Asymmetrical Information - Megan McArdle

01.29.13

The Twinkie is Dead! Long Live the Twinkie!

Did the baker's union get what they wanted all along?

Apparently, Hostess is close to selling off its venerable Twinkie brand to one of two investment firms.  You may remember that Hostess filed for bankruptcy last fall, after it was unable to come to terms with the baker's union.  Twinkies madness followed, as people rushed to stockpile their favorite treat.  But lovers of bland, rubbery cake and oleaginous white filling can rest easy: the Twinkie has been saved from the brink of destruction.  

Unanswered, in any news report I could find, is whether the baker's union has been rescued as well.  If they are, then the real story of the Hostess bankruptcy will be the baker's union's brilliant negotiating strategy.

Yes, you heard that right.  The baker's union took a lot of heat for refusing to renegotiate its contracts, even as the company was obviously teetering.  Even the teamster's union complained that they were being unreasonable, which seemed to many--including me--like prima facie evidence that they must have lost their mind.  

But a few months later, I got to talk to someone who has a lot of experience in labor negotations.  They viewed the Hostess story entirely differently from the way that we in the press did: not as a fight between management and their crazy union, but as an internicene dispute between the unions.  In this telling, the teamsters had an unreasonably sweet deal, one that was killing the company.  And the bakers declined to take cuts in order to keep the teamsters sugared up.  They were betting that whoever bought the company would still need the bakers, but not the insane distribution contracts that the teamsters had enjoyed for years.  

Let me explain.  In the grocery business, truck drivers do more than just drive a truck.  Over the years, they have taken on more responsibilities--they frequently even stock shelves, as store owners have cut down on backroom labor.  But the teamsters had some very old-school work rules, as Holman Jenkins of the Wall Street Journal explained:  

Under the latest turnaround plan, the sticking point was Hostess's distribution operations, source of the Hostess horror stories filling the media. Union-imposed work rules stopped drivers from helping to load their trucks. A separate worker, arriving at the store in a separate vehicle, had to be employed to shift goods from a storage area to a retailer's shelf. Wonder Bread and Twinkies couldn't ride on the same truck.

Hostess has spent eight of the past 11 years in bankruptcy. As the company explained to its latest judge, the Hostess brands "have not been able to profit from many of their existing delivery stops and have been unable to enter potentially profitable markets, such as dollar stores, vending services and movie theaters."

If Hostess were able to rationalize or outsource delivery to serve these customers, ready to go are "new products based on its best-selling cake items that have a longer shelf-life and can withstand freezing en route to customers over longer transportation hauls."

Under pressure on Monday from Judge Robert Drain to back down from their strike aimed at forcing the company to liquidate, the bakers themselves pointed to "what everyone in the baking industry knew: Hostess's production costs were neither excessive nor out of line with the market but its distribution costs were—to the tune of between $80 million and $130 million annually."

One could always ask about the wisdom of a labor-law structure that causes companies like Hostess to drag on for decades without adapting to their marketplaces. One might question whether the bakers are acting in true and brotherly solidarity. But given the circumstances that actually exist, the bakers might well prefer to hold back further concessions, let the company liquidate, and try their luck with a new owner or owners who might materialize for its bakery operations.

 In other words, the bakers could figure on getting about the same deal from whoever bought the brands.  But the teamsters couldn't--which is why they were pressing the bakers to make concessions.  The bakers, however, saw no reason to help the teamsters out at their own expense.  

If Jenkins was right--and if the bakers do manage to make Twinkies a union shop--then they'll have done the right thing for their membership by pushing the company into bankruptcy.  

It's a fascinating story.  And I think one that tells you a lot about the modern labor movement, and modern labor reporting.  We tend to see fights in terms of unions versus management.  But when companies fall on hard times, and there's less money to go around, the disputes are often union versus union.  If we insist on looking at things through the old-fashioned lens, we might miss something big.