December 4, 2012

Hostess' failure simmered for years

The company's closure follows a decade of financial trouble and competitive complacency.

By Jessica Hall jhall@pressherald.com
Staff Writer

When Hostess Brands shut its doors last month, the unions and the company pointed fingers and blamed each other.

Today's poll: Hostess

Who do you think is more at fault for the Hostess bankruptcy, the union or the company’s management?

Management

Union

View Results

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Striking workers placed a faux coffin lid outside the Hostess bakery in Biddeford after the company announced last month that it would liquidate. In hindsight, an analyst says, both the union and company would have been better off had they tried harder to reach a deal.

2012 Staff FIle Photo/Gregory Rec

In reality, while the recent bakers union strike against the company might have been the last straw, the demise of the 82-year-old maker of Twinkies and Wonder Bread had begun a decade earlier.

"It's a little bit of a scapegoat -- the union problem," said Bob Goldin, executive vice president of food industry analysis firm Technomic. "If their business was growing 10 to 15 percent a year, these union problems wouldn't have been as much of a factor. A growing business would have saved a lot of ills."

Hostess got final bankruptcy court approval on Nov. 21 to close its 33 bakeries and put its brands up for sale, putting about 15,000 employees out of work. Another 3,200 will be unemployed after they finish closing down the company over the next year.

In Maine, 500 Hostess employees are out of work, including 370 at the Hostess bakery in Biddeford, which produced chocolate cupcakes, Sno Balls and other snack cakes and bread.

The closure ends a decade of financial chaos for a company that has had six chief executives in the past eight years and had to contend with complicated labor agreements, rising commodity prices and a shift in American tastes toward healthier foods. It also operated under inefficient work rules, such as a requirement that cakes and bread be delivered in separate trucks to the same retail location.

Those problems compounded the pressures the company was already facing from a botched reorganization after its first bankruptcy filing in 2004, analysts said.

"With the benefit of hindsight, it's clear that the company probably should have imposed deeper cuts in the first round. But imposing those cuts often involves a kind of 'fight' with creditors that can be costly, so there is often a temptation to 'kick the can' and hope it will all turn out OK in the end," said Stephen Lubben, the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and a bankruptcy expert. "The unions have taken a lot of blame, but there are some real indications that the company was not too well run after its first bankruptcy case."

FRESH INFUSION OF MONEY

That reorganization took five years, cut $110 million in annual labor costs, and gave the company a fresh infusion of money. But the revamping left Hostess with more debt than it started with, and it was still saddled it with a cumbersome labor structure -- issues that made it inevitable that the company would return to bankruptcy court, experts said.

Even though the company got some union concessions during its first reorganization and cut 10,000 jobs, its labor issues remained overwhelming: Its work force was 83 percent unionized and the company had to negotiate with 12 separate unions. Its 372 collective-bargaining agreements required Hostess to maintain 80 different health and benefit plans and 40 pension plans. Its three dozen bakeries served 5,500 delivery routes and 500 distribution centers.

NOT KEEPING UP WITH TASTE TRENDS

The company also failed to keep up with trends in American tastes.

"In the snack business, they hadn't done anything to grow that business," Goldin said. "No marketing. No innovation. It's the same darn products they've had for generations. The same cakes, the same flavors. It's the same old, same old. They were riding on momentum and their audience is old -- the people who grew up eating these products. And they haven't bought one in years."

Analysts joked that Hostess' last major product introduction came in 1967 when it introduced Ding Dongs and Ho Hos. Wonder Bread had been the first large-scale baker to sell loaves of presliced bread, but that innovation came in 1930.

(Continued on page 2)

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Today's poll: Hostess

Who do you think is more at fault for the Hostess bankruptcy, the union or the company’s management?

Management

Union

View Results