4/1/2018 The Real Retail Killer | The New Republic

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The Real Retail Killer

How private equity is gouging some of the country’s best-known corporate brands

By ALEX SHEPHARD
March 28, 2018

We are in the midst of a mass extinction in retail. Over the past five years, dozens
dozens of
of retailers
retailers—
retailers
once the bedrock of malls across the country—have shuttered. The most recent victim was Toys
‘R’ Us, which announced it was going
going out
out of
of business
business last week, a collapse that could cost as
many as 33,000 jobs.

Many are blaming

blaming the
the stores
stores themselves for failing to adapt to the rise of e-commerce and
changing consumer habits. Others have pointed
pointed the
the finger
finger at the rise of one-stop-shopping
behemoths like Walmart and Target, both of which have made life hell for category
category killers
killers like
Toys ‘R’ Us. Some see the enduring impact of the Great Recession, while others still—including
including
including
Toys
Toys ‘R’
‘R’ Us
Us—blame
Us millennials for not having enough kids.

These explanations have some merit (with the exception of the millennials one). But the biggest
ongoing threat to retail is debt. Over the past several years a number of major retailers have been
saddled
saddled with
with billions
billions of
of dollars
dollars in debt by private equity firms. Toys ‘R’ Us, for instance, was hit
with over $5
$5 billion
billion in
in additional
additional debt
debt after it was acquired by private equity firms KKR and Bain
Capital in 2006. With annual
annual interest
interest payments
payments of over $400 million a year, Toys ‘R’ Us didn’t
have a chance.

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Private equity is remaking the retail environment, causing even successful companies like Toys
‘R’ Us to go out of business. And they’re fundamentally remaking American commerce in the
process, with Amazon, Target, Walmart, and Dollar General set to benefit. Meanwhile, private
equity is more or less getting off scot-free.

Retail is, of course, not the only target of private equity. Remington, the oldest manufacturer of
firearms in the country, announced it was filing
filing for
for bankruptcy
bankruptcy on Monday. Remington faced
specific challenges—most notably a nationwide decrease in gun sales following President Trump’s
election—but private equity’s fingerprints were all over its collapse as well. The gun manufacturer
was acquired by Cerberus
Cerberus Capital
Capital over a decade ago.

But it’s in retail that private equity’s malign influence has really been felt. Claire’s, Payless, Wet
Seal, rue21, and dozens of other retail outlets have all filed for bankruptcy in recent years—and all
had been acquired by private equity firms before ultimately throwing in the towel. For all of these
companies, Toys ‘R’ Us very much included, private equity was supposed to be a savior, making
the necessary cuts to compete in an increasingly fragmented and top-heavy marketplace. But
instead, these companies have become burdened with debt that cannot be repaid, while revenue
has (at best) stagnated.

This creates an impossible dynamic. In a fluid retail environment, legacy brands have to adapt to
the rising threat of e-commerce. But they’re so burdened by debt they lack the capital and
flexibility needed to change course.

Were it not for that crushing debt, many would still be in business. Yes, the continued threats
from Walmart, Target, and e-commerce would still exist. But Toys ‘R’ Us was running a profitable
business when it announced it would be liquidating its assets and closing its hundreds of stores—
it just didn’t have the kind of revenue, let alone profits, to pay nearly half-a-billion dollars in
interest a year. As Jeff Spross chronicled
chronicled at The Week, “Just before the buyout, the company had
$2.2 billion in cash and cash-equivalents. By 2017, its stockpile had shriveled to $301 million,
even as its debt burden ballooned from $2.3 billion to $5.2 billion.” This story has played out time
and time again, though not always at so dramatic a scale.

Why has private equity’s role in the retail apocalypse been obscured? One reason is that Amazon
has fundamentally changed the way that the media discusses business. Even though e-commerce
only has about 10 percent of market share in the United States, Amazon’s success is seen as an
inevitability—so much so that the stocks of rival companies fall when it enters a new sector.
When Amazon announced it was acquiring Whole Foods, for instance, other grocery giants

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shuddered, with the stocks of chains

chains like
like Kroger
Kroger dropping precipitously, even though Whole
Foods itself had only 11 percent
percent of
of marketshare
marketshare.
marketshare

The success of e-commerce is so baked in the cake that it’s become standard practice to blame
brick-and-mortar retailers for their own demise. According to this line of thought, they should
have done more to combat Amazon and adapted to online retailing. Never mind that Amazon’s
dominance has resulted from its all-encompassing convenience and extreme cost-cutting, neither
of which would be easy for a brick-and-mortar retailer to imitate. Blockbuster
Blockbuster and Barnes
Barnes &
&
Noble
Noble’s
Noble money-losing attempts to compete with Netflix and Amazon, respectively, are cases in
point.

There is also more than a whiff of consultant-class superiority behind all of this. Private equity
firms, after all, are supposedly full of smart people who know what they’re doing—even better
than the retailers themselves. Therefore, the entry of these forces into the retail sphere must have
been necessary, while the demise of these companies must have been inevitable. The market, like
God, does not make mistakes.

But private equity firms made a host of mistakes and compounded them by turning these retailers
into debt vehicles, all the while maximizing dividend payments. As David Dayen reported
reported in The
New Republic last year, the two private equity firms that acquired Payless “paid themselves $700
million in dividends in 2012 and 2013.” Betting on low interest rates to persist was a mistake that
has ultimately bankrupted dozens of retailers.

This is corporate raiding of the 1980s variety—but it’s being done more quietly now, with staid
professionals overseeing the takeovers instead of the more flamboyant leveraged buyouts of the
Reagan years. But the result has nevertheless been a catastrophe. Even though the economy is
humming along, hundreds of thousands of people have lost their jobs. These closures will only
lead to further consolidation, with the Walmarts and Amazons of the world benefiting mightily—
and, of course, the private equity titans who set all this into motion in the first place.

Alex Shephard is a staff writer at The New Republic. @alex_shephard

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