Tastykakes suffers toothache of unionization, public financing 

Philadelphians may lose a sweet economic powerhouse in the Tasty Baking Company if the company is unable to find some sugardaddy to keep it going, which may be thanks to both unionization and government entanglements. According to the Philadelphia Inquirer, the treat manufacturer's decision to move facilities in order to expand operations resulted in biting off more debt than it could chew:

The $100 million debt used to build and move into the new plant, coupled with a failure to gain all expected cost savings from the facility, has put Tasty into a financial squeeze that could force a sale of the firm - identified with Philadelphia like few others - three years from its 100th anniversary.

Tasty said Wednesday that it had skipped a debt payment due Jan. 1 and had until Jan. 14 to work out a deal with its banks, led by Citizens Bank of Pennsylvania, for additional relief. Otherwise, it will be in default.

How did Tasty get such a toothache? A government-subsidized sugar high. Tasty received $31 million in publicly subsidized financing in addition to other credit from Citizens Bank, Bank of America, Sovereign Bank, and M&T Bank, just before the great recession. According to the report, "everything needed to go right for Tastykake to be able to pay it back, given the thin profit from its business. That hasn't happened."

How would a company ever get financing for such a huge risk that would effectively quadruple its debt? Oh:

The challenge for Tasty was always that the two-week shelf life for its products meant that, to keep customers supplied, it had to have two plants running at once during a relocation, Baur said. "Charlie, with his contacts, his knowledge, figured out how to do that."

 

Charlie is Charles P. Pizzi, CEO of Tasty, who came on "after a career in government and 13 years as CEO of the Philadelphia Chamber of Commerce." He also sits as chairman of the board of directors of the Federal Reserve Bank of Philadelphia. Apparently, having such clout was what enabled him to get taxpayer money for cheap, which incentivized other private banks to buy in too.

Too bad for them, because the cost of materials to produce things like the Butterscotch Krimpets has gone up, particularly sugar (a commodity with an artificially inflated price thanks to government subsidies that keep out foreign imports). Then the Great Atlantic and Pacific Tea Company (A&P to you and me) filed Chapter 11 in December, which Tasty cited as difficult to swallow:

The company cited a bankruptcy filing by the owner of the A&P, Super Fresh and Pathmark grocery chains and rising commodity costs as contributing factors to the financial squeeze and said it was looking at all options.

Did I mention that A&P is 95 percent unionized?

The company's good relationships with its labor unions could also be a plus, Flickinger said. A&P has one of the most heavily unionized work forces in the business, with 95 percent of its workers covered under collective bargaining agreements. It said in its filing it would seek to work with the unions to lower costs.

...

The company's decision to seek bankruptcy protection was widely expected as A&P has been bleeding red ink for some time. In its most recent quarter, the company's loss doubled to $153.7 million as revenue continued to fall. In its filing in bankruptcy court, A&P listed total debts of more than $3.2 billion and assets of about $2.5 billion.

Part of the problem was that union pensions were too big a slice of the pie. From page four of the bankruptcy filing: "[S]ignificant employee related obligations, including underfunded single- and multi-employer pensions, expensive health and welfare programs, and high store labor costs as a percentage of sales." Tastykakes can look forward to this problem too, as the move actually inspired a successful unionization drive of Tastykakes by the Philadelphia-based Local 492 of the Bakery, Confectionary, Tobacco Workers, and Grain Millers International Union:

"When they transferred over to the new building, some of the workers didn't like the way it was handled as far as their seniority," Condran said. "They felt they needed some security." In the spring, the company shifted production from its longtime plant on Hunting Park Avenue in North Philadelphia to a new facility in the Naval Business Center in South Philadelphia.

So, in summary: Tastykakes was hungry for expansion, but because the market was skeptical, the company had trouble getting financing. Then, a politically connected CEO takes over and gets the government to intervene, subsidizing his company's move, and making it more attractive for other banks to get in on the action. Because of the economic downturn, his company may leave taxpayers holding an empty bag, and the company has already started missing payments on its debt. Meanwhile, the government-subsidized move created an opportunity for a union to move in, which will also inevitably expand costs.

So how did that work out for the company?

In a March interview at the new bakery, where a larger-than-life, 1920s image of a little girl eating a Tastykake hangs outside, Pizzi said leaving the old bakery had been "like moving from a 1946 pickup truck to a Maserati."

Investors reacted Wednesday as if the Maserati were up on concrete blocks, sending Tasty shares down 37 percent, or $2.38, to $4.05.

It looks like Charles Pizzi got his just desserts. Tastykakes? More like wastey-kakes.

About The Author

J.P. Freire

Bio:
J.P. Freire is the associate editor of commentary. Previously he was the managing editor of the American Spectator. Freire was named journalist of the year for 2009 by the Conservative Political Action Conference (CPAC). You can follow him on Twitter here. Besides the Spectator, Freire's work has appeared in... more
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