Labor Union Unfairly Blamed for the Hostess Meltdown

by DAVID MACARAY

“Ignored or left to languish, even the strongest brands can decline or die.”—Charles Sullivan, Hostess CEO, 2000 (Source:  Mid-American Journal of Business, Spring, 2000)

“If you over-lever a business, and you don’t invest back into the business for a period of years, you’re going to wind up in bankruptcy.”—Greg Rayburn, Hostess CEO, 2012 (Source:  CNBC Squawk Box, November 15, 2012)

Unless a last-minute investor comes to the rescue (and there are rumors that Dean Metropoulos & Co., owners of Pabst Blue Ribbon beer, is considering acquiring the company), Hostess Brands, Inc., founded in 1930, will permanently shut its doors, put 18,500 people out of work, and begin liquidating its assets.

Despite the fact that it’s had two bankruptcies since 2004, that its management has proven woefully inadequate (it’s had six CEOs since 2002), and that its Wall Street masters ( a private equity firm and two hedge funds) burdened Hostess with $800 million of debt, the blame for this mess is being laid on the BCTGM (Bakery, Confectionery Tobacco and Grain Millars International Union), the union representing Hostess employees.

Let’s look at the facts.

The company was never seriously interested in solidifying and entrenching its position in the marketplace. Rather, caught up in the go-go exuberance of the “bigger is better” philosophy of the post-Reagan era, Hostess went on a wildly ambitious buying spree in the 1990s, one that more than doubled the company’s total number of production facilities and employees.

Then, in the early 2000s, despite warnings from market analysts, Hostess began buying back huge amounts of its own stock. Because the timing was bad, the move resulted in enormous debt and what was described as “balance sheet degradation.” One could make the case that Hostess was not only a poorly run company, but one that was crying out for a cohesive market strategy. You don’t go through six CEOs if you have a clear plan.

But they blame the union for their problems.

During the 2000s, over-burdened with debt and absent any clear idea of what to do or where to go next, Hostess abruptly shut down 21 production facilities and cut its total workforce from 35,000 to approximately 18,000. First they buy big, then they sell big. To any outside observer, Hostess Brands, Inc., during the early 2000s, would appear to be a company in distress.

Yet, during this dreadful period—a period during which Hostess continued losing market share, continued watching its technology grow obsolete, continued accruing debt, and continued struggling to find a codified plan of action—it never stopped generously rewarding its top executives. Annual salaries were doubled and even tripled. Hostess was pretending it was still a healthy, successful company.

But they blame the union for their problems.

In the wake of Hostess’ 2004 bankruptcy, the BCTGM willingly gave back $110 million in concessions. This was done in return for the company’s promise that it would invest in new machinery and new technology, and thereby insure its future in the marketplace. For the union, these give-backs were a prudent, self-preservation move, ones the rank-and-file and leadership felt was necessary.

But despite that promise, Hostess never followed through on those long-term investments. Indeed, the “long-term” no longer seemed to interest them. Instead, company executives and the private equity firm and two hedge funds that ran the company sought to line their own pockets. They raked it in. Meanwhile, the revolving door of CEOs continued.

Then, most recently, after the chickens had come home to roost, Hostess, now in full-blown panic mode, approached the BCTGM and demanded debilitating pay and benefit cuts. Even in the wake of the union’s $110 million in concessions that followed the first bankruptcy, Hostess demanded staggering give-backs. They insisted on cuts of between 27-32 percent. And that was just for starters.

Alas, the union saw the writing on the wall. This was a company that was going out of business. This was a company that was going out of business and was looking to “harvest” as much as it could on the way out. Hostess could spin it any way they liked, but this is what was happening.

And it was at this point that the workers said enough is enough. They realized that the company they’d worked for all these years had been run into the ground. While the decision gave them no solace, they recognized what needed to be done, and by a vote of 92-percent, the union rejected the massive cuts and opted to go on strike, even knowing that a strike almost assuredly put them in jeopardy.

Hostess is a cautionary tale. It’s a company that was not only systematically picked clean by Wall Street vultures, it’s one whose executives lavishly compensated themselves during its death throes. For Hostess, it’s been one reckless, greedy move after another—one management fiasco after another—and yet they’ve been unwilling to blame themselves.

They blame the union for this whole mess.

David Macaray, an LA playwright and author (“It’s Never Been Easy:  Essays on Modern Labor,” 2nd Edition), was a former labor union rep.

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