The failure of the brand, for decades a staple of American kids’ diets, is a parable, rife with the problems that have plagued some of the country’s oldest and most famous brands — a combination of pension burdens, labor rules, crippling debt from financial engineers and management’s failure to freshen up a stale product line and keep up with consumers’ changing tastes.
There was plenty of finger-pointing on Wednesday. In the bankruptcy filing, Brian J. Driscoll, chief executive of Hostess Brands, blamed its failure on “restrictive” labor rules and legacy pension burdens. He lamented that the company had 372 collective bargaining agreements with a dozen unions, and that Hostess paid $103 million a year to employees’ pension funds. He said the Teamsters’ contract rules required different workers for making bread and cake deliveries and limited flexibility to serve small outlets.
However, Frank Hurt, president of the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union, the biggest of the Hostess unions, blamed management. He said executives launched a deli-style bread that “was just a loser from day one.” He said they starved the advertising budget. And he said that the union had been compliant, freezing wages for four or five years as the number of workers fell. As for the pension plan, which is owed $944 million, Hurt said Hostess had not made a payment to the fund since July.
“I have to tell you Wall Streeters don’t give a [darn]about people. Zero. They could care less,” Hurt said. “That’s what’s wrong with this country.”
Meanwhile, Hostess has been nibbled to death by competitors as consumers sought healthier snacks. Its biggest rivals are Grupo Bimbo, which has bought up classic brands such as Arnold, Thomas’s, Entenmann’s and Sara Lee, and Flowers Foods, owner of Nature’s Own.
Bankruptcy, the company said, offers another chance to “reengineer,” overhaul its union accords and shed pension liabilities. “The Company’s current cost structure is not competitive,” the company said in a statement. And that, “combined with the economic downturn and a more difficult competitive landscape,” prompted the need for a reorganization.
Driscoll said that the big pension fund originally served workers from several companies but that as those companies went out of business the burden on remaining firms grew. Pension funds have struggled since 2008 with the woes of the economy and stock markets.
But the bankruptcy filing also says that Hostess lost $250 million in the less than three years since it emerged from its previous bankruptcy. That means it would have lost money without any pension costs at all. A person familiar with the company’s bankruptcy filing said it has lost money in 30 of the past 37 quarters.
Steve Jakubowski, a Chicago bankruptcy attorney and blogger, noted that when the company emerged from bankruptcy last time it forecast 2011 revenue of $3.1 billion. But last year it had revenue of only $2.5 billion. In need of cash, its private-equity owner, Ripplewood Holdings, invested an additional $40 million last year and got hedge funds such as Silver Point Capital to lend more. The company’s debt load now totals $860 million.
“It shows how important it is to get the capital structure right the first time you come out of bankruptcy,” Jakubowski said. “With so much debt on your books, you have to have everything go right.”
Hurt, the union leader, says that Hostess doesn’t pay more than other competitors. He said the roughly 5,500 members of his union working for Hostess earn $18 to $19 an hour in pay and pension costs. Hurt said that when he talked to Hostess executives on Tuesday they didn’t complain about the union.
In the end, the company’s problems may be baked into its products. The person familiar with the company, who asked for anonymity to preserve his relationship with it, said that even the most popular food brands need reinvention every eight years or so. Yet Hostess has not done that.
“Fresh wholesome Hostess meets my tough standards,” said a nagging mom in a television ad that ran in the 1980s. But standards and tastes have changed since the 1980s and now the company’s creditors will fight over the crumbs.