I wanted to take time out from the usual whirlwind of stories involving the current President of the United States and all of the drama associated with that to revisit a horrific crisis happening in this country and has been happening long before a certain real estate developer decided to run for President or a hostile foreign power attempted to hack our elections. You can consider this diary to be a sequel to a diary I posted here nine years ago; in fact, that diary was my very first diary on this site. I had been a long time visitor and some time commenter, but this was my first journalistic contribution. In that diary I had commented on the distressing but rising incidences of malls which were suddenly losing anchor stores and going out of business including the mall I had shopped at numerous times in my youth and even worked at during and after my senior year of high school before I went off to college. At that time, I indicated that some of these malls were dying due to the rise of big box strip malls and the small but increasing surge of e-commerce as well as the financial crisis which decimated many communities. So what has changed since then?
Well, the trend has been accelerating rapidly. Last year numerous retailers filed for bankruptcy, and many of them including Radio Shack, H.H. Gregg, Gordman’s, Gander Mountain, The Limited, Sports Authority, Wet Seal, BCBG Maxazaria, and Vanity went out of business, and other retailers like Sears, Kmart, JC Penney, Macy’s, and Payless Shoe Source have closed a large number of stores. Many of these same retailers still hanging on are expected to close within the next couple of years, and these closures will eliminate over 100,000 jobs. Much of the blame for these store closures is laid at the feet of Amazon, and while Amazon has certainly grown from the 800 pound gorilla it was nine years ago to the two ton Tyrannosaurus Rex it is today, it’s actually a convenient scapegoat. Total e-commerce sales accounted for 8.9% of total retail sales in the second half of 2017, and while this is huge rise from the 4% a decade ago, it doesn’t account for the total drop in retail sales of brick and mortar stores. Some of the change is demographic, as the main driver of retail sales from the 1960’s through the 1990’s came from Baby Boomers getting married and raising families, and now that many of them have retired or are nearing retirement, they are naturally downsizing and spending less. Some of the change is cultural, as the Millennial generation is less inclined to spend money on “stuff” and more inclined to spend their money on experiences such as dining out, going on trips, and to movies, concerts, or other activities. And some of the change is economic, as many communities have seen their middle class workforce decimated by companies moving jobs overseas to cheap labor markets like China, India, southeast Asia, and Latin America, or more increasingly being automated by robots and computer programs, leaving large numbers of people unemployed or underemployed and with less money to spend, despite the recent headlines of record-low unemployment. But one of the biggest causes of the retail apocalypse has been seriously under-reported by the mainstream media but has a big imprint on the economy, most notably the rise of private equity firms and their role in the retail landscape.
In the 2000’s a number of private equity firms including Bain Capital, KKR, Golden Gate Capital, Sun Capital, Blum Capital, and Ares Management began buying up many mall retailers in leveraged buyouts which used these companies assets for part of the purchase instead of borrowing the money from a bank, and they covered those payments by issuing more debt on the acquired companies, often selling whatever real estate assets the company then owned and leasing the space back to those companies at interest rates much higher than the going market rate. In addition, those same private equity firm paid themselves special dividends and fees upon purchase of these companies, thus adding even more debt to the acquired company. The idea behind these buyouts was that the companies would be taken public and the firms would make their even bigger payday upon the sale of the IPO, leaving the stockholders to worry about the companies’ profitability.
This worked for a while, but then e-commerce exploded, and that left a lot of these retailers in a bind, as they were unable to compete with online sales, mostly because the reserves they had to update their stores to buy and sell more items people wanted to purchase or to improve customer service went to pay off debts to these private equity firms instead. The most classic example of this is Sears itself. Eddie Lampert bought Kmart back in 2004 and used that company to buy out Sears a year later and merged the two retailers into Sears Holdings Ltd. Even though Sears was already struggling in the retail space at that time, they still owned the Kenmore appliance, Die Hard battery, and Craftsman tool brands, as well as Lands End and a large volume of real estate.. But over time, Sears began selling off their legendary brands, and Lampert created a separate company called Seritage Growth Properties to sell Sears’ real estate assets to while leasing back those assets to Sears’ stores at over-market rents. Though the fourth quarter of 2017 was a good time for retail sales, with total sales rising five percent from the fourth quarter of 2016, fourth quarter sales for Sears fell over 27% from 2016. The most stunning news from this development was that Sears had still not yet filed for bankruptcy, though Sears Canada filed for bankruptcy and went out of business last year.
Toys R Us filed for bankruptcy in September, 2017, and in March, 2018 they announced they would be liquidating all of their stores, closing 182 outlets and putting 4,300 employees out of work, not to mention shuttering an iconic brand that many Boomers and Gen-Xers associated with their childhood. The culprits behind this bankruptcy were KKR, Bain Capital, and Vornado Realty Trust, who acquired the company in a leveraged buyout in 2005. Last February Bon-Ton Stores, the parent company of retail stores Bon-Ton, Bergner’s, the Boston Store, Carson’s (f.k.a. Carson Pirie Scott), Elder-Beerman. Herberger’s, and Younkers, filed for bankruptcy, and last week a bankruptcy judge approved a bid from two PE firms to liquidate the stores, beating out a bid from two retail REIT companies who wanted to buy the stores and keep them open.
I mentioned this in particular because even though I work in healthcare insurance claims processing and haven’t worked in retail since my college days, my employer is situated just outside of the major mall in my area which I go by every working day. In fact, my employer shared a space with MC Sports, another retailer which was a victim of the retail apocalypse. It has since been replaced this week by a Habitat For Humanity Restore consignment store. The mall which I go bay every day has suffered its share of vacancies, and they have been aggressively trying to rent out the vacant spaces with other stores, but it has become a losing battle. The mall is your typical suburban middle-class mall with anchor tenants Sears, JC Penney, Macy’s and Bergner’s. But Sears looks like a mausoleum these days, and with Bon-Ton announcing their liquidation, Bergner’s is going out of business, and the mall is going to be in seriously bad shape. I wonder how long it will be before this mall meets the same fate as the mall I once shopped and worked at in my youth.
