Monday, November 19, 2012

Hostess and the Unions

Hostess, maker of Twinklies and Wonder Bread, went out of business last week after union members refused to come back to work from a strike. This has lead to a national polarization. On one hand the ACL-CIO put out this statement:

What's happening with Hostess Brands 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. These workers, who consistently make great products Americans love and have offered multiple concessions, want their company to succeed. They have bravely taken a stand against the corporate race-to-the-bottom. And now they and their communities are suffering the tragedy of a needless layoff. This is wrong. It has to stop. It's wrecking America.

Some information has been circulating that supports the union position and blames everything on incompetent management. This is incomplete.

Hostess has been in decline for a decade or more. Sales have been declining as the nation becomes more interested in a healthy diet. Their signature product, the Twinkie, is the poster child for junk food.

At the same time that their sales have gone down, their expenses have gone up. Hostess uses sugar instead of corn syrup and the price of sugar is kept artificially high bu government policy (at the same time, corn syrup is federally subsidized which is why so many food makers have switched). Prior to going out of business, Hostess had filed Chapter 11 bankruptcy twice.

Facing declining sales and rising costs, the only way that Hostess could stay in business was to cut expenses. Personnel is usually one of the highest costs in running a business so they asked the bankruptcy courts to approve a cut in pay. This was granted which lead to the strike.

I have seen short lists of issues circulating Facebook. They point out the multiple reorganizations and raises in management pay. All of these points are irrelevant. Hostess could not stay in business if its plants were closed due to a strike nor could it stay in business for very long if it didn't get wage concessions.

Two unions were involved. One, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM) is affiliated with the AFL-CIO. The other union is the Teamsters Union. The Teamsters met with the Hostess management and agreed that wage cuts were the only way to stay in business. The BCTGM told its members that there were better options but did not specify any.

Obviously the management was not bluffing and the Teamsters blames the BCTGM for the loss of 18,500 jobs.

I don't know if they still teach about Pyrrhic Victories in school but this seems like a classic example. In Classical times, King Pyrrhus won two battles against invading Romans but he lost proportionally more of his army than the Romans did leaving Pyrrhus in a weaker position after his victories.

The AFL-CIO is celebrating this because it sends a message to management that worker concessions are off the table. They would prefer to see a plant closed than see its workers paid less.

It is certainly possible that Hostess was not a viable company in the long-term. Two reorganizations in less than a decade indicates that their problems went deeper than poor management. It is also possible that the BCTGM's claim is true that Hostess was planning on selling its parts. In that case, lower production costs would make it more likely that the plants would stay open under new owners. Regardless, the plants are closed now and the workers are unemployed.

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