Summary: Twinkie-Town - Should you stock up on Ding-dongs?On Friday Hostess Brands’ baker’s union rejected a proposed set of wage and pension cuts, forcing management to move from a Chapter 11 bankruptcy reorganization to a Chapter 7 liquidation. Consumers went out and immediately stocked up on the four major food groups: fruit pies, Twinkies, Ho-hos, and Wonder Bread. But they needn’t worry: the iconic brands will be purchased by someone, and will be produced somewhere. But it’s unlikely that the new own owners will hire the same workers from the same union at the same or better wages. Instead, whoever buys these brands will likely set up new plants in new locations with new contracts. There are a lot of states where unemployment is over 10% with a lot of people looking for work. Twinkies aren’t going to just disappear. Rather, they will be in short supply for a few weeks, and once new distribution channels are established, they’ll be back on the shelves What happens to the workers is another story. It’s not just an issue of greedy unions and inept management, as some on the right or left would have you believe. Hostess actually entered bankruptcy back in 2004 and was there until 2009. But they came out at perhaps the worst possible time: just after the longest and deepest economic slump since World War II—not exactly propitious for a snack-food company.And in addition to poor timing and high wages, the company had an antiquated distribution system and a relatively long inventory cycle. Cash-flow was a problem. A new company with new contracts and new management should be able to create value from a well-established brand.But some people will lose out. Herein lies the paradox of creative destruction: society cannot reap the rewards of competition without suffering the slings and arrows of fortune. That’s why we have a safety-net: to cushion the blow to individuals and families, while everyone adjusts to continual change. Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @GlobalMarketUpd
