American Elephants

Another Day, Another 18,500 Jobs Lost. by The Elephant's Child

Good bye, Twinkies; so long, Ding Dongs; farewell Hostess Cup Cakes; Bye, Donettes, Suzy Qs, Ho Hos, SnoBalls, Fruit Pies, Zingers, and Wonder Bread. Where I grew up, it was Eddy’s Bread.  The company began with Hostess Cup Cakes in 1919.  It wasn’t until 30 years later that the cupcakes got the squiggles on top and the vanilla creme filling.

Twinkies were invented in 1930, in Shiller Park, IL.  Hostess baked over 500 million Twinkies a year.  In 1999, President Bill Clinton included Twinkies in the millennium time capsule, which led to many jokes about the longevity of Twinkies.

If you have been around for quite a while, you may be aware of the explosion of snacks available in the junk-food aisle of grocery stores. Along with the increase in varieties and brands, which is still going on, has been the war on junk food conducted by the healthy-eating crowd. Twinkies, probably because of the name, were held up as the poster child for junk food, so enterprising folk at State Fairs promptly started deep-frying them. Go figure.

Hostess filed for Chapter 11 bankruptcy in January, which today became a Chapter 7 liquidation. Hostess, previously Interstate Bakeries, emerged from a protracted multi-year bankruptcy in 2009. The story is a long one, and fascinating, with politics, the Teamsters Union and Private Equity Groups — Ripplewood in particular. Hostess asked their unions — Teamsters and the Bakery , Confectionary, Tobacco Workers and Grain Millers International Union for concessions.

Hostess had a highly leveraged capital structure, with little margin of safety, and high labor costs.  By 2011, its sales were down about 11% from 2008 and down 28% from 2004. Twinkies remain the best seller.  But this time around, the company asked for more money from their lenders, who said no thank you;  new concessions from the unions who flatly refused. It’s a near total loss for all. Hostess offered a contract that in exchange for salary concessions from union members, would guarantee them increases in 3 years and seats on the board. The Bakery Workers refused, went on strike, and Hostess shut their doors permanently.

The critical issue is legacy pensions. Hostess has roughly $2 billion in unfunded pension liabilities to its union workers. The union hopes that someone will bu the company and restore their jobs, but the field is overcrowded. Some major may buy the brands, which are still popular, but the jobs are gone. The increased costs of ObamaCare were undoubtedly another  major problem, as they have been for so many American companies.

Obama’s strongest union backer, AFL-CIO President Richard Trumka has injected himself into the Hostess bankruptcy blaming capitalism rather than an intransigent union.

What’s happening with Hostess Brands is a microcosm of what’s wrong with America, as Bain-style Wall Street vultures make themselves rich by making America poor. Crony capitalism and consistently poor management drove Hostess into the ground, but its workers are paying the price. These workers, who consistently make great products Americans love and have offered multiple concessions, want their company to succeed. They have bravely taken a stand against the corporate race-to-the-bottom. And now they and their communities are suffering the tragedy of a needless layoff. This is wrong. It has to stop. It’s wrecking America.

This is all complete hooey, and Mr. Trumka should be ashamed of himself. Even the Teamsters Union asked the BCTGM to back down, but it’s over.

Mr. Trumka has most recently been seen at the White House advising President Obama on strategy for addressing the Fiscal Cliff.

So another 18,500 workers will join the ranks of the unemployed, which are already gathering in thousands as a result of the requirements of ObamaCare. More to come.


4 Comments so far
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Although I’m thinking Trumka may have started speaking before he got his program. Because, you see, the private equity firm involved with Hostess (and owner of roughly 2/3 equity in it) is Ripplewood, a PE firm run by democrat Tim Collins. And the reason Ripplewood was able to get involved with hostess in the first place? Because of Collins’ connections to prominent Democrat Dick Gephardt, who runs a “labor advisory service” consulting company in Atlanta, GA (The Gephardt Group). So the attempt to lay this off on Evil Republicans will be a hard case to make.

To me, it seems the most likely savior of the Hostess brand will be Grupo Bimbo, a Mexican corporation whose U.S. branch, Bimbo Bakeries USA (which already owns such brands as Sara Lee, Entenmann’s, Freihofer’s, Boboli, Ball Park Buns, and Thomas’ English Muffins) had tried purchasing Hostess when it was in Chapter 11 before. Unfortunately, they will most likely transfer the operations to existing bakeries, which means many of the old bakers may be hired in, but most won’t.

Essentially, though, even though it was bleeding cash at a horrendous rate (something along the lines of $2 million a week as of the end of 2011), the BCTGM evidently believed that the owners would never shutter such an Iconic brand. They gambled, and lost. And so did we.


Comment by Lon Mead

Exactly. The Bakers union apparently thought someone else would buy up the business and their jobs would be saved, and they would show the company that the union just couldn’t be blackmailed. There is apparently oversupply in the business in general. Yes, I would imagine that Bimbo would buy up the choice brands, but would they need to buy the physical establishments?

Sounds like the prior bankruptcy was not well solved. We really do need to get some basic economic information into our schools, like profit and loss, where money comes from, what taxes do, nothing too complicated, but when dozens of adults at the Democrat convention say that profit should be banned by law, and new Senator Warren more or less agrees, we’re in trouble.


Comment by The Elephant's Child

“…would they need to buy the physical establishments?”

No. They will probaly buy some of them (simply because some of the equipment would be too difficult and/or expensive to move), but like I said, the majority will just be moved to existing bakeries.

And no, the initial bankruptcy wasn’t handled well. For one thing, Miller Buckfire (Hostess’ restructuring banker) didn’t cut enough of the debt before petitioning release from Chapter Eleven. Second, Hostess came out of bankruptcy with MORE of a debt load than it had when it filed for bankrupcy in the first place (Ripplewood justified this by saying that Hostess was expected to “grow” into its new capital structure), which had a lot to do with why it wound up having to re-file for bankruptcy.

Hostess was operating with very narrow margins, a growing expense from resource purchases (corn, sugar, and flour prices have all gone up in the past couple years), and a huge unfunded liability to its pension fund. The issue with the union was simply the straw that broke the camel.


Comment by Lon Mead

I wonder how much the contemporary healthy-eating theme had hurt their business. I see the results in the grocery store. Much smaller display of Hostess products, potato chips are getting less shelf space, but corn chips get more. Overall, I’d say junk food is still winning. There was a time when I was in 5th grade when the little convenience store a couple of blocks from school was where we all stopped to get a Hostess Cup Cake on the way home. Eddy’s bread dominated Idaho, Montana, and probably Wyoming. I was unaware ever that it was a Hostess brand. Same thing as Wonderbread — bland spongy sandwich bread.


Comment by The Elephant's Child

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