Saturday, 17 November 2012

How the Twinkie Episode Works

This is the simplistic explanation of how to save a profit margin.

Somewhere around five to eight years ago...some budget guy at Hostess likely crunches the numbers for a final time, and there's a meeting with the top twelve guys who run the company.  They can't sustain the profit that they had enjoyed over the past couple of decades.  Between machinery replacement costs, increasing transportation costs, and worker costs (union rates)....there's a problem.

Adding to this....the budget guy knows there's a ceiling to the max that people will pay for Twinkies.  It's like asking a guy what's the max he'd pay for a regular can of Pepsi, and he says $1.50 max.  You can repackage the soda into larger cans and bluff the guy into paying $2 for a bigger can or bottle.

So the Hostess boards sits there and knows that significant change has to occur.  You can pace this out, or hasten it.  But in the end....you need a court action to play your cards on this matter.

You walk over to the bank and start borrowing money.  Doesn't matter what you use it on....just borrow and get into heavy debt.  Send the CEO to China twelve times a year. Pay bonuses to the top guys.  Just waste the money as much as possible.

At some point in 2011, you wake up and have the bank guys get all nervous and upset.  They want massive budget cuts.  You go and do the dance with the union, and draw this out to the end of 2012.  The union does a favor for you....thinking they need to be tough on this for a sweeter deal.  In truth....the company absolutely does not want a deal.

The end result is that the company will bankrupt and sell off its possessions to the highest bidder.  Various non-union companies in southern states will walk in and buy up the words "Twinkie", "Ding Dongs", etc.

Southern truckers will then move the items to the fifty states and the profit margin will move back to a point where everyone is making great profits.

The 18k union guys who lost their jobs?  They will sit there for hours and hours this weekend.....trying to understand where their leadership screwed up, and how they can recover.  What bakeries will start up in union states?  Answer: none.  You may actually have to pack up and move to a non-union state....just to stay a baker.

The top level of the union leadership?  They probably will be scratching their heads over where they go now.  The fancy leased car, the big trips to Reno, and the $100k a year to be a fancy union rep?  Well....it's gone in a matter of weeks.

Call it Twinkie-economics or whatever, but the simple truth is that you can produce an item as long as there is a sizable profit margin.  After that.....you don't produce something that won't sell.

Someone will sit and write a book on this in a year or two....defining Twinkie-economics and the logic of bankrupting a company....to survive.  In the end, it makes sense (cents works too).