Tuesday, November 20, 2012

No More Twinkies?

Hostess has declared its intent to go into Chapter 7 bankruptcy (liquidation of the company). Assuming the last minute negotiations between the company and the baker's union mediated by a federal judge fall through and the company is liquidated, does this mean that all 18,000+ jobs and 30 iconic American brands (including Twinkies!) will all just disappear?  Should the company be bailed out by the government in order to save the jobs of the bakers?

Just like with GM and Chrysler before the auto bailout, the tension at Hostess is between management and the workers' union. Management blames the union for demanding too high of wages making the firm uncompetitive, and the union claims wages are fair and blames management for being incompetent and making bad decisions over the years resulting in the firm being uncompetitive.

According the the WSJ, the union President, Frank Hurt commented, "People are going crazy because they think they're not going to be able to get any Twinkies or Ho Hos or Wonder Bread.... They'll be produced somewhere, some time and by our members."

If the union's version of the company's troubles is completely correct, then the company's productive assets will be gobbled up by another buyer or company who is more competent at managing, all union jobs and brands will be saved, workers will maintain their current level of pay, and the only things that will disappear are the jobs of the incompetent managers and negative profits.

Management makes a different claim. Chief Executive Gregory Rayburn claims, "Nobody wants to have anything to do with these old plants or these unions or these contracts." He also claims that Hostess has been searching for a buyer for the last few years but has been unable to find one because buying the company would mean buying the collective-bargaining agreements, as well.

If management's version of the company's troubles is completely correct, then the profitable brands, plants, and competent managers will be gobbled up by other firms, unprofitable brands and plants will disappear, and workers could be rehired by other firms at market rates but the union's collective bargaining agreement won't survive bankruptcy. Depending on the conditions of the industry, more workers could be hired at lower wages if the union was keeping wages high by keeping competing baker's out, or some jobs could be permanently lost if the industry is really shrinking and the high labor costs were from the union preventing workers from being fired.

In no version of events do all jobs, brands, plants, and capital disappear. 

Which version of the company's troubles is correct: the union's or management's?  Or is Hostess's time up because consumers are simply demanding healthier snacks and are saying bakers should be baking whole wheat crackers instead of Twinkies? We don't know yet, but with a quick bankruptcy in court and no government bailout, we will find out the truth because the resulting market for Hostess's brands and capital and labor markets will resolve the issue for us. A bailout would distort the incentives of each side to come to an agreement and it would not correct the problems of bad management (if they really are terrible) or labor contracts (if they really are too costly) and it certainly wouldn't help Hostess better address changing consumer tastes.

We don't know what's going to happen, but today's WSJ (article still behind a pay wall) provides some hints: "Flowers Food Inc... has renegotiated lending terms to allow it to tap additional cash. Analysts see that as a clear sign it is gearing up to buy Hostess assets.... Private-equity firm Sun Capital, meanwhile, is interested in bidding on Hostess's entire business.... [The company] would like to try to negotiate a deal with Hostess's unions."

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