Wednesday, January 11, 2012

Hey! Give Me My Cream Filling!

Read The November 2012 Update On This Article! 

I tend to eat fairly healthy these days. I do, on occasion, break my diet and go for baked goods, sweets, and red meat. For me, though, red meat is a necessity as it provides Vitamin D3. My diet is mostly vegetables, unprocessed grains, and fish, though.

So those who know me may find it a bit ironic that I am writing about junk food that I tend to avoid. In fact, I am writing about something that I considered, in my adult life, to be a rare treat and not regular regimen. However, Hostess held a rather iconic place in modern society.

Even though I usually don't partake, I have always found comfort in staring at the temptation of Snowballs, Cupcakes, Ding Dongs, and Ho Hos in the grocery store. My mouth would water a little bit. Then I would grab some rather high cocoa content chocolate, usually a bar that would last me a month.

Hostess emerged from Bankruptcy protections granted in 2004, in 2009. In 2009, real estate costs, increased fuel costs, and higher supply costs (sugar and flour mostly) brought the company to seek protections and repay creditors. When those protections expired, Hostess found itself still over $700 Million in debt. That is after their $2.2 Billion in annual sales. The Wall Street Journal provides a good story from last month in the provided link.

This time around, Hostess is seeking Chapter 11 protections and may or may not be seeking restructuring.



But what led to this?

The 2004 Bankruptcy case obviously was not enough. Since 2009, when the protections expired, several things have taken place that threw up trade and production obstacles in Hostess's way. First, taxes and regulatory fees on sugar increased. When you produce lots of baked goods stuffed with a sugary cream, that is a hard cost to suddenly accrue. You could say that the experts should have planned ahead and budgeted for the increase in supply costs. However, who would have expected that a bill such as Obamacare would seek to regulate the supply costs of baked goods?

Transportation costs, including both the delivery of supplies and the communication of products to wholesalers and retailers nearly doubled. That is sure to have not helped.

However, labor costs brought about by making concessions to unions are what killed Hostess. That is right, labor unions stole our creamed filling. How?

Let's look at transportation costs. Dock workers, truck drivers, and mechanics employed by Hostess and their suppliers are mostly Teamsters members. Unions raise their membership dues, negotiate contracts to increase wages and benefits, then include the higher prices of their union dues as part of the necessity of raising those labor costs. If Hostess were allowed to hire outside of unions in non-Right-To-Work states, those transportation laborers could actually have gotten the same benefits plus a higher wage to keep for themselves. How? By not having to pay the union dues. If the difference was split, Hostess would have saved that difference. The other half would have been in workers' pockets. It would have been better for both. But the union would have screamed for the administrators not getting their "fair share". Oh, Hostess also paid directly to the union, not to just the laborers.

Not to target the Teamsters, other labor unions are involved. They just happened to be the first example I had at the tips of my fingers. Teamsters, despite their history with mob connections, are probably one of the least corrupt unions out there. But common sense is common sense. Math is math. The numbers are numbers. A is A.

SEIU had its part to play as well. SEIU drives up medical costs, education costs, and other "employee services" costs.

The list goes on. 80% of Hostess workers belong to one union or another.

The largest is the Bakery & Confectionary Union with its Industry International Pension Fund to which Hostess owes over $940 Million in pension funds Hostess is contractually obligated to provide to the union. The link provided provides more information on Hostess's filing, announced January 11, 2012 in the Wall Street Journal.

This is despite being based in Irving, Texas. Texas is a Right to Work state. Maintaining mandatory contractual agreements with labor unions though not mandatory by state law is most likely the final nail in Hostess's cream-filled coffin.  

Unions did grant some concessions to their contracts in order to keep some jobs. However, despite those concessions, Hostess tried to be the "good guy" and still pay their laborers above market value. 80% of their employees remain union workers. The conceded salaries/wages from the unions did nothing to alleviate union-contracted pensions and health care costs. As Obamacare phases in heading towards its full implementation in 2014, that portion of "labor costs" will increase, not only for hostess, but their suppliers and their clients (retailers). The company cannot afford the current requirements. Even if they make it through this bankruptcy case, labor contracts and health care costs forced upon them by Obamacare will just topple them again.

Though I will miss seeing those Snowballs, Cupcakes, and loaves of Wonder bread on the shelves, I am die-hard against any form of bailout or subsidy. They wouldn't qualify, anyway, because Hostess isn't some overpriced and inefficient "green energy" company. They are famous for producing items that the First Lady opposes:  junk food. She thinks we should not be allowed the option to choose what we eat. However, DC elitists wanted a posh IHOP and voted to grant a $756k+ subsidy to build a franchise. On that note, a government bailout for Hostess could happen, but I wouldn't count on it.

That "equal protections and entitlements" myth will continue, regardless. Even if deemed "too big to fail", Hostess won't get a bailout unless our inept Congress decides to bend to the President's mandate to raise the debt ceiling yet again. Free Market Capitalism dictates that they fall due to their failures to run efficiently. Allowing this to happen will send a hard lesson to the nation, serving as a warning to the dangers of too much government regulation and socialist labor union intervention.

The good news is that you now have one less choice on the shelves granting an incentive to ween your kids off of Wonder bread and towards a whole-grain alternative, if they'll eat it.

Atlas is shrugging. This time because he wanted his cream filling.