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The wonder of creative destruction

by Aaron McCormack on November 29, 2012

I won’t miss Hostess brands. Not a bit. For those of you outside the USA, the company makes “iconic” foods in the United States such as Wonderbread (plain white bread with nothing wonderful about it) and Twinkies (a sickeningly sweet combination of 38 ingredients – many of which you would not want to eat separately).

The collapse of the firm has had a lot of press in the USA because so many people remember enjoying these brands as they grew up.  It has also thrown a microscope once again on the behaviour of:

– Unions (refusing to adjust archaic working practices, not taking enough cuts to help the company survive, insisting on levels of benefits that are not sustainable)

– Private Equity ownership (saddling the company with debt so that the biggest bill is servicing the interest on debt  used to buy the firm, refusing to compromise with workers)

– Management (CEO awarded a 300% payrise, being incapable of resolving the conflicts between ownership and workers)

Left and Right-wing commentators and news outlets have given a lot of press to their favoured narrative – whether it be greedy capitalist ownership “asset-stripping” the company and killing it, or greedy backward-looking unions destroying the company with their “unreasonable demands”.

As usual – it is likely that both strands are true.  Hostess brands were bought and sold by private money three times since 2004.  Each time, the private money added more debt (the interest on which needs to be serviced) and inserted new management.  In fact there were seven CEOs in that period.  Management was therefore inconsistent and probably incapable of building the relationships needed to get to a deal with an intransigent Union.  In the end, mutually assured destruction was a threat that became a reality.  When companies get destroyed, the ownership usually get what’s left of the pickings and the workers are left with nothing.

The real underlying problem that helped make this all happen was declining sales.  Thankfully some Americans are waking up to the fact that these food products are just not that good for you.  Unfortunately the company itself was in so much turmoil that it could not adjust to the most obvious trend in the food industry for the last 20 years – that of “healthy”.  It had the assets, the market power and the capability to do so, but it didn’t.  Growing companies can tolerate and hide a multitude of dysfunctions.  Shrinking companies cannot.

So the company will go into bankruptcy protection. Most of the brands are profitable and most of the bakeries and distribution (and the jobs that go with them) are assets that will be valuable to someone.  Maybe they will be bought by a company specializing in healthy snacks, or gluten-free baked goods.  Maybe they will just keep selling garbage dressed up as food.

The thing about tectonic shifts in markets (and “waves” of creative destruction) is that no matter how many times you reconfigure a business that is in decline, it will still eventually die.  Bucking that trend requires owners with vision, management with talent and workers who believe in the mission (and stand to share in the upside).

The issue of owners, workers and managers who don’t “gel” has been a problem since companies were invented.  Yes, debt-fuelled buyouts and Union contracts will have made it more challenging to reach the right balance between stakeholders.  But, like the restaurant down the street with a nasty owner, grumpy staff and crap food, the whole thing needs to be put out of its misery.

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