The decision by the maker of Wonder Bread to pull out of the Southern California marketplace was widely seen last week as a reflection of the region's preference for wheat over white.
But troubled Interstate Bakeries Corp. contended that other, more hardcore business issues were at play: notably the high cost of doing business in the region, as well as rigid union contracts that have prevented it from improving its business practices.
"Our primary consideration has to be the company's long-term survival and financial health," said Craig Jung, chief executive officer. "While IBC has made marked progress in several problem markets over the past six months, bread operations in Southern California continue to be unprofitable."
The Kansas City, Mo.-based company said that it would close all four of its Southern California bread bakeries, lay off about 1,300 workers and would stop selling the white bread in the region in late October. However, the company said it will continue making and selling Hostess Twinkies, Ding Dongs and its other popular goodies.
Interstate, which acquired the Wonder Bread brand in 1995, has been seeking to reorganize in U.S. Bankruptcy Court since September 2003. It has admitted that its white bread sales have fallen as the region has acquired a growing taste for whole grains.
But Jung also maintained that the baker has long struggled to be profitable in Southern California due to "structural barriers," such as incursions by lower-cost, non-union competitors. Meanwhile it labors under dozens of collective bargaining agreements and more than 40 pension plans. He also blamed high workers' compensation costs.
The company has often had a confrontational relationship with the Teamsters union, which represents more than 80 percent of Interstate's 25,000 employees. And that relationship isn't bound to improve anytime soon.
Union officials said they were blindsided by the decision to close the plants, as well as 17 distribution centers and 19 outlet stores, especially in the midst of contract negotiations. The union hinted at a possible local strike at Interstate's two remaining confection factories, which make the Twinkies and Ding Dongs, if an agreement is not reached.
Teamster officials have publicly stated that while Interstate feels that union concessions are crucial to the company's turnaround, workers have already made significant wage and health give-backs to keep the company afloat during its financial reorganization.
Interstate spokeswoman Sandi Sternberg said that any strike at the company's remaining Southern California factories could prove to be disastrous for the struggling company.
"Any labor activity would only compound the company's problems and reinforce the Teamsters' lack of concern for our employees and our membership," Sternberg said.
Officials with the Teamsters did not return repeated telephone calls for comment.
The troubles Interstate is having in Southern California may provide a glimpse into difficulties the company could face across the country in coming years. Interstate closed its operations in Washington and Oregon in 2005, citing similar reasons for the shutdown.
However, Sternberg maintained that the company expects sales of Wonder Bread to remain strong in other regions. But she also acknowledged that the company has been hurt by an antiquated delivery system which the union has been resistant to change.
Interstate hopes to make a proposal to its creditors on Oct. 5. It will present a revamped business plan that calls for concessions by unions as well as changes to its distribution and sales practices. The company has secured debtor-in-possession financing until February of next year.
The company delivers bread through a traditional route structure in which drivers also function as sales people. It has wanted to change that to a "path-to-market" structure, which separates distribution and sales. The company has also proposed allowing retailers to place orders online.
"Interstate's distribution system has not fundamentally changed in 75 years and has failed to account for both advances in technology and changes in grocery store and consumer preferences," Sternberg said.
That lack of innovation has especially hurt in Southern California, where competition is particularly stiff. That competition includes Bimbo Bakeries USA, a unit of Mexican bread giant Grupo Bimbo, which has a license to make Wonder Bread in Mexico.
"The Los Angeles market is one of the most dynamic markets in the country," said David Margulies, a spokes man for Bimbo. "That market changes quickly and often sets trends for the entire nation. People stopped eating white bread here a while ago, forcing many of us to adjust."
Eduardo Martinez, an economist with the L.A. Economic Development Corp., said there is no doubt that Interstate has been hamstrung by its labor agreements in what is a highly competitive, evolving marketplace.
"Because Interstate is union, they're at a disadvantage to the smaller companies that use private contractors to distribute and sell their products," Martinez said.
Competitors, including Bimbo, use more entrepreneurial, privately contracted vendors and distributors, he said. That cuts costs significantly while improving efficiency.
"There are successful bakeries here, but like the airline and auto industry, it's always an exercise in adaptation and innovation," Martinez said. "It is evident that Interstate's bread business wasn't able to do that here."
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