RIP Hostess: Playing Chicken with Twinkies

We are living through the second Great Depression. During times of significant economic downturn, companies have to reduce their costs in order to make up for lost revenues due to declining sales. Companies in trouble due to market-wide phenomena tend to be able to renegotiate deals on most of their costs, but labor is one of the most challenging. Labor unions rarely want to give ground, but sometimes will when there is a realization that the company can’t survive without pay or benefit cuts.

In the case of Hostess, the company lost significant market share and needed to trim costs to survive. According to Huffington Post, executives agreed to drop their salaries to $1 until conditions changed. The International Brotherhood of Teamsters agreed to significant-but-necessary pay cuts to 18,000 workers, agreeing that the survival of the company depended on reduced costs. However, another union representing the company’s bakers, the Bakery, Confectionery, Tobacco Workers and Grain Millers’ International Union, decided to play chicken with the company and ordered a strike despite the Twinkie provider’s critical state. Due to an unwillingness to compromise, 5000 workers took down an iconic brand. Will it be back? Let’s look at the Hostess situation and examine the lessons it will leave behind.

Dealing with Crises: General Motors Versus Hostess

Contract re-negotiation is a crucial step for businesses to take when the economy contracts. In a basic sense, businesses only work when revenues exceed costs. This can only occur when a complex web of contracts are set at the optimal level. If one set of costs rises too quickly, any company will fall. When revenues drop sharply, costs must drop or the brand will die.

In the case of GM, the net of all of its contracts are a losing proposition. When the government chose to bail it out, it essentially allowed the company to continue making the same mistakes. It’s a lot like if a person were to put his or her hand on a hot stove, then, rather than immediately pulling it away upon feeling pain, said individual decided to self-medicate the pain with drugs in order to continue with the same foolish activity. Eventually, the finger will melt off if changes are not made. GM is currently surviving on bailouts, but will it last when the government can no longer afford to jump in for a last-minute rescue?

Bankruptcy Reorganization Will Save Some Hostess Brands

Hostess is exercising its only option. The company’s bakers will not agree to reduced wages, so the business model no longer works. The best solution for society at large is for Hostess to release those bakers to go work at a company that will pay them the wage that they want. Also, Hostess will now free up its assets for other, more efficient companies to use. Meanwhile, iconic brands under the Hostess banner will be picked up by other companies and put back on the shelves. Twinkies will be back in time.

The real tragedy here though are the job losses felt by the 18,000 teamsters who did agree to pay cuts in order to save the company. Arguably, if the bakers had also agreed to cuts, Hostess would still be here. People are too quick to blame big business for every ill. Executives running companies are charged with the difficult job of weighing everyone’s interests and making a profit at the end of the day, so that the company can survive. Sometimes, people are not willing to work for the amount of money that the company is able to pay. In these cases, companies go under, not because of the greed of the rich, but because of the harsh, cold reality of math.

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