The Twinkie Meltdown

I haven’t eaten a Hostess cupcake since I was six. Now, I guess I never will.

The shutdown of Hostess  dominated today’s business news. Reporters are speculating on why Hostess failed.

According to various commentators, Hostess’s demise was caused by:

1. People just don’t eat cupcakes wrapped in plastic the way they used to.

2. The cost of labor and unions’ unwillingness to cave.

3. The company was really, really mismanaged.

4. The price of sugar due to the power of the sugar lobby.

Are any of these the “real” reason?

First  - Has America lost its sweet tooth? Or, at least lost its taste for sweet food soaked in preservatives and wrapped in plastic? Hard to say, but there is objective evidence to the contrary.

Second – Was labor the culprit?  Labor costs are an issue in virtually every distressed company.  And many companies in chapter 11 blame their financial problems on their employees. However, many (if not most) of these companies do not end up in liquidation. At some point, if a business is not completely mismanaged, its employees are generally willing to make sacrifices for the sake of saving their jobs.

Third  - Was Hostess mismanaged? If it weren’t, it would not have ended up in bankruptcy. But once in chapter 11, severe mismanagement problems are usually quickly addressed under the watchful eye of the creditors.

Fourth – Did the price of sugar cause Hostess to crumble?

Apparently, the price of sugar in the US is twice the global price of sugar. Stated simply, sugar imports are strictly controlled, which drives up the US price.

The sugar industry in the US has been protected by strong tariff legislation for several decades.  This protects jobs in sugar industry, but it is not without its price. Sugar tariffs have a bitter irony: for every US sugar manufacturing job saved, three jobs in the US confectionary industry were lost.

I have long been a proponent of trade laws that protect American industry. However, the demise of Hostess is a cautionary tale of how the wrong trade legislation can do more harm than good where it comes to job preservation.

The legacy of Hostess will not be its cupcakes, but the fact that it was a casualty not of unions, but of lobbyists.

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