hostess
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Commentary

What Hostess Brands’ Return to the Stock Market Says About the State of U.S. Workers

Jul 25, 2016

Rick Wartzman is senior advisor to the Drucker Institute at Claremont Graduate University.

When Twinkies maker Hostess Brands announced this month that it would soon go public as part of a deal valuing the company at $2.3 billion, it was widely hailed—and correctly so—as the capstone to an amazing three-year financial and operational turnaround.

But one question kept eating at me: What happened to the thousands of factory hands who used to work at the company?

For most of them, it turns out, things haven’t necessarily been so sweet.

In fact, when you look at the long history of Hostess, you can see five major forces—the pernicious pressures of Wall Street, the decline of organized labor, the rise of contingent work, globalization, and automation—that have left many blue-collar employees in America feeling battered.

Before the rise of Hostess, it fell hard—twice. The company first filed for Chapter 11 protection in 2004, and though it emerged from bankruptcy five years later, it never really found its footing. Sales continued to slip as it struggled to innovate, and losses piled up. A heavy amount of debt weighed it down. Archaic work rules, built into existing labor agreements, also hurt efficiency.

By the time the company went bankrupt again in early 2012, and then decided to liquidate 10 months later, fingers were being pointed in all directions. Some blamed the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, whose members had gone out on strike, for refusing to accept deep wage and benefit cuts that might have saved the company and, with it, 18,500 jobs.

Others supported the bakers for fighting for their dignity, noting that they’d already made giant concessions in the past. The real culprits, in their eyes, were the hedge funds controlling Hostess.

Indeed, the company seemed to have become an example of a larger trend that has not been kind to rank-and-file workers: a “short-term financial mentality,” as University of Southern Maine economist Michael Hillard put it at the time, “that you can always squeeze more—squeeze more out of operations, squeeze more out of labor.”

As pieces of the company were sold off in 2013, two private-equity firms, Metropoulos & Co. and Apollo Global Management, purchased the bulk of the snack business (Twinkies, Ding Dongs, Ho Hos, and more) and retained the Hostess name. Flowers Foods snapped up most of the old bread lines, including Wonder and Nature’s Pride.

Metropoulous and Apollo have invested north of $100 million in equipment upgrades at the three factories they’ve brought back to life, put in place a savvy marketing and distribution strategy, stepped up R&D, and created about 1,200 jobs.

That, of course, is infinitely better for workers than was the situation a few years ago. “Remember, when we bought the business, it was at zero,” says Bill Toler, the current CEO of Hostess. “It was gone. No employees, no plants.”

Yet it’s also worth noting the differences between the old Hostess and the new one. For starters, it takes far fewer people now to generate the same output.

Toler says it’s all but impossible to compare yesterday’s Hostess and today’s because the size and structure of the two enterprises are so different. But there is no doubt that a range of new efficiencies, especially the centralization of food production and the introduction of direct-to-warehouse delivery, helps Hostess to crank out nearly as many snack cakes as before with a fraction of the workforce.

Mechanization also has had significant effect. Matthew Clark, director of research and education at the bakers’ union, figures that the advanced systems Hostess has installed have allowed it to reduce headcount at individual factories by a half to two-thirds. “It’s pretty staggering,” he says. Others have suggested that the impact of automation could be even greater.

There are plenty of nuances as to which tasks are most susceptible to machines supplanting humans, but manufacturing jobs, in general, are highly vulnerable. “These days, practically every sector is a technology sector,” says Natalie Foster, a fellow at the Aspen Institute’s Future of Work Initiative. “It’s good for the robots, but not so good for the people.”

Meanwhile, those workers who were rehired by Hostess are not doing as well as they once were. The bakers’ union, which has again been elected to represent 400 or so workers at two Hostess factories, has been able to restore pay to where it was earlier: $16 to $19 an hour, depending on the position, for those starting out. But the union was unable to negotiate a guaranteed pension this time.

As for the bread operations picked up by Flowers, the bakers’ union hasn’t been able to make inroads there—a reflection of just how difficult it is for organized labor to gain traction anywhere (a subject I’ve explored previously). At the same time, truck drivers in more than a dozen states have sued the company, claiming they’ve been improperly classified as independent contractors.

Flowers, which denies any wrongdoing, is one of a number of major companies that have faced such charges—a sign of the expanding use of so-called contingent workers across the economy. Typically, they receive lower pay and fewer benefits than do regular employees, while lacking various workplace protections.

Then there’s foreign trade. When the old Hostess went under, a U.S. Labor Department investigation found that “increased imports of baked products contributed importantly” to the company’s failure, thereby making employees eligible for certain benefits and job training under the Trade Adjustment Assistance program.

Critics scoffed, saying that competition from abroad wasn’t really a factor in Hostess’s demise. But in 2012, according to Census Department data, the United States imported about $3 billion worth of bread and bakery products from other countries—mostly Canada and Mexico—up sharply from about $1 billion worth in 2000. That was a much bigger jump than in imported goods overall, which roughly doubled over the same period.

Sometimes, the relationship between globalization and jobs is relatively straightforward, like when Mondelez International said earlier this year that it was moving 600 jobs from its Oreo factory in Chicago to Mexico, where labor is cheaper. More often, it’s trickier to sort out.

Either way, there is a growing consensus among experts—even those who continue to view free trade as a definite net plus for the economy—that some workers are invariably displaced by globalization. “That there are winners and losers from trade is more clear than ever,” says Christopher Wilson, deputy director of the Mexico Institute at the Woodrow Wilson International Center for Scholars. “The question that arises is: How do you deal with the losers?”

Training can help. But it is not unusual for those landing new jobs, even after going back to school, to struggle to find something that pays as well as what they had before. “Generally speaking, it’s a race to the bottom,” says Bill Messenger, an official with the Washington State Labor Council, who helped build the case for why Hostess workers should have access to trade assistance.

One person who was retrained is Mike Hummell, a 14-year Hostess veteran who became a leading voice against management during the 2012 strike against the old company.

Hummell, who had worked at a Wonder Bread factory in Kansas, was certified as a power-plant technician in May 2015. He expressed hope that he’ll find a job in this field before long, but he hasn’t yet. In the meantime, he is driving a forklift for a nonunion manufacturer of plastic products. He said he likes the job fine; it’s certainly better than the final days of the Hostess he left behind.

But it’s not anywhere close to the halcyon times. Hummell now makes $14 an hour. He used to make more than $20 an hour, including $4.25 that was self-directed to a retirement plan. “To be entirely candid,” he says, “it is a step back.”

That’s awfully tough, any way you slice it.

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