The day before Thanksgiving, the U.S. Bankruptcy Court for the Southern District of New York approved Hostess Brands Inc.’s (“Hostess”) emergency interim motion for the orderly closing of its business and sale of assets. Hostess filed for Chapter 11 bankruptcy protection in the beginning of this year, having recovered in 2009 from its first bankruptcy.
What does the approval mean? In the next year, Hostess will close 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes, 570 bakery outlet stores and the worst part – lay off approximately 18,500 workers; the number of employees will decrease by approximately 94% in just sixteen weeks. The fate of the brands Americans have fallen in love with since 1930 – Twinkies, Ho-Ho’s, CupCakes, and Donettes – is grim.
How did Hostess get here? Hostess has been at a competitive disadvantage in the market largely due to an inflated cost structure, a large portion of which is its collective bargaining agreements covering 15,000 to 18,500 employees. Hostess had been in the process of reorganizing its business and as part of this process, was able to successfully work with its lenders and its largest union, the International Brotherhood of Teamsters (“Teamsters”), covering 6,000 Hostess employees. The Teamsters understood the financial distress that the company was facing and worked with management and accepted a contract that included an eight percent pay cut, seventeen percent cut in health coverage contributions, and a suspension of the company’s pension payments into 2015. However, Hostess could not gain the support of its other large union, the Bakery, Confectionary, Tobacco and Grain Millers Union (“BCTGM”), which covers 5,600 Hostess employees. The BCTGM was unwilling to work with management to negotiate a new contract. When Hostess won court approval to impose wage and benefit cuts, which motion BCTGM did not contest, BCTGM ordered a nationwide strike on November 9, delivering a crippling blow to Hostess. The strike stopped production and delivery of products nationwide. Hostess suspended operations at all plants across the country after workers did not return to work after being asked to do so.
BCTGM’s strike will not only result in thousands of workers losing their jobs, but it has already resulted in lost wages for those workers. According to the New York Post, the union sent notices to members at its 36 locals stating that members would be fined $140 a day if they crossed the picket line – a hefty fine since this is approximately equal to their pay. In some cases, workers at plants honored the picket line where union members from other parts of the country were actually striking outside their plant.
Hostess’ high labor costs have taken a toll especially when compared to non-unionized rivals. Hostess officials stated that it has over 300 contracts that it negotiates. These contracts are costly and in extreme cases include clauses such as requiring different products be delivered on different trucks even where those products are going to the same place. In addition to those high labor costs, Hostess’ financial distress has been caused by a failure to respond to changing consumer tastes, increasing debt, and increasing cost of ingredients.
The sudden cost of the strike essentially broke an already-weak Hostess and as a result, Hostess moved quickly to apply to the court for an order approving immediate liquidation. Hostess is hoping to take advantage of the outside interest in Hostess, which includes a number of iconic American brands like Drake’s, Dolly Madison, Nature’s Pride, Wonder Bread, Merita, Home Pride, Butternut, and Beefsteak. Hostess is looking to start negotiations with potential buyers immediately and is optimistic that buyers will come forward to buy individual brands and keep those vintage brands alive. Hostess is also moving fast because payroll has been costing them $1 million per day without any income due to the strike.
Brody and Associates regularly advises its clients on all labor management issues and provides various related training programs. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.
