It seemed somewhat fitting that as the most gluttonous holiday on the calendar drew near, the creator of the Sno Ball and Twinkie, Hostess, announced it was shutting down. The timeless baking corporation found itself drowning in problems as bankruptcy proceedings were further complicated after the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union organized a strike that proved too much for the company to handle.
Hostess Brands had filed for bankruptcy earlier this year, its second go-round in 8 years, but there was little hope that the company would make it out unscathed. While the conflict with the union was the tipping point, it was hardly the only nail in the coffin.
As Hostess entered the bankruptcy process, Steve Jakubowski, a partner with Levenfeld Pearlfield, discussed how Hostess had fallen to this new low after following its plan out of bankruptcy in 2004:
“Why did Hostess’ plan fail? Well, it was losing $150 million a year going into confirmation in 2008 and wasn’t projected to start generating real net income until fiscal year 2012. Based on the financial projections, it seems the dream of the reorganization team (which lost a lot of money on this bet) was to turn the company around in five years, generate about $150 million in “EBITDA,” and sell the reorganized company at some multiple of EBITDA to the next pipe dreamer at a number that would get debt and equity investors out whole, perhaps even with a modicum of profit. “
Jakubowski went on to say on his blog that Hostess lost $138 and $341 billion in 2010 and 2011 respectively. The company’s reorganization team had forecast losses of $34 and $9 billion during those years.
How were these forecasts so far off target? Where did Hostess go wrong? Those are the questions Steven Honig posed in his aptly titled post, “Twinkies and Capitalism.” As usual, Honig had some pearls of wisdom beyond the immediate facts and consequences:
“My point is so much simpler: the failure of this company appears to be a disaster for absolutely everyone involved and it was accomplished in about four years by people we consider to be smart, and we are about to brush it off and forget about it.
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Classify me what you will for saying that the emperor has bad clothes and for not knowing the address of another tailor who can cut a better fit to human need, but as Hostess joins an almost unmeasurable parade of failures that bring economic tragedy one has a choice: to casually observe that such is the nature of free enterprise; OR to say that there is a problem if this is the best we can do.”
Honig, writing this in August, had an inkling that Hostess was on its way out for good. No more restructured bankruptcies; no more second chances, but no one could have predicted the final chapters for the baking conglomerate.
As Hostess prepared for a contentious bankruptcy, part of their five-year plan was contingent on employees taking a substantial pay cut. This decrease in salary was met with protest, and eventually turned into strike after the employees’ union was alerted to the details of the plan. From Drew Lunt on Labor Relations Today:
“Hostess, the nation’s second largest bread maker, announced today that it was shutting down operations and selling its assets after being unable to ward off a strike by employees represented by the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union (BCTGM).”
In his post, Lunt goes on to outline the agreement that BCTGM found so offensive:
“BCTGM rejected a proposal from Hostess that would have cut salaries across the company by 8% in the first year of the five-year agreement. However, salaries would then have bumped up 3% in the next three years and 1% in the final year. Hostess also had also attempted to reduce its pension obligations and its contribution to the employees’ health care plan in exchange for other concessions, including a 25% equity stake for workers in the company and the inclusion of two union representatives on an eight-member board of directors.”
After the court-ordered negotiations between Hostess employees, union representation, and Hostess management broke down, Lunt’s colleague at McKenna Long & Aldridge, Shannon Creasy, broke down the company’s slowdown of day-to-day operations:
“The interim approval resulted in the termination of approximately 15,000 Hostess employees on the day before Thanksgiving. Hostess will continue to employ about 3,200 employees on a temporary basis to assist in winding down the company’s operations. In addition to allowing temporary retention of employees for the wind-down, the plan also provides for: (1) the return of excess packaging and ingredients, (2) going-out-of-business sales at Hostess retail outlets, (3) an amended financing agreement, and (4) the use of cash collateral.”
The inevitability of Hostess’s demise setting in, lovers of the brand waxed poetic, grew nostalgic, and in some cases, bought packages of Twinkies for $50 on e-Bay. Robin Shea fell into the first two categories as she mourned the loss of the “building blocks of a healthy school lunch”:
“I don’t think I’ve eaten a Hostess product since I rode my dinosaur to school in fifth grade or so. But, boy, do those pink Sno Balls bring back happy memories, along with cheese spread sandwiches on blindingly-white Wonder Bread, so squishy that when you took a bite the ends of the bread fused together to form a perfect seal. Better living through chemistry! So I was sorry to hear that the company was going out of business. Much more seriously, I was sorry for those 18,500 employees who would be put out of work as a result.”
While many employees will struggle to find a silver lining, especially in this economy, many Wonder Bread, Twinkie, and Sno Ball fans are already anxiously awaiting the sales of Hostess’s beloved recipes (and maybe even their brands), hoping that their favorite snacks will live on in another company. As Huffingtonpost contributor Andres Jauregui reported, there are already suitors lining up for the timeless brands and recipes:
“Flowers Foods, the Georgia-based company that owns baked good brands such as Nature’s Own and Tastykake, may be a likely bidder for Hostess assets, according to the Wall Street Journal.
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Mexican-owned megabakery Grupo Bimbo, a prime competitor of Flowers in the United States, might also vie for Hostess’ iconic brands.”
With potential buyers seeking Hostess’s assets, there is still hope that Twinkies will continue to outlast all other foodstuffs in the snack aisle. The company is unlikely to survive, but as Dan Kelly writes on the DuetsBlog, the brands will live on:
“As the company’s CEO has pointed out, numerous factors have contributed to the business’s failure, and it is therefore difficult to see the business case for a single company or group of investors simply picking up where Hostess is leaving off. Having said that, there is clearly a significant amount of goodwill and value in the Hostess trademarks alone. Commenters across the spectrum are already lamenting the imminent loss of so many names packed with so much goodwill: Twinkies, Ho Hos, Ding Dongs/Ring Dings (for some history of these names see here), Wonder Bread, Dolly Madison, Zingers, Sno Balls, Suzy Q’s, etc. It is a long list, and hopefully some of these icons will live on, and those individuals who have brought them to us will land on their feet.”
To read this commentary and more on Hostess’s bankruptcy proceedings, check out LXBN’s tagged page here.
Photo Credit: Thomas Hawk, Flickr