bailout to save those 20,000 union jobs.
