Unable to win Union Concessions Hostess (Maker of Twinkies) goes out of Business

Posted by PITHOCRATES - November 18th, 2012

Week in Review

Twinkies are no more.  Hostess, unable to get their workers to leave the picket lines and return to work, are closing Hostess down.  Putting another 18,000 or so on the unemployment rolls.  And depriving kids from hereafter the joy of that delicious crème filled snack.  The one thing they eagerly looked forward to in their lunch bags.  But not anymore (see No more Twinkies? Others could buy Hostess’ brands by Matt Krantz and Jeff Swiatek posted 11/16/2012 on USA Today).

The company, which had been in and out of bankruptcy restructuring, was already struggling from a high cost structure and sluggish consumer demand for its products. Its fate was sealed by a confluence of negative events including rising commodity costs and competitive pressures, says Erin Lash, analyst at Morningstar.

The company had warned it would file a motion in U.S. Bankruptcy Court to shut operations if enough workers didn’t end a weeklong strike by 5 p.m. ET Thursday. On Friday, it followed through on that threat…

The shutdown will result in the loss of about 18,000 jobs…

Privately held Hostess filed for Chapter 11 protection in January, its second trip through bankruptcy court in less than a decade. The company cited increasing pension and medical costs for employees as one of the drivers behind its latest filing. Hostess contends workers must make concessions for it to exit bankruptcy and improve its financial position.

The company, founded in 1930, is fighting battles beyond labor costs, however. Competition is increasing in the snack market, while Americans are increasingly conscious about healthful eating. Hostess also makes Dolly Madison, Drake’s and Nature’s Pride snacks.

The Teamsters union is urging the bakers union to hold a secret ballot on whether to continue striking. Citing its financial experts who had access to the company’s books, the Teamsters say that Hostess’ warning of liquidation is “not an empty threat or a negotiating tactic” but a certain outcome if workers keep striking.

So who’s to blame?  Labor?  Or management?  Well, supporters of labor will say it was management’s fault.  And supporters of management will say it was labor’s fault.  But what do the numbers say?

According to Bloomberg Businessweek Hostess Brands, Inc., has 10 key executives.  If they paid each a million dollars that would be $10 million in executive pay.  If each executive gave up $500,000 in pay that would save the company only $5 million.  Now if they asked each of the 18,000 workers to give up $5,000 in pay and benefits that would save the company $90 million.  Which is a lot more than $5 million.

These numbers are just to illustrate the realities of a company with 18,000 workers.  And why management fights so hard to win concessions from these workers.  A little bit from each of them can save a lot of money.  Whereas a lot from the executives will save little money by comparison.  Which is something the Teamsters understood when they reviewed their books.  And why they were willing to lose a little of their pay and benefits.  Because losing a little is better than losing it all.  Like they will now.

Once upon a time people had the decency to die shortly after retiring.  Something actuaries took notice of when calculating the costs of defined benefit pensions.  And retiree medical costs.  So when companies started offering them they were able to fund them.  Then people started living longer into retirement.  Much longer than they were supposed to.  Longer than the actuaries ever thought possible when they first set up these programs.  They were living longer.  And because they were living longer they had a lot more time to come done with a whole bunch of health ailments.  Consuming a lot of health care benefits during a long retirement.   That cost an enormous amount of money.

Companies simply can’t afford these costs anymore.  Which is why most businesses in the private sector economy have gone to defined contribution retirement plans.  Like 401(k)s.  Only public sector workers and unionized workers enjoy pensions these days.  But even the unions are finding it hard to keep them.  As these costs are bankrupting the businesses they work for.  Like Hostess.  For if they have 18,000 workers now and have been around since 1930 their pensions and medical costs will be greater than their current labor costs.  Which was just too much in a competitive market place.  As there were other delicious snacks to buy out there.  Which prevented them from charging $25 for a pack of Hostess Twinkies.  So they had to cut costs.  And with 18,000 workers those costs had to come from them.  Because there are no other costs large enough to cut to make a difference.

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