Savor what could be the last Ding Dong you’ll ever eat while you contemplate the end of Hostess Brands Inc., but don’t fix blame solely on labor union intransigence.
Company executives baked this failure. It’s an epic one, with 18,500 workers losing jobs.
Fundamentally the company, based in Kansas City for decades as Interstate Bakeries Corp., couldn’t adapt to consumer demand for ever-healthier fare.
And in its death throes, the company’s new private equity owners botched its emergence from its first bankruptcy in 2009, making it unlikely they could save it from its second bankruptcy filing last January.
The failure of Ripplewood Holdings to rescue Hostess is doubly interesting. Its founder is a big Democratic Party donor. But the relationship between Ripplewood and the company’s unions — its two biggest were the Teamsters and the Bakery, Confectionary, Tobacco and Grain Millers International Union — has ended on an especially sour note.
Managers always can defend or justify their decisions, but the magnitude of missteps by Hostess executives dwarfs finger-pointing at the unions.
As consumers turned in ever-increasing numbers to yogurt, whole grain breads and crackers, protein bars and energy bars, Hostess executives fought for snack market share with aging brands — Twinkies, Ho Hos, Fruit Pies and the like. They acted as if we still all loved Wonder Bread, the white, cottony staple of our youth.
And in recent years, consumers began to worry more about sugar and obesity. As a colleague joked, every Hostess product comes in the same flavor — regret.
Yet the company never developed breakthrough products to counter the health kick.
Sales, which hit $3.53 billion in 2002, had eroded to $2.5 billion late 2011.
To point out the obvious, you can’t blame unions for that.
Of course, unions do bear responsibility for generous labor agreements, reached in good times, that hindered the company. It faced hefty pension payments and inefficient work rules, such as the requirement that cake and bread products be delivered to a single retail location in separate trucks.
According to The Wall Street Journal, Hostess had 372 collective bargaining agreements with a dozen or so unions. It maintained 80 health and benefit plans and 40 pension plans.
The draining union contracts, combined with the lack of an up-to-date product line, meant that the company couldn’t quickly modernize plants or mount effective marketing efforts. It had to contend with rising costs for ingredients and the increased price of fuel for delivery trucks. And it took on more debt.
But Hostess executives shouldn’t have let onerous union pacts linger for years. They needed to work harder to educate union members and get cooperation to rationalize contracts, hold down costs and revamp work rules.
This can be tough. Executives trying to work out better union deals risk crippling strikes.
But executives make the big money because a company’s success is ultimately in their hands. Many take all the credit for success but avoid admitting mistakes that lead to failure.
Instead, Hostess executives threw up their hands altogether in 2004 and took the company into bankruptcy. In a five-year ordeal to reorganize, it went through several CEOs. It closed plants, made others more efficient, laid off workers and forced union concessions.
Hostess emerged from reorganization in 2009, in the hands of Ripplewood.
Ripplewood, which poured $130 million into the company, isn’t your typical private equity firm. Its founder is Tim Collins, who invested in Hostess to show he could work with labor to revive an iconic American business.
According to Fortune magazine, Collins linked up with Richard Gephardt, a former House majority leader and Missouri Democrat who is now a labor consultant. Collins had donated to Gephardt’s campaigns.
Gephardt apparently was key to Ripplewood’s play for the company. The unions did boost concessions to $110 million. But, insiders and analysts told Fortune, the unions went along because Ripplewood didn’t fight too hard for more givebacks.
Fortune said that was perhaps because of Gephardt’s role.
This was hardly a private equity deal to strip the company and then sell it. Ripplewood didn’t pay itself a big dividend.
But it did charge management and consulting fees for a while and raised executive compensation while seeking even more wage cutbacks. The CEO’s pay went from $750,000 to $2.55 million.
And Ripplewood added Gephardt’s son to the board, paying him an annual fee of $100,000.
Hostess’ losses doubled in 2011 over the previous year. By early this year, rising interest obligations ballooned its debt about $860 million.
The Teamsters were willing in the end to cooperate more to save the company. The bakers outright rejected any more concessions, but that’s just icing on the cupcake.
The Teamsters, the bakers and AFL-CIO president Richard Trumka attacked the company. Bakers leader Frank Hurt said Hostess “failed because its six management teams over the last eight years were unable to make it a profitable, successful business enterprise.”
Ripplewood’s altruism was just empty calories, and it was lumped with Bain Capital, much excoriated in the presidential campaign.
What happened to Hostess, Trumka said, “is a microcosm of what’s wrong with America, as Bain-style Wall Street vultures make themselves rich by making America poor. Crony capitalism and consistently poor management drove Hostess into the ground, but its workers are paying the price.”
