Twinkie killed to save Big Bird

[_Quasimodo]

Fear not, Droopy, Sub and bc.

If you are worried about getting your Twinkies or Cupcakes in the future, there are warehouse shelves filled with them, good for at least the next hundred years. No bacteria or fungi would dare eat them.

The demise of Hostess has to do with creating products that are only foods in the academic sense. Labor costs only became an issue after sales plummeted. The company, because it was unwilling to keep up with dietary trends, committed suicide.

[_bcspace]

Loss of jobs aside, I'm not worried about it. In fact it's turning out to be a capitalist opportunity for me as I headed down to the local Hostess shop we have here, snapped up some twinkies and ho hos and am now making a handsome profit on Ebay.

[_Eric]

Loss of jobs aside, I'm not worried about it. In fact it's turning out to be a capitalist opportunity for me as I headed down to the local Hostess shop we have here, snapped up some twinkies and ho hos and am now making a handsome profit on Ebay.

Yes, the epitome of capitalism is waddling down to the local Hostess shop, marking up a box of Twinkies, and selling it on eBay.

Thanks for that wonderful example, Uncle Pennybags.

[_Brackite]

This Thread has me craving twinkies.

[_Droopy]

This Thread has me craving twinkies.

I'm a Suzy-Q man myself.

[_Droopy]

Loss of jobs aside, I'm not worried about it. In fact it's turning out to be a capitalist opportunity for me as I headed down to the local Hostess shop we have here, snapped up some twinkies and ho hos and am now making a handsome profit on Ebay.

Yes, the epitome of capitalism is waddling down to the local Hostess shop, marking up a box of Twinkies, and selling it on eBay.

Thanks for that wonderful example, Uncle Pennybags.

Aren't Ebay jobs real jobs, Eric? Or only the government subsidized, "shovel-ready" kind?

[_Eric]

Aren't Ebay jobs real jobs, Eric? Or only the government subsidized, "shovel-ready" kind?

I think reselling Twinkies at a marked up price on eBay is a terrific example of capitalism. bcspace is a true capitalist.

[_moksha]

I think Utah should declare the Twinkie as the official State Snack Cake, with a codicil that nothing can
replace Jell-O.

[_MeDotOrg]

Too late to save Dan White.

For a more in-depth look, consider The Atlantic:

Hostess Brands, the maker of Twinkie and Wonder Bread, is getting ready to bake its last corn-syrupy snack cake. After failing to win major contract concessions from one of its key labor unions, the beleaguered 82-year-old company has asked a federal bankruptcy court for permission to start liquidating its assets -- or, in real person speak, begin the process of selling off pieces of the company to the highest bidder while laying off most of its 18,500 workers.

There are two important things to realize about this rather sad situation. First: Twinkie, Wonder, and all the other high-calorie marvels of culinary science Hostess sells aren't going to disappear from shelves for good. One of its competitors will likely swoop in, buy them up, and restart production. So you can stop bidding on $100 boxes of Sno Balls on eBay.

Second: This is not a simple story that anybody should try to slot neatly into their political talking points. It's not just about Wall Street preying on Main Street, or big bad labor unions sucking a wholesome American company dry. It's about an entire galaxy of bad decisions that will cost many people their jobs and money.

As David Kaplan chronicled at length for Fortune earlier this year, the roots of this debacle go back to when Hostess entered its first bankruptcy in 2004. Not unlike the situation automakers would find themselves in a few years later, the company was collapsing under the weight of flagging sales, overly generous union contracts replete with ridiculous work rules, and gobs of debt. But unlike the automakers, the five years Hostess spent trying to fix itself in Chapter 11 didn't fix its fundamental problems.

Instead, they set the stage for its eventual demise. A private equity company, Ripplewood Holdings, paid about $130 million dollars to take Hostess private, and the company's two major unions, the Teamsters and the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union, sacrificed about $110 million in annual wages and benefits. But its labor contracts were still deeply flawed. Worse yet, the company left bankruptcy saddled with more debt than it went in with -- "an unusual circumstance that the company justified on expectations of 'growing' into its capital structure," as Kaplan put it.

Suffice to say, Hostess didn't do much growing. It continued to lose hundreds of millions of dollars making and selling starchy snacks that much of the public had lost its taste for, while failing to launch any great new products. The interest on its loans swelled the company's debt. By January 2012, it was back in Chapter 11, trying to wrestle a new contract with more concessions from its unions.

Hostess insisted that unless workers accepted further cuts, the company would have to shut its doors for good. That's the sort of threat that distressed companies often make in labor negotiations, and unions are inclined to consider it a bluff. But after getting a look inside Hostess' books, the Teamsters concluded that the threat was serious. Its members narrowly approved the contract in September.

The bakers' union, which represents about a third of the Hostess' workforce, did not. Instead they launched a strike last week that Hostess CEO Greg Rayburn says forced the company to take the final, dramatic step of liquidating everything and firing workers. Per the AP:

Although many workers decided to cross picket lines this week, Hostess said it wasn't enough to keep operations at normal levels; three plants were closed earlier this week. Rayburn said Hostess was already operating on thin margins and that the strike was a final blow.
"The strike impacted us in terms of cash flow. The plants were operating well below 50 percent capacity and customers were not getting products," Rayburn said.

It's not clear what, other than perhaps a misplaced faith that belief that they really did have the upper hand, might have convinced the bakers to strike. Certainly, the Teamsters all but begged them to accept the new contract. Some, interviewed by CNNMoney, said that their jobs simply weren't worth saving at the pay levels Hostess was offering. If that was really the prevailing opinion, it's a pity, because a lot of people at that company did seem to believe their jobs were valuable enough to hold onto, even if at a lesser pay grade.

Already, a few parties have tried to politicize this affair. The AFL-CIO today called it "a microcosm of what's wrong with America, as Bain-style Wall Street vultures make themselves rich by making Americans poor." GOProud sent a winking blast email headlined "Unions Kill Twinkies" (literally, they wrote in a wink).

Both takes are exceptionally reductive. Let's look at Wall street first. The private equity guys will likely lose most of their investment, since their stake in the company will be worthless. It's also not clear that the hedge funds and other lenders that supplied Hostess with its mountain of loans will fare much better. When it entered Chapter 11 this year, the company owed around $935 million, if you include the additional loan it took out to keep the lights on and creme flowing. Meanwhile, Reuters reports that the company listed $981.6 million worth of assets in its bankruptcy filing. There's virtually no chance they'll sell for that much in a liquidation. One of the failed bids to buy the whole company out of its last bankruptcy valued it at just $580 million. And that was when it was a going operation. If you factor in the interest payments Hostess has been making on its loans, some of the creditors might end up making out ok. But it doesn't seem likely anybody will make a killing.

In short: the smart money guys larded Hostess with too much debt and never figured out a real plan for fixing its business. They're coming out with a loss as a result.

As far as the unions go: You can blame them for not making enough concessions. You can blame the bakers for administering the final death blow. But you can't blame them for management's strategic incompetence, or the decision to try to run a flailing company on debt, hope, and empty calories.

There's more than enough blame in this story for everyone involved to have a taste.

[_Gadianton]

OMG Droopy, can you get your story straight? Good freaking @#$%@#$%@#

Word is the employees would rather have taken a cut to preserve employment but the union was threatening them not to complain about it.

The same thing happened over and over again throughout the seventies and into the eighties when the steel and auto unions priced their own workers out of world markets. Greed and envy are like that.

To all those union members who supported the destruction of their own jobs and the jobs of those among them who wanted to take the necessary concessions for the time being and continue to work, your wives and children have my condolences and sympathy - but not you, and you are accountable for the suffering and deprivations you, yourselves, have no brought upon their heads.

Whose fault is it, the workers' fault, or the unions? Are you going to fault union workers under duress?

The situation of the abusive union is one that at minimum exploits information asymmetry. The union workers are individually threatened, and they have no practical way of coordinating their efforts such that they can simultaneously act out of self-interest that is also for the benefit of all union members. Two scenarios:

a) If Droopy suggests that the union threatened them with retribution beyond the harm incurred by losing their jobs, then they all clearly did act out of self-interest in such a way that led to the optimal solution for all employees -- they all lived!

b) If the threat were less than the cost of losing a job, say, a 1000$ union fine, their actions were still rational, even though the collective outcome, and the outcome of each individual union member, was sub-optimal

Ten points to the person who can tell me what economic model predicts this.

As a bit of bonus information, this idea is so powerful, that even if the union members were to play their scenario out a hundred times, knowing in detail the outcome that they will lose their jobs (but with the information asymmetry assumption still in place), the rational course of action will always be to vote with the union.