Twinkies cut the wrong thing

When Hostess (who made Twinkies) went bankrupt in 2004, it was one of the largest food bankruptcies in American history.

It was a Chapter 11, to be specific. That's the survivable kind: the company keeps running while a court restructures its debts.

Getting out took four and a half years. And to keep the company alive, the unions and workers gave up concessions worth up to $220 million a year in labor costs.

You’d think a pay cut that size, every year, could fix something.

But it only bought them a few years of runway.

Because pay cuts didn’t touch the underlying problem: for decades, the owners had promised workers retirements that the business could never afford.

And these promises legally could not be restructured, in a world where people kept buying fewer Twinkies.

So $220M in pay cuts only treated the symptom.

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Historians say that WWII was basically inevitable, because of how WWI ended: punitive terms that settled nothing and scheduled the next war.

Same thing at Hostess.

By January 2012, Hostess was bankrupt again. About $1B in assets against $1.43B in liabilities. $944 million owed to the pension fund alone.

This is where it turned ugly.

Management asked the workers, who had already paid once, to take deep cuts again.

Meanwhile the CEO had taken a 300% raise, from about $750,000 to $2.5 million a year, while steering the company into bankruptcy.

The bakers walked out.

A week later the company quit restructuring and moved to liquidation: 33 bakeries closed, 18,500 jobs gone, 82 years of continuous Twinkie production over.

Here’s the takeaway:

Don’t mistake a painful cut for a fix. Make sure you’re treating the underlying problem, or you’ll be right back where you started.

How to find the real problem, below.

Find the disease

Before you make a painful cut, name the problem it actually solves.

The tool for that is one I've pointed you to before: the Five Whys. Take the crisis in front of you and ask why, five times, until you hit the thing underneath.

Run it on Hostess.

Why are we out of cash? Sales dropped below costs.

Why can't we cut costs? They're locked in contracts.

Why do those contracts exist? Promises made decades ago that nobody planned to pay.

If your fix doesn't reach the last why, it isn't a fix. It's a payment plan on the next crisis.

Here's to never paying twice,

Michael

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