As I’m sure you already know, Hostess Brands is going bankrupt and closing up shop. So who killed Hostess? The answer, as usual, is complex.
Hostess Brands, Inc., known as Interstate Bakeries during most of its existence since 1930, is a wholesale baker and distributor of bakery products in the United States. It is the owner of the Hostess, Wonder Bread, Nature’s Pride, Dolly Madison, Butternut Breads, and Drake’s brands.
Wonder Bread was the first nationally sold brand of sliced bread. Ever heard that expression “The best thing since sliced bread?” That’s where it comes from.
For much of Hostess’ history they were buying up or merging with competitors, using economies of scale and brand recognition to dominate the market in the 1950’s and 1960’s. When I was a kid we used to take a sack lunch to school containing a sandwich (on Wonder Bread) and a Ding Dong along with some potato chips. I wasn’t alone – many other kids had Hostess products in their lunches.
But then things began to change. Hostess products were mass produced with bleached flour and refined sugar and contained lots of preservatives as well as artificial flavorings and colorings. Somewhere around the late Sixties the health food movement began to pick up steam and spread across the country.
Hostess products naturally became synonymous with “unhealthy” because they used pretty much every ingredient on the health food hit list except red meat. Then came the Atkins Diet which virtually prohibited anything with a Hostess label on it.
The dietary changes were probably most noticeable with kids – a big portion of the Hostess target demographic. Moms quit buying Hostess products for their kids as “healthy” snacks began to dominate the market.
On September 22, 2004, Interstate Bakeries filed for Chapter 11 bankruptcy. The company also named a new chief executive, Tony Alvarez. Interstate Bakery’s stock, which had been at one time $34/share, fell to $2.05/share as they declared bankruptcy. At the time it was the longest bankruptcy in U.S. history. During bankruptcy, Interstate fought a 2007 bid from Mexican baked goods giant Grupo Bimbo and Ron Burkle of the Yucaipa Companies.
With the leadership of Craig Jung, the company emerged from bankruptcy as a private company on February 3, 2009. The plan included a 50 percent equity stake by Ripplewood Holdings and lines/loans by General Electric Capital and GE Capital Markets, Silver Point Finance and Monarch Master Funding. Interstate’s union workers made contract concessions in exchange for equity.
During the 2004–2009 bankruptcy period, Interstate closed nine of its 54 bakeries and more than 300 outlet stores. Interstate’s work force declined from 32,000 to 22,000 employees. The company also dropped some regional brands and operating agreements, such as the agreement to produce Sunbeam Bread for the northeastern U.S. (now produced by LePage Bakeries of Auburn, Maine).
Effective November 2, 2009, the company was renamed Hostess Brands, Inc. after the cake division that featured Twinkies and cupcakes. Hostess continues its bread lines, including Wonder Bread.
So, Hostess Brands emerges from bankruptcy in the middle of the Great Recession. Three years later, management is pulling the plug. So who is to blame?
You can point to the the Bakery, Confectionery, Tobacco Workers and Grain Millers’ International Union, which represents 6,600 Hostess employees. They rejected the latest contract proposal from Hostess because it required significant concessions.
You can point to Hostess’ management. They made the decisions that put Hostess in its current predicament. Or you can blame the American buying public, because we quit buying Hostess products the way we used to do.
The truth is businesses are like living organisms in many ways. They are created, they grow, they get old, and they die. Their lifespans vary. Sometimes they stay alive by transitioning into completely new organisms.
Many people who have never run a business don’t realize how quickly a profit can turn into a loss. Businesses exist to make a profit. For some strange reason some people (pretty much all on the left) believe that business owners should not lay-off workers, cut wages and benefits and/or close a business until they have lost all their previous profits trying to stay afloat.
There is an urban legend that investors get wealthy by buying and then dismembering healthy companies and declaring bankruptcy. This is kinda like the “No Money Down” theory of real estate speculation. Yes, it can be done, but the circumstances where it works are very rare. If it was easy, the original owners would have done it themselves.
Labor costs are one factor affecting the health of a business. If your business is competing with other companies that have significantly lower labor costs (due to lower wages or automation) then you are at a disadvantage. The bigger the difference in labor costs, the bigger the disadvantage. That is a cold, hard fact of life.
What I find really interesting is that none of the stories about the Hostess bankruptcy mention how much the baker’s union members were making or would have made under the rejected contract. That’s a pretty important piece of data, don’t you think?