As America heads into its annual shopping orgy there are troubling signs on the horizon for retail stores and malls. Conventional wisdom has decided the cause is simply the advent and maturation of online shopping. That is a very surface analysis and doesn’t account for many of the details. Earlier this week David Dayen of New Republic shed a great amount of light on the “retail apocalypse” that is coming.
As many here know long time retailers such as Sears (and its partner Kmart), Macy’s, Toys’r’Us, Payless and many others are on the brink of bankruptcy and going out of business. About a month ago Sears Canada announced that it would be closing all its stores in that country leaving some 12,000 unemployed.
Was this a product of Amazon and other online retailers? No, more likely it was the product of greed, poor management and that uniquely American creation known as the vulture capitalist. You may remember presidential candidate Mitt Romney and his bunch of vultures at Bain Capital. Their modus operandi was to find a company in trouble, sell off its assets, cut employee wages to the bone and raid any retirement funds involved, load the company with a huge amount of debt (that was often paid to the corporate raiders in the form of bonuses and fees) and then selling the bones of what was left.
And this has happened over and over again in the retail world.
This story is at odds with the broader narrative about business in America: The economy is growing, unemployment is low, and consumer confidence is at a decade-long high. This would typically signal a retail boom, yet the pain rivals the height of the Great Recession. RadioShack, The Limited, Payless, and Toys“R”Us are among 19 retail bankruptcies this year. Some point to Amazon and other online retailers for wrestling away market share, but e-commerce sales in the second quarter of 2017 only hit 8.9 percent of total sales. There’s still plenty of opportunity for retail outlets with physical space.
The real reason so many companies are sick, as Bloomberg explained in a recent feature, has to do with debt. Private equity firms purchased numerous chain retailers over the past decade, loading them up with unsustainable debt payments as part of a disastrous business strategy.
Billions of dollars of this debt comes due in the next few years. “If today is considered a retail apocalypse,” Bloomberg reported, “then what’s coming next could truly be scary.” Eight million American retail workers could see their careers evaporate, not due to technological disruption but a predatory financial scheme. The masters of the universe who devised it, meanwhile, will likely walk away enriched, and policymakers must reckon with how they enabled the carnage.
Dayen then offers a brief summary of how the private equity (vulture capital) firms work. This is a general pattern, not always followed exactly.
The mismanagement of Sears reflects an ongoing pattern: private equity takeover artists that benefit from hobbling the companies they purchase. Golden Gate Capital and Blum Capital, the two firms behind footwear chain Payless, paid themselves $700 million in dividends in 2012 and 2013, all on the back of the company. Payless filed for bankruptcy this year, closing 400 stores. Toys“R”Us filed for bankruptcy in September, unable to sustain between $400-$500 million in annual interest payments on $5.2 billion in long-term debt. Buyout managers, including Bain Capital and longtime firm Kohlberg Kravis Roberts, stripped out nearly $2 billion in cash while debt levels rose.
This is a robbery in progress. Private equity firms borrow massively to buy companies, and use corporate cash reserves to pay themselves back. Workers who supply the value to the business see nothing; in fact, to service the debt, companies usually cut staff. When the retailer collapses under the borrowing weight, all workers lose their jobs. And even when sales go up, like they have by 5 percent annually in the toy sector over the past five years, dominant toy sellers like Toys“R”Us cannot compete because of the debt burden. The company’s profitability was increasing when it filed for bankruptcy.
So if you can take a minute to reflect on our economic system that rewards the vulture and punishes those hard workers at the retail level who helped make the stores the success they once were only to see their jobs and their retirement stolen from them by the class that will be enjoying a huge tax break from Republicans this Christmas.
And you may want to take a close look at the store as you do your shopping. It may not be there next year. And you may want to consider why these retailers are going out of business. It is not because of the internet.