How the Goons Killed Hostess

For millions of American children Hostess snack foods were symbols of freedom – an opportunity to indulge in illicit pleasures that were frowned upon by their adult wardens. The kids at school who had Wonder Bread sandwiches and Hostess cupcakes were usually the ones who were not wearing “sensible” oxfords. Their homes allowed soda and chips and pizza. They were the objects of muted envy. For these millions of kids, now grown to adulthood, the total obliteration of the Hostess brand loomed as the loss of a childhood icon with emotional resonance.

Nostalgia rises at the mere recitation of the names Ho Hos, Ding Dongs, Sno Balls, Zingers, Donettes, Suzy Q’s, Drake’s Coffee Cake, Drake’s Devil Dogs, Yodels, Yankee Doodles, Sunny Doodles, Funny Bones, chocolate Cup Cakes with the white squiggle across the top, Fruit Pies, Dolly Madison cakes and Twinkies, whose partially hydrogenated oils, artificial flavors and high-fructose corn syrup made my mother refuse to give them to her offspring.

The moral burden of “junk food” made my loving Mom shun it, but to kids it was a beckoning call at once both grotesque and appealing – dangerous and illicit and exciting. You wanted it because it was bad!

The Twinkie, introduced in 1930, ten years before my parents married, was a popular treat of the Depression years and remained one of the company’s best sellers. Its creator was inspired after seeing bakery machines used to infuse strawberry cakes standing idle when fruit was not in season. Back then, the availability of fresh fruit shifted with the seasons. It was Hostess that pretty much created the notion of “snack cake,” which expanded cake eating from dessert time to any time.

Of them all, the Twinkie, either fresh from the wrapper or deep fried at a country fair, is the most iconic: yellow on the outside, creamy white on the inside and enhanced by the quaintly outdated name “Hostess.” Its underbelly was marked by three white dots where the cream filling had been injected and it tasted like its authentic self: a blend of oil and corn syrup and artificial flavoring. Losing the Twinkie would mean losing a piece of our past and another waved good-bye to our long-ago youth.

The Problem

Hostess Brands was hemorrhaging cash and was hobbled by union pension and health plan obligations and wildly inefficient work rules. The company’s owners balked at throwing even more money into a wasteful pit of union indulgences. They asked the unions for concessions to save the company. The bakers’ union went on strike and the Hostess owners chose liquidation and more than 18,000 workers were threatened with unemployment.

It was then that the Hostess caretakers made the painful decision to liquidate their much beloved enterprise rather than endure a nationwide strike by one of the largest of its dozen unions, the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union. The owners reluctantly shut down 33 bakeries and 565 distribution centers and prepared to dismiss almost 18,500 employees all at once. An auction of its brand and recipe portfolio would follow.

Hostess had posted hefty sales of $2.5 billion in 2011 but lost a whopping $341 million and hadn’t the cash flow to weather the bakers’ union work stoppage. Hostess’ 372 collective-bargaining agreements required it to maintain 80 different health and benefit plans, 40 pension plans and mandated a $31 million increase in wages and health care and other benefits in 2012. Idiotic union work rules required that cake and bread products be delivered to the same retail store in two separate trucks! Also, the workers who loaded bread were forbidden to load cake. On most routes another “pull up” employee would move the delivered baked goods from the back of the store to the shelves.

The Hostess caretakers negotiated concessions from a few of its unions, including the Teamsters, but the bakers’ representatives refused the company’s last best offer. The bakers refused an 8% wage cut and a 17% increase in their healthcare contributions. The courts granted Hostess the authority to modify collective-bargaining contracts, which prompted a strike, so Hostess liquidated rather than attempting to emerge from Chapter 11 intact. Those 18,500 lost jobs were about 11% of the net new jobs created that October in the entire U.S. economy. In short, management did the job of management and withheld investment in a business model that would not return that investment with a profit.

Emotions ran high at Drake’s Bakery in Wayne, NJ when arriving workers learned that their employer was going out of business. Plant manager Mohammed Carew called a meeting in the cafeteria. More than 100 warehouse workers, packers, drivers, production line workers and others gathered and were told that their employment was terminated and that they should go home.

“It’s sad,” said Augusto Santos, 58, a warehouse worker and union member, as he stood in the parking lot. “Women were crying,” he said. “Even grown men were crying.”

Although many bakery workers had crossed picket lines that week, Hostess said their help wasn’t enough to keep operations at normal levels.

Hostess investors plowed another $60 million into Hostess but wouldn’t provide more without new labor givebacks. Investors lost money as a result of the Hostess collapse. The company booked about $2.5 billion per year in sales, with Twinkies alone generating $68 million in 2012. But it wasn’t enough.

The Stampede

As news of the shutdown spread, shoppers flocked to stores to stock up on Hostess treats. That led to a run on products at Hostess outlets. Signs declaring a “last day sale” advertised loaves of Wonder Bread for 59 cents each. Some left the store with shopping carts full of bread. The treats were appearing on Internet sales and auction sites at inflated prices. A box of Twinkies was offered on eBay with an opening bid of $10,000. There were no takers.

The Revival

Early in 2012, Hostess received six bids for the whole company, but “none of them was actionable,” said Joshua Scherer, a partner at Perella Weinberg Partners, which was advising Hostess. Beginning in the summer a sale process was begun to test whether individual brands could be sold to raise funds to help exit Chapter 11 bankruptcy protection. In November of 2012, within days of announcing its intention of liquidating, Hostess received more than two dozen inquires. More than 50 parties had signed nondisclosure agreements. Mr. Scherer estimated Hostess to be worth $2.3 billion to $2.4 billion in a normal bankruptcy – an amount equal to its annual revenue. He called the sale a “once in a lifetime opportunity for our competitors to get iconic brands.” The initial focus would be on “selling assets to continue as a going concern.” Hostess shut down 36 bakeries and other facilities in 22 states from Alaska to Illinois to New Jersey and closed down its 5,500 delivery routes.

At long last, U.S. Bankruptcy Judge Robert Drain in White Plains, New York approved the sale of Hostess Brands, with assets totaling more than $800 million, to Flowers Foods, Grupo Bimbo, Apollo Global Management and C.Dean Metropoulos for most of the Hostess cake and bread brands.

That’s the good news. The bad news was that Hostess’ old unions were not content with having killed an American icon that employed 18,500 workers. The unions launched efforts to recapture their old power at the new companies’ bargaining tables. The bakers’ union’s workers, along with 13,000 other Hostess employees, were in fear that they might not get their jobs back. Ironically, the union bosses who put those employees in the unemployment line were the same fools the workers turned to for help.

Several companies that had purchased Hostess assets had no interest in reinstating the old jobs, salaries and collective bargaining agreements that had bankrupted Hostess. The union goons grew testy. The Bakery, Confectionary, Tobacco Workers and Grain Millers International Union and the International Union of Operating Engineers both voiced their concern that they might not have jobs in Hostess’ bright new future. Retuning to the previous business model was not a sane option. Investors would flee.

A guaranteed secret ballot vote before the strike could have averted this entire fiasco. It is a reform that would have given the bakers union workers an opportunity to decide for themselves whether they wanted to risk a strike that could cost them their jobs. The union bosses rejected any attempt at a secret ballot because it might cost them their grip on the levers of power. Even the Teamsters union, which represented thousands of Hostess workers and had already agreed to a Hostess restructuring, knew that the bakers’ unions’ plans to strike spelled doom for every employee’s job. The Teamsters pleaded with the bakers to have a secret ballot on whether to accept the Hostess contract proposal.

Fatally, the bakers’ union staged a voice vote in a loud and intimidating union hall on whether to accept the Hostess contract offerings. When that failed, the union bosses unilaterally declared that their strike would go forward. Unsurprisingly, Hostess CEO Greg Rayburn said that the bakers’ union was “willing to sacrifice its Hostess employees for the sake of preventing other bakery companies from asking for similar concessions.” As the employees of Hostess discovered, their union’s powers were limited by market realities. In any competitive economy, refusing to rein in demands for unsustainable worker benefits is a formula for worker unemployment.

The reconstituted Hostess employs only 1,200 people, about 15% of the almost 8,000 workers who lost their jobs during the 2012 bankruptcy. Some Hostess employees who got their jobs back lost them again. Under the Apollo and Metropoulos takeover, Hostess shut down one of the plants they had reopened in Illinois, eliminating 415 jobs. This episode provides one more illustration of the economic climate that propelled Donald Trump to the White House.

For example, after losing his job at Hostess in 2012, Mark Popovich has had three jobs, one of which paid $10 an hour – half of what he was paid at Hostess. He had been a devoted “union man,” but he voted for Donald Trump. It was the first time he had voted Republican.

“It’s getting old, getting bounced around all the time,” lamented Mr. Popovich, a 58-year-old Ohio resident.

An Apollo spokesman quipped that “Hostess’s comeback was a win-win-win-win,” that benefited workers, investors and consumers. The brand’s new owners rode a wave of nostalgia for Hostess snack cakes. When Hostess lenders auctioned off the company in 2013, Apollo and Metropoulos bought some of the Hostess snack cake brands, including Ding Dongs and Twinkies. Snack cakes still produced some of the highest profit margins in the food industry and Hostess cakes had instant brand-name recognition. The bankruptcy provided a clean slate, liberating the takeover companies from the burdens of suffocating union contracts, idiotic labor rules and debt and pension payments. The one group of workers who were no longer welcome were the unionized drivers who had insisted that Hostess cakes and bread be delivered to stores nationwide in separate trucks and by different drivers.

Ronald Litland, 44, delivered Hostess products in Illinois for a decade. He was laid off in 2012. When his unemployment benefits ran out, he delivered pizzas. He is still paying back hefty student loans and taking care of his son. “I have a hard time making ends meet,” he said. He now earns about $24,000 a year.

Hostess bakery production was also cut back. The takeover companies chose to acquire only a few of the roughly one dozen snack cake bakeries. Other assets of the Hostess archipelago were also trimmed away. Food companies snapped up some Hostess bread brands, but reopened only a few of the shuttered Hostess bakeries.

“I lived a good life,” Mr. Popovich reflected. Every year he had vacationed in the Bahamas or St. Martin. His health insurance as a Hostess employee had covered the $385,000 cost of his wife’s surgery. His most recent job is driving a forklift for $16 an hour – a quarter less than he earned working for Hostess. He was entitled to a pension, which he was promised after working for Hostess for more than two decades. He recently received a letter informing him that the pension fund was nearly insolvent. The takeover companies are not obligated to rescue the pension fund, which is managed by a labor union. Neither do they have to pay the severance that Hostess had been obligated to pay Mr. Popovich.

And so it was that even a multi-billion-dollar snack cake empire could not satisfy the gargantuan sweet tooth of the power-hungry union bosses. There was no limit to their greed or their self-assurance. They boldly went where no sane man had gone before. It was the union goons who killed the beautiful Hostess.

Thomas Clough
Copyright 2017
January 18, 2017