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And That’s The Truth, Ruth!

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Junk food addicts across America held their breath, because it looks like one of the oldest, time-honored snack foods is about to go bye-bye forever. Four days ago Hostess Brands, 82-year old maker of Twinkies and Ho-Ho’s, filed motions to enter bankruptcy, requesting payouts for key managers and closure of most of the bakery’s operations. The move comes after a week of labor strikes led by the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM) whose claims over excessive demands from the company’s management prompted workers to strike in 24 production facilities across the country. Under orders from bankruptcy court Judge Robert Drain, executives from Hostess and officials from BCTGM entered into private mediation, but in a last attempt to settle the labor dispute, negotiations have failed and 18,500 jobs hang in the balance. Adding headcount to the unemployment pool is troubling, but how in the world we got here is even more worrisome. Workers strike to keep pay and benefits where they are and the company threatens to cost them all their jobs by filing to liquidate? Are the books at Hostess really that bad, or is this how corporate America plans to act when workers resist cuts for cutting sake? 

A Not So Golden Sponge Cake

The battle between Hostess and its unionized work force has centered around the BCTGM’s claims that company management planned to cut pay and benefits by 30 percent while key managers received increases of anywhere from 35 to 85 percent. BCTGM reported that during the downsizing that occured in Hostess’s first bankruptcy, it made concessions that allowed Hostess to save $110 million, which the company committed to invest in improvements to the business. The agreement between the two parties resulted in workers taking an eight percent reduction in pay, a 17 percent cut in health plan contributions and a freeze on pension contributions until 2015. 

Statements from the CEO, Gregory F. Rayburn, confirm the company’s position that increased labor costs, along with higher ingredient costs and slowing sales growth, are negatively impacting Hostess’s profitability . However Hostess has told this story before. In 2004 the company filed for Chapter 11 bankruptcy citing managerial failures, electronic accounting issues, increased ingredient costs, waning brand presence, and a lack of new products. At the time, Hostess was $1.43 billion in debt and over five years laid off over 10,000 workers, reduced benefit payouts and cut wages to align labor costs with sluggish revenues. Based on its current financial position, many of these concerns went unresolved as the company continued to struggle with marketing and profiting from even its best known brands. 

On November 9th the BCTGM organized a company-wide workers strike, taking 24 Hostess production facilities offline until management proposed a new arrangement. One week later, talks having made little progress, Hostess filed for bankruptcy protection, and is planning to close 36 bakeries, 242 depots, 216 retail stores, and 311 hybrid depot-store facilities. The move would leave nearly all of it 18,500 employees unemployed, while 19 senior managers would recieve a total of $1.75 million in compensation after the dissolution of the company. The judge presiding over the case, Robert Drain, denied Hostess’ bankruptcy motion, instead urging mediation with BCTGM in the interest of, “giving the union as well as the debtors and their lenders a last chance to try and work those issues out in private”. As of yesterday, no agreement has been reached, and Hostess plans to continue with its move to liquidation. 

The Cream Filling

But the greater issue at hand, is why Hostess is liquidating instead of making a deal? And what sort of response is closing up shop when employees ask to maintain their lowered wages, health and pension benefits? The company’s decision makes even less sense considering the costs of closing amount to $70.4 million between closing its various corporate offices, retail stores, and production facilities. Instead of coming to an agreement with people who have already shown a willingness to compromise, Hostess would rather spend millions to eliminate tens of thousands of jobs and sell itself to the highest bidder. 

This whole thing makes you want to ask, “is that how you really feel?”, because a company willing to go bankrupt rather than improve its business and pay its workers  speaks volumes. Sure, Hostess has a host of financial difficulties with mounting debts and brands that are the enemies of a culture cutting out carb-laden snack foods, but it’s also been poorly managed. Prior to its first bankruptcy filing in 2004 Hostess, then a blending of Interstate Bakeries and Continental Baking, acquired four different bread companies and attempted to merge the operating paradigms under one umbrella. They failed dismally, because the success of snack cakes couldn’t be translated into bread making, and the revival of dieting plans like the Atkins Diet only complicated the company’s existing concerns.

While somewhat overstated in its press release, the BCTGM makes a good point with,”The crisis facing Hostess Brands is the result of nearly a decade of financial and operational mismanagement that resulted in two bankruptcies, mountains of debt, declining sales and lost market share”. Arguable, but only over the degree mismanagement contributed to the company’s decline, not whether it was a factor. It’s grossly inappropriate that executives who made a series of poor decisions, are shutting down because the workers refuse to accept deeper cuts designed to pay for bad financial judgement. 

Last Words

Some might argue that this is the fault of the union; after all it was the union that organized the strikes that Hostess cites as reasons for filing in the first place. But just because it has filed and plans to press on with a bankruptcy filing, does not mean it didn’t have another option that would have saved jobs. The union has come to the table twice, and made a deal twice but this time it’s Hostess with an unreasonable disinclination for compromise. Anti-union critics claim that we are long past the time for workers unions, but if this knee jerk reaction is a barometer for more to come, it’s not time for America to wash her hands of unions just yet.

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About Alexander J Smith III

  • Dr Dreadful

    Unions don’t make the decision to go on strike lightly, especially nowadays when in most states there are laws mandating a vote of members before a strike is declared. For workers, a strike means lost pay and hardship with no guarantee that their wages and working conditions will improve in the long term.

    From all that I’ve read, I can’t see that the BCTGM acted unreasonably or rapaciously in this case, whereas there is plenty of evidence to suggest that Hostess’s downfall came about through long-term mismanagement.

    The bottom line is that it is management that is ultimately responsible for the running of a business. If you agree to a deal with a union knowing that it will be unworkable, that too is mismanagement. You hardly then have the moral grounds to turn round and blame the union when the company fails.

  • Alexander J Smith III

    -Dr Dreadful

    Now I agree with you completely here, and I couldn’t find any solid evidence to suggest that liquidating the company was the only option Hostess had at the time. IN particular, management’s decision seemed strange in the face of the workers only asking to retain their pay and benefit contributions at the levels where they were because the Union wasn’t asking for increases. Hostess could have made a deal but chose not to and I think that says a lot about the relationship between labor and management in U.S. firms.

  • Igor

    The executives are doing exactly what their plan calls for: liquidate the company and take the assets as booty.

    There’s no mystery about this at all. And it’s happening all over America in every industry: execs are managing the companies into deep problems and declaring bankruptcy as soon as possible. Then, they claim the liquidated asets as soon as possible to get the highest yield for the least time and effort.

    Federal corporate law allows them to cash in pension funds and healthcare funds as they wish, unless controlled by unions (those damn busybodies!)

    It’s a scam, pure and simple. Trillions of dollars in company assets across America are on the chopping block.

    The execs have NO interest in saving the company. For them, personally, their best return is to crash the company. They’ll get the assets, both as ‘retention’ bonuses and as stockholders (by this time they’ve converted all their common stocks from the ESO to Preferred stocks so they’re first in line at the bankruptcy payout window.

    It’s a scam, plain and simple. A quick killing. And it’s spreading across the American business world like a plague of locusts.

    There is NO good business reason for this corporation to fail. They make a popular retail product and they OWN the most valuable properties in the grocery business: the quick food shelves in the grocery and convenience stores. Salesmen for competitors would kill for those properties. More valuable per linear inch than mansion lots in the Hamptons! More expensive than ocean front lots in Malibu or Biarritz or the Riviera!

    Scam, folks! That’s spelled S-C-A-M. SCAM!.

  • Igor

    What the execs at Hostess did to employees is called “betrayal without remedy”.