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After lecturing us for years that Hostess is a worthless legacy company saddled with overpaid union workers, Hostess 'fessed up yesterday... There's been over a hundred offers to buy all or parts of the company.

No surprise- The wholesale bakery biz has devolved to a near monopoly, to the point that even a bakery chain saddled with mediocre management can make money... Which says something about Hostess' management. With the closure of Hostess, there's but one surviving nationwide full line bakery chain, Bimbo. On the cake side of the biz, McKee's Little Debbie brand and Flower's cake brands play 2nd and 3rd fiddle to market leaders Hostess and Dolly. On the bread side, Flowers has grown from a regional to covering most of the southern markets, and a few other regionals like Pan O' Gold in the upper midwest have large market shares. But in much of the country with Hostess gone there are only two or maybe three competitors left.

Now imagine how outrageously profitable the auto industry would be if Toyota, Honda, Nissan, VW, Subaru, KIA, Hyundai, etc. were all gone and the the only "competitors" left were the big three- GM, Ford and Chrysler. Then shut down GM... and that's the situation we've got in the baking industry today. Now it ain't rocket science that an industry with just two competitors can't help but be immensely profitable, so it's no surprise that over a hundred companies want to take Hostess' place in a near monopoly market.  

Now one would think a company could just rent a big warehouse, roll in some ovens, truck baked goods all over the country, and take over Hostess market share. Well, ain't that simple- for a start you need a building that will meet sanitation standards, so not just any vacant warehouse will do. You need silos and freezers for ingredients, giant vats for preparing doughs, ovens that would fill the longest semitrailer, automated wrappers, a series of conveyors to move the bread down that line, and sophisticated computers, software, and servos to run the whole line. That'll set you back about $20,000,000 at today's prices, and that's just for a conventional bakery- for high volume metro markets like NYC, Chicago, or southern Cal you'd better upgrade to a high speed bakery for around $50,000,000. And you'll need a lot of those bakeries- truck bread over about 300 miles and the transport costs eats up all the profit. Just to cover 80% of the U.S market you'll need 40 or so bakeries and at least 5 of them should be the pricier high speed variety... Figure about a billion $$$ or so just for your bakeries. Then you've got to deliver your bread, so figure on a thousand "transport" semi tractors at over $100,000 apiece and 2000 trailers at $30,000 a piece and 100,000 shipping "racks" (big shelves on wheels) at $500 apiece... Heck, we've spent another couple hundred million and we don't even have a place for them to deliver too! You'll need at least 500 depot/thrift stores spread around the country on pricey retail corridors, so figure another 250 million $$$ there. Then you need step vans to make the final delivery to the stores- just the bare chassis (and I mean bare, not even a windshield or floor and the drivers seat is a temporary wooden bench) runs over $30,000, and figure over $50,000 by the time they put a body on in it. You'll need around 10,000 of those step vans, so add another half billion $$$ to the tab. Then there's the odds an' ends, like hundred dollar displays for your half million or so customers, 10,000 plus $1000+ handheld computers for the route drivers, and another hundred million $$$ or so in ingredients and inventory on hand. And the trademarks and brand names? I'm no expert on brand "equity" but the #1 selling bread and cake brands for decades (Wonder and Hostess) and the #3 selling bread (Home Pride) are worth a few hundred million at least- think how many "points" it'd take to just get 300,000,000 consumers familiar with your brand, never mind persuade them to buy it.

And don't forget (like Hostess execs did) that you're gonna need around 20,000 skilled workers to run all this. Sure, you can get your help from the temp agency "slave markets"... Hostess tried that during the strike and it didn't work. There's no "running a bakery for dummies" book, and screw up and you'll burn your multi-million dollar bakery down. Same with the delivery drivers- you need folks that can drive through the worst weather and deliver. The competition is paying a living wage and benefits for such skilled bakers and drivers, and any bakery that hopes to survive will have to also.

So tally it all up and it'd cost over two billion $$$ to rebuild Hostess from scratch, but with a near monopoly market position it'd still be a paying proposition. That makes Hostess worth over a billion $$$ dead or alive. So all Hostess vulture capitalist owners have to do is cover their couple hundred million dollar "investment", and beyond that it's pure profit! Yup, having legally robbed it's workers of near a billion dollars in pension contributions in bankruptcy court, Hostess vulture capitalist owners will make off like bandits!

There oughta be a law...

Originally posted to RuralRoute on Fri Nov 30, 2012 at 09:41 AM PST.

Also republished by In Support of Labor and Unions.

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Comment Preferences

  •  if the offers to buy contemplate a stock sale, (6+ / 0-)

    such that the union contracts carry over to the new owner, then you'd be right, but I suspect that the offers are asset sales, leaving the union contracts and liabilities with the old company so that the new Hostess can carry on sans union.

    •  That's my suspicion... (4+ / 0-)

      Hopefully the unions will challenge such a move in court and on the streets if the new owners try to reopen without the unions.

      •  I don't think owners had problem with Bakers Union (0+ / 0-)

        It's the Teamsters that even the Bakers seem to have thrown under the bus....

        JOINDER OF THE BAKERY, CONFECTIONERY, TOBACCO WORKERS AND GRAIN MILLERS INTERNATIONAL UNION IN OBJECTIONS TO DEBTORS’ EMERGENCY WINDDOWN MOTION AND MOTION PURUSUANT TO SECTION 1113(e) OF THE BANKRUPTCY CODE

        http://www.bctgm.org/...

        In early summer of 2011, officials of the Company visited with officers of the BCTGM and made a presentation to them. Central to that presentation was the Company’s acknowledgement of what everyone in the baking industry knew; Hostess’ 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.
        .....
        Accordingly, when advisors for the BCTGM began meeting with
        Company representatives in the late summer, continuing literally until the day before this chapter 11 filing, they made two things crystal clear: (1) they were prepared to recommend to the BCTGM leadership that it accept concessions if, but only if, the Company (a) marked its distribution costs to market, (b) established a sustainable capital structure, (c) developed a plan for new revenue, and (d) gave meaningful successorship rights to the BCTGM; and (2) it was the BCTGM advisors’ view that if these conditions were not met, BCTGM workers were likely to strike the Company, because they had lost faith in it and believed that liquidation was preferable to the death spiral the Company had created.

        Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. www.hamiltonproject.org

        by PatriciaVa on Fri Nov 30, 2012 at 11:09:55 AM PST

        [ Parent ]

        •  Yeah, this seems like an inter-union war. (1+ / 0-)
          Recommended by:
          PatriciaVa

          Between the Teamsters and the Baker's Union.

          •  Been there, done that... (0+ / 0-)

            When Hostess (then Continental Baking) closed our Minneapolis bakery in 1987, we Minnesota Teamsters sided with the Bakers in fighting the closing. We did so in direct violation of an order from the then head of the Teamsters Bakery and Laundry division, an elder Mr. Meidel who was also head of the Chicago bakery drivers local and later thrown out of the Teamsters for corruption. He wanted us to let our driving jobs go so they'd get transferred to his local. We lost the battle for the bakery jobs, but the company caved and opened a distribution center in a Minneapolis suburb that kept 30 jobs here 'til they closed it too a decade later.

        •  Teamsters aren't the problem either... (1+ / 0-)
          Recommended by:
          BlackSheep1

          It's not the driver's wages that's hurting Hostess, it's the fuel cost and wear on the trucks! For example, they were supplying markets like eastern North Dakota out of a bakery in Billings, Montana. That thousand mile or so round trip costs darn near a thousand $$$ just in fuel... Even if the Teamster drivers worked for free it's a losing proposition.

          •  Based on the analysis that BCTGM appears to.. (0+ / 0-)

            ...support in their joinder, Teamsters costs were "$80 million and $130 million annually" above the market, while their costs (BCTGM) were market.

            Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. www.hamiltonproject.org

            by PatriciaVa on Fri Nov 30, 2012 at 12:25:29 PM PST

            [ Parent ]

      •  RuralRoute - to enter bankruptcy a company (0+ / 0-)

        must have more liabilities than assets or have run out of cash. When the assets are sold they will be allocated by the court in order of their preference with the secured debt being paid first and the stockholders being paid last. How will the investors "make out like bandits" from the sale proceeds? I haven't looked at all the financial details but it would be interesting to see a list of the liabilities in order of their preference as viewed in a bankruptcy process. I just don't have a good handle on the numbers so that I can understand what is happening.

        "let's talk about that"

        by VClib on Fri Nov 30, 2012 at 06:39:12 PM PST

        [ Parent ]

    •  I don't understand the comment (1+ / 0-)
      Recommended by:
      BlackSheep1

      Seems to me that Rural Route is primarily valuing hard assets, then the brands. I don't see much about labor.

    •  My guess is that the new owners will buy (0+ / 0-)

      only the recipes and the brands and leave everything else behind unless they need it and can acquire the physical assets for pennies on the dollar. But in any event all contracts will be voided in the Chapter 11 and it will be an asset sale.

      "let's talk about that"

      by VClib on Fri Nov 30, 2012 at 06:32:28 PM PST

      [ Parent ]

  •  I guess... (4+ / 0-)

    ...that now highly successful GM must have gotten rid of its unionized workers to attain its present status.  Oh wait, they did not.  

    I'm not always political, but when I am I vote Democratic. Stay Democratic, my friends. -The Most Interesting Man in the World

    by boran2 on Fri Nov 30, 2012 at 10:20:37 AM PST

    •  But they did agree to two tier labor contracts (4+ / 0-)
      Recommended by:
      svboston, nextstep, BlackSheep1, VClib

      so that newly hired employees would be paid much less than the starting employees did just before the bailout.  I'm not saying that wasn't necessary, but there was mention in Meteor Blades' diary about how the jobs being created in this economy for manufacturing are not the same as what used to be considered good manufacturing jobs in the past.

  •  These are great (and ignored) points (2+ / 0-)
    Recommended by:
    Debby, IreGyre

    In the stories about Hostess the media seems to forget that we are trying to get our jobs back with the new owners. The media does not respect what it takes to run a bakery, it must not have been on the company press release. If they want to crank up those bakeries and meet demand in a week, they will need the Baker's Union.

    I assume this is related to your topic but I am not sure I get the differences between forms of bankruptcy.
    http://www.businessweek.com/...

  •  No...they really won't (3+ / 0-)
    Recommended by:
    nextstep, johnny wurster, VClib
    Yup, having legally robbed it's workers of near a billion dollars in pension contributions in bankruptcy court, Hostess vulture capitalist owners will make off like bandits!
    This is an asset sale, the proceeds will not flow to the owners of the company but the secured and unsecured debt holders.  
  •  A wholesale bakery is a license to print money... (1+ / 0-)
    Recommended by:
    wintergreen8694

    That's what I discovered when I started working for Hostess predecessor Continental Baking in the 1970s. Back then they actually had a half dozen competitors... With Hostess closed, there's only one nationwide full line bakery left- Bimbo. Heck, Hostess management would really have to work at it to lose money today!

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