SOUTHERN CALIFORNIA ENTERPRISE : Bakery Took a Beating but Rises Again : Good Stuff Workers Buy Firm, Lose Some Bread, Make Profit

They’ve got plenty of crust over at Good Stuff Bakery. Faced last May with closure of the 72-year-old business, the workers took substantial pay cuts and bought the struggling company.

It was a painful gamble for the 350 employees of Good Stuff, which supplies bread and rolls to restaurants and institutions. Some of them are still uncertain they made the right decision, which will leave the employees owning 75% of the company in five years.

Already, however, the buyout appears to be paying off for Good Stuff’s well-worn facility north of Dodger Stadium. With six months behind it, Good Stuff is making a profit and investing in plant and equipment, said Chief Executive Murray Loeterman, an industry veteran brought in by the bakers’ union to run the company.

“Our motto is ‘We’re doing good stuff together,’ ” Loeterman said.

Everyone acknowledges that one thing was clear early this year: Good Stuff was crumbling. The debt-laden firm, which recorded nearly $40 million in annual revenues, had been laboring under Chapter 11 bankruptcy protection for nearly two years. The owners had filed a plant-closure notice with the state. Non-union operators were considering buying the business, which could have meant layoffs and deep wage cuts.

“It was a question of alternatives and neither was good,” Loeterman said. “To close the plant and lose your job or to take a wage cut.”

In the end, after many meetings, members of the Bakery, Confectionary and Tobacco Workers Union Local 37 and Teamsters Locals 683 and 63, which represent most of the Good Stuff employees, agreed to a buyout plan proposed by American Capital Strategies, a Bethesda, Md.-based investment banking firm that specializes in helping unionized workers buy their companies.

The $2.5-million transaction, which closed May 21, was not as high profile as last summer’s employee purchase of United Airlines, but it worked the same way.

ACS, brought in by the bakers’ unions, advised forming an employee stock ownership plan, or ESOP, to buy company stock. An ESOP provides attractive tax advantages; it allows a company to shelter income by donating stock to the ESOP, said Rick Braun, vice president and a principal in ACS and chairman of the board at Good Stuff.

For example, he said, if a company has $1 million in pretax income and is taxed at a 40% rate, it will pay $400,000 in taxes. But if the company contributes $1 million worth of stock to the ESOP, it pays no taxes. That adds to cash flow.

In this case, employees end up with 75% of the company after five years and ACS and its principals get 25%, although they may sell more stock to the ESOP later, Braun said.

As part of the bankruptcy plan of reorganization, the seller agreed to finance the transaction by taking an interest-free $2.5 million note for the company. So far, Good Stuff has made all its payments on schedule, Braun said.

It helped that the new owners bought only the assets and none of the debt.

“We started out with a pretty clean slate,” Braun said.

The workers agreed to take pay cuts that were “material,” Braun said, although he would not say how big they were.

“By the time we got involved, Good Stuff was losing a substantial amount of money, mainly because of the debt” and shrinking margins in the baking industry, Braun said.

“There was no way of immediately curing the company’s ills other than by dramatically reducing expenses,” he said. “The only viable option in that regard was a reduction of employee compensation. You can’t go to your suppliers, for example, and demand a reduction in the price of flour. You can’t go to the electric company and demand that they cut your electricity rates.”

That concept remains a hard sell on the bakery floor.

“They tell us that we are an owner, but at the same time we have to wait,” said baker Jose Monge, who has worked for the company for 25 years.

“We have a good feeling. We’ve come a long way. But,” he said, buttonholing CEO Loeterman on a bakery tour, “we have a lot to discuss, right?”

“Right,” Loeterman replied.

“It’s difficult,” Loeterman said later. “Initially, it’s hard to see past the wage cut and I can understand that.”

“They’re really buying a company on time. It’s like buying a layaway present, only it’s taking five years.”

From midnight until late afternoon there is a steady buzz of people and machines at the bakery, which is in Elysian Valley, a collection of homes and factories along the Los Angeles River.

The company is busy investing in safety measures, equipment and paint--regular maintenance that Loeterman said had been neglected. He recently ordered the trimming of a big tree in front of the firm’s office only to discover a long-forgotten flagpole, tattered flag and a sign proclaiming “Four S Bakery Products,” the original name of the bakery that is still used on some of its goods.

Good Stuff earned about $500,000 in its first six months, but most of that will go to pay for smog control filters on oven vents that were ordered long ago by the South Coast Air Quality Management District. (The aroma of baking bread, specifically the ethyl alcohol it contains, contributes to air pollution.)

Good Stuff is working on a business plan to increase its market share, add variety and improve the profit margins on its products, Loeterman said. The company also intends to expand its tiny retail line, currently is featured at Gelson’s and Hughes markets.

But competition is fierce, Loeterman noted.

“The bakery industry in general has not been real healthy,” he said. “There are too many ovens chasing too few customers. And price has always been the weapon of choice in the baking industry, which has created a lot of problems.”

Management is working on ways to increase employee participation in the company and its future direction, Loeterman said.

“If we can lick the internal problems we can be a real factor in this market,” he said. “We serve customers from the smallest to the largest. Many companies don’t want to do that. They don’t want to sell to the customer that only wants $25 or $50 worth of product, but we find that the guy that’s real small today may be in a different position tomorrow.”

For its part, ACS is talking to other local bakeries interested in setting up an ESOP. It closed another deal at Martino’s Bakery in Burbank in August, Braun said.

“It’s all very gratifying when it comes together, when you see something rising like a Phoenix rising from the ashes,” Braun said. “This is a story, at its most primal level, of saving jobs, saving 350 jobs.”

“Yes, they had to make concessions . . . but they got to save their jobs.”