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The real reasons Hostess went bankrupt
hostess
November 17, 2012
By: Ryan Witt
Yesterday Hostess announced its intention to declare bankruptcy, close down all of its operations, and lay off approximately 18,500 workers. The news stunned many Americans, and sent shoppers to the local grocery store in an attempt to buy their last Twinkies and Ding Dongs. The commonly sold story by many media outlets (i.e. Fox News) is that Hostess went bankrupt because of a greedy and stubborn union which increased the company's labor costs beyond all reason. However, a deeper investigation of the facts shows that Hostess failed for a variety of reasons, many of them unrelated to unions.
Decreasing Demand
The number one culprit behind Hostess’ demise was a decrease in demand for many of their products. Hostess has blamed a union strike over the past week, but in reality Hostess has been struggling to make a profit for quite some time, and had already filed for bankruptcy once in 2004.
Hostess itself admitted to decreased demand in a recent statement it released to debtors. Here is a quote from that statement via Fortune,
"The Debtors have experienced a significant decline in the demand for their branded sweet goods and bread products. According to data from Information Resources Incorporated (the "IRI"), an independent market research concern that reports sales trends in most supermarkets (excluding mass merchandisers, club stores and discount stores), the Debtors' total unit volume of branded sweet goods declined by 4.3% during the latest 52 weeks ending September 5, 2012, and revenues from the Debtors' branded sweet good products declined 1.5% during the same period. The Debtors' total unit volume of branded bread products declined by 9.6% during the latest 52 weeks ending September 5, 2012. Revenues related to the Debtors' bread products declined 5.3% from the comparable period one year ago."
Furthermore, Hostess believed this trend would continue,
"The Debtors believe that they will continue to experience reduced demand for their products based on various factors, including some of the factors discussed in greater detail below."
Hostess primary products are Wonder Bread and “junk food” like Twinkies. Over the past decade carbohydrates and fatty foods have become less popular. Many supermarket chains sell their own brand of bread at cheaper costs, and also feature a bakery to sell freshly baked bread. Parents who used to put a Ding Dong in their child's lunch bag everyday now put an apple or orange in there instead. Many of the consumers rushing to buy Twinkies now have not bought Hostess products in many years, which tells you all you need to know about the company’s struggles.
A Mountain of Debt
In addition to decreasing demand, Hostess has also struggled because it was burdened with over $860 million in debt with just $1 billion in assets. The company has over 100,000 creditors, including the labor unions and pension funds which represent the employees, and will now undoubtedly lose out on some of their claims because of Hostess newest bankruptcy.
A debt-to-assets ratio like that ultimately limits how a company can operate. While Hostess' competitors spend money on advertising or technological improvements to increase sales or make their operations more efficient, Hostess was paying off interest on their debt. According to Outside the Beltway, Hostess was using an antiquated distribution which undoubtedly affected the bottom line of a company that relies on distribution so heavily (imagine all the places one can get a Twinkie). Eventually, the company finds itself in a position where it can no longer even pay the debt itself, hence the bankruptcy.
Poor Management
Finally, as noted by Think Progress, Hostess mysteriously tripled the pay of their CEO just months before asking union members to take a pay cut to “save the company.” One could understand how union members found it hard to believe the company was strapped for cash after raising the CEO’s salary from approximately $750,000 to $2,555,000. Nine other executives at the company also received massive pay raises earlier this year, which now appear to be part of a “golden parachute” package. Other CEO's, like the head of American Airlines, freezed or reduced their pay over the past four years when they asked unions to make similar sacrifices.
It is also worth remembering that Hostess executive agreed to pay the labor unions their high wages and generous pensions in an earlier contract. Much like NHL owners, the Hostess executives were trying to take back an earlier contractual promise made to the union.
Conclusion
It is easy to blame the death of Hostess on labor unions, but the reality is that the company was probably going down regardless. But take heart America, Hostess' popular brands like Twinkie surely will be sold off as part of the bankruptcy. The Twinkie will still be on American store shelves in the future, just made by a better run company.
hostess
November 17, 2012
By: Ryan Witt
Yesterday Hostess announced its intention to declare bankruptcy, close down all of its operations, and lay off approximately 18,500 workers. The news stunned many Americans, and sent shoppers to the local grocery store in an attempt to buy their last Twinkies and Ding Dongs. The commonly sold story by many media outlets (i.e. Fox News) is that Hostess went bankrupt because of a greedy and stubborn union which increased the company's labor costs beyond all reason. However, a deeper investigation of the facts shows that Hostess failed for a variety of reasons, many of them unrelated to unions.
Decreasing Demand
The number one culprit behind Hostess’ demise was a decrease in demand for many of their products. Hostess has blamed a union strike over the past week, but in reality Hostess has been struggling to make a profit for quite some time, and had already filed for bankruptcy once in 2004.
Hostess itself admitted to decreased demand in a recent statement it released to debtors. Here is a quote from that statement via Fortune,
"The Debtors have experienced a significant decline in the demand for their branded sweet goods and bread products. According to data from Information Resources Incorporated (the "IRI"), an independent market research concern that reports sales trends in most supermarkets (excluding mass merchandisers, club stores and discount stores), the Debtors' total unit volume of branded sweet goods declined by 4.3% during the latest 52 weeks ending September 5, 2012, and revenues from the Debtors' branded sweet good products declined 1.5% during the same period. The Debtors' total unit volume of branded bread products declined by 9.6% during the latest 52 weeks ending September 5, 2012. Revenues related to the Debtors' bread products declined 5.3% from the comparable period one year ago."
Furthermore, Hostess believed this trend would continue,
"The Debtors believe that they will continue to experience reduced demand for their products based on various factors, including some of the factors discussed in greater detail below."
Hostess primary products are Wonder Bread and “junk food” like Twinkies. Over the past decade carbohydrates and fatty foods have become less popular. Many supermarket chains sell their own brand of bread at cheaper costs, and also feature a bakery to sell freshly baked bread. Parents who used to put a Ding Dong in their child's lunch bag everyday now put an apple or orange in there instead. Many of the consumers rushing to buy Twinkies now have not bought Hostess products in many years, which tells you all you need to know about the company’s struggles.
A Mountain of Debt
In addition to decreasing demand, Hostess has also struggled because it was burdened with over $860 million in debt with just $1 billion in assets. The company has over 100,000 creditors, including the labor unions and pension funds which represent the employees, and will now undoubtedly lose out on some of their claims because of Hostess newest bankruptcy.
A debt-to-assets ratio like that ultimately limits how a company can operate. While Hostess' competitors spend money on advertising or technological improvements to increase sales or make their operations more efficient, Hostess was paying off interest on their debt. According to Outside the Beltway, Hostess was using an antiquated distribution which undoubtedly affected the bottom line of a company that relies on distribution so heavily (imagine all the places one can get a Twinkie). Eventually, the company finds itself in a position where it can no longer even pay the debt itself, hence the bankruptcy.
Poor Management
Finally, as noted by Think Progress, Hostess mysteriously tripled the pay of their CEO just months before asking union members to take a pay cut to “save the company.” One could understand how union members found it hard to believe the company was strapped for cash after raising the CEO’s salary from approximately $750,000 to $2,555,000. Nine other executives at the company also received massive pay raises earlier this year, which now appear to be part of a “golden parachute” package. Other CEO's, like the head of American Airlines, freezed or reduced their pay over the past four years when they asked unions to make similar sacrifices.
It is also worth remembering that Hostess executive agreed to pay the labor unions their high wages and generous pensions in an earlier contract. Much like NHL owners, the Hostess executives were trying to take back an earlier contractual promise made to the union.
Conclusion
It is easy to blame the death of Hostess on labor unions, but the reality is that the company was probably going down regardless. But take heart America, Hostess' popular brands like Twinkie surely will be sold off as part of the bankruptcy. The Twinkie will still be on American store shelves in the future, just made by a better run company.
