Hostess, which is in bankruptcy for the second time since 2004 and is now owned by a group of financial firms led by two hedge funds, had issued an ultimatum to striking bakers: Call off the strike by 5:00 p.m. Thursday or the company will be shut down. The strike persisted and the closure was announced Friday morning.
The Hostess Brands shutdown will mean the loss of 18,500 jobs nationwide. Hostess Brands operated 33 bakeries, 565 distribution centers and 570 outlet stores.
"There's no way to soften the fact that this will hurt every Hostess Brands employee," CEO Gregory Rayburn said in a letter to employees. "All Hostess Brands employees will eventually lose their jobs - some sooner than others."
But the problems at Hostess go way beyond the company and its employees.
In fact, they're part of a national issue that undermines the entire U.S. economy.
Why Hostess Brands is Shutting DownHostess management had been trying to reorganize the company, primarily by cutting labor costs, after filing for Chapter 11 bankruptcy for the second time in January of this year. There are two major unions at Hostess, the International Brotherhood of Teamsters, which represents about 7,000 Hostess workers, and the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union, which represents about 5,000 employees.
According to an article published last summer by Fortune, labor relations at Hostess have been contentious for some time. In order to allow Hostess to come out of bankruptcy, management had wanted to cut wages by 8% this year, gradually giving back half of the cut over the next five years. In addition, management wanted to reduce its contributions to employees' health care and pensions.
The biggest issue is that Hostess' union pension funds are underfunded by $2 billion. Under its agreements with the unions, Hostess is required to contribute to multi-employer pension plans (MEPPs). MEPPs provide pension benefits to workers within a particular trade, regardless of what company they work for. The concept was that all companies employing workers in a particular trade would contribute to the trade pension fund so that workers would not lose their pension benefits if they changed employers.
Fortune writes, "Trouble with MEPPs is, if some employers go out of business, the remaining companies have to pick up the shortfall in funding benefits. When there are too few employers left standing, the fund is in trouble...A third of the 40 MEPPs to which Hostess contributes are among the most underfunded plans in the country."
With Hostess gone, all of the remaining companies contributing to the MEPPs serving Hostess employees will now have to pick up the slack left by Hostess.
This legacy of the go-go years of the 1950s and 1960s is something that will have to be dealt with on a national level. There is massive underfunding of MEPPs in general and the situation only gets worse as individual companies go out of business.
This problem is not peculiar to the United States. In Japan, for example, the government has proposed eliminating all corporate pension funds to resolve underfunding issues. This follows a string of bankruptcies of otherwise healthy companies because they could not afford their increased obligations to MEPPs after other participants defaulted.
In September, Hostess presented a package of reduced wages and benefits to its unions. The Teamsters narrowly voted to accept the package but the smaller Bakers' union rejected the deal.
Following that rejection, management asked the bankruptcy court to allow it to force a new contract onto the recalcitrant bakers. In the face of this move by management, the bakers opted to strike. This angered the Teamsters, who, having agreed to the management proposal and fearing for their jobs, wanted the bakers to hold a secret ballot on whether or not to continue their strike instead of a voice vote.
What Hostess Brands Workers Are SayingJohn Smith, a wrapping machine operator at the Hostess plant in Indianapolis, IN told USA Today, "You have to take a stand for what you believe in. They gave us a take-it-or-leave-it deal. We can't take the financial abuse."
A union business agent at the Indianapolis picket line told USA Today that he would rather see the plant sold. "It's definitely got to be better than what this company's trying to implement. There are other bakeries out there looking to purchase some of these locations. These employees have the opportunity to go back in (under a new owner)."
The bakers remained on the picket lines and, at 5:00 p.m. on Thursday, Hostess' fate was sealed.
Assuming that the bankruptcy court gives its permission, management will auction off the Hostess brands and facilities.
One potential buyer is Bimbo Bakeries USA, part of the Mexican baking conglomerate, Bimbo Group. Bimbo is already the top baker in the United States selling products under the Sara Lee, Entenmann's and Arnold brands, to name but a few. Bimbo had made a bid for Hostess back in 2007, before it came out of its first bankruptcy and may be willing to snap up some of Hostess' iconic brands at auction.
But a sale of Hostess assets will not resolve the outstanding issue of underfunded pensions. This is a much bigger issue than the death of the Twinkie and, if left unresolved, it will cause problems for other companies in the future.
Check out this full report by Money Morning's Shah Gilani on how dangerous unfunded pensions are to the U.S. economy.
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