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Hostess is back - an economics success story

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As expected, but contrary to press hysteria, Twinkies and other Hostess products are being manufactured again. Two private equity firms bought the rights to most of the snack products - and also bought four of their bakeries - and they will be available again at most outlets on Monday.

Those who followed the bankruptcy last November will remember that the proximate reason for Hostess's Chapter 7 liquidation was the refusal on the part of their bakers' union to accept a new contract imposed under Chapter 11 reorganization. The underlying cause, however, was more an issue of union work rules on the part of the Teamsters - rules that, for example, required different products to be delivered on different trucks, resulting in substantial inefficiency. Basically the bakers' union didn't want to pay for the inefficiency caused by the Teamsters.

The new Hostess doesn't employ truck drivers at all. Instead, they contract out delivery to third parties. Not only does this permit the third parties to be more efficient, but it permits Hostess to deliver to more than twice as many stores - obviously a substantial benefit to the company.

They do still employ bakers - two shifts of them, at the moment - but the lack of union rules facilitates plans to invest in the bakeries and make them more efficient. Those efficiencies have permitted Hostess to switch to higher quality ingredients - their ingredient costs are up 9% - and perhaps eventually to scale back to a single shift.

Ultimately this is a success story. Inefficient practices that accumulated during good times are being trimmed out in favor of more efficient practices, which will ultimately provide the consumer with a better value for the next business cycle. This illustrates why the economy needs a recession now and then: to work out inefficiencies that are unsustainable in the long run. Now if only we would manage the recessions to promote the necessary restructuring, instead of dragging them out by trying to preserve the status quo, we could get the bad times over with more quickly.

Hostess products available Monday:
http://www.latimes.com/business/la-fi-twinkies-hostess-20130713,0,1531568.story
More detail on how the new Hostess is organized:
http://online.wsj.com/article/SB10001424127887324260204578584060534891582.html
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On July 14th, 2013 07:31 am (UTC), izmirian commented:
That's a definitely a good story. There was a similar story about the old GM factory here in Fremont California which got converted to the new united motors plant. In that case it was operated by pretty much the same workers and I think on a fairly similar pay scale but without all of the union rules, so there was a lot more flexibility. It went from the worst quality in the US to the best quality. There was an NPR this American life episode on it at one point. Pretty inspiring. Of course then that plant went out of business and now it's building Tesla automobiles.
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