|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
The corporate bias against labor is buried in the rhetorical DNA of the company’s announcement. Note the New York Times article announcing the closure:
Hostess Brands, the bankrupt maker of cream-filled pastries like Twinkies and Ho Hos, said on Friday that it planned to wind down its operations and sell off its portfolio of well-known brands. The decision comes a week after one of the company’s biggest unions went on strike to protest a labor contract.
The paragraph flows from announcing the liquidation to the union strike and the decision to close one week later. This draws a chain of causation between the strike and the closure that sits in the mind of the audience. The important term glazed over by the structure of the paragraph?
Yes, Hostess Brands was bankrupt before this strike happened. Indeed, it’s been bankrupt twice in the last 8 years, having only emerged from its last bankruptcy 3 years ago. Think about that a second. That means Hostess managed to go bankrupt, restructure, and run itself back into bankruptcy in 3 years. Perhaps this should get more play than “labor strike” when we discuss the demise of the company.
What prompted the company to run itself into the ground again? While the company has publicly placed all its business woes since 2009 on the difficult task of cutting labor costs, the reality is that the company remained behind the times. When America began to seek healthy alternatives to Wonder’s delicious but frightening 1950s deadly chemical feel, Hostess trudged onward losing market share to others. When childhood obesity became a national epidemic, Hostess kept churning out fat-filled cakes that sat uneaten on shelves. As the business faltered, Hostess turned blame on the workers.
But a losing business model with cheap labor can generate higher margins for only so long, and while this strike will provide the basis for closing the doors of the company, it will trigger the event that the company itself has planned for some time — liquidation. Hostess will now sell its famous brand names to other companies who can profit off them with smaller-scale production or by tweaking the product itself to better compete. For those at the top of Hostess, this — and not cutting labor costs while chasing diminishing markets — was the brass ring all along, with the owners of the company likely to become rich on these sales. By the way, who owns Hostess? If you guessed, “Private Equity firms seeking to slowly kill the company while milking its resources” you’d be right!
Even as it played the numbers game, Hostess had to face chaos in the corner office at the worst possible time. Driscoll, the CEO, departed suddenly and without explanation in March. It may have been that the Teamsters no longer felt it could trust him. In early February, Hostess had asked the bankruptcy judge to approve a sweet new employment deal for Driscoll. Its terms guaranteed him a base annual salary of $1.5 million, plus cash incentives and "long-term incentive" compensation of up to $2 million. If Hostess liquidated or Driscoll were fired without cause, he'd still get severance pay of $1.95 million as long as he honored a noncompete agreement. When the Teamsters saw the court motion, Ken Hall, the union's secretary-treasurer and No. 2 man, was irate. So much, he thought, for what he described as Driscoll's "happy talk" about "shared sacrifice." Hall says he tracked Driscoll down by phone and told him, "If you don't withdraw this motion, these negotiations are done." Hostess withdrew the motion a few weeks later when Driscoll left -- the same Driscoll who, Hostess told the court in its motion, was "key" to "reestablishing" Hostess's "competitive position going forward." Abbott and Costello couldn't have made this stuff up if they'd gone to Wharton.
The board replaced Driscoll with Greg Rayburn, a restructuring expert Hostess had hired as a consultant only nine days earlier. Rayburn was a serial turnaround specialist who had worked with such high-profile distressed businesses as WorldCom, Muzak Holdings, and New York City Off-Track Betting. He became Hostess's sixth CEO in a decade. Within a month of taking over, Rayburn had to preside over a public-relations fiasco. Some unsecured creditors had informed the court that last summer -- as the company was crumbling -- four top Hostess executives received raises of up to 80%. (Driscoll had also received a pay raise back then.) The Teamsters saw this as more management shenanigans. "Looting" is how Hall described it in TV interviews.
Dick Gephardt, former House majority leader and current CEO , Gephardt Group Rayburn announced that the pay of the four top executives would go down to $1 for the year, but that their full salaries would be reinstated no later than Jan. 1. Hostess pays Rayburn $125,000 a month, according to court filings. At the same time Rayburn became CEO, Gephardt's son Matthew, 41, the COO of the Gephardt Group, was put on the Hostess board as a $100,000-a-year independent director.