Many reasons have been given for the decline of retail America, these last years. Surely, it is Amazon's fault: Why trudge to a mall when a mall a hundred times larger is sitting behind your computer screen? Or surely, it is the fault of penny-pinching "millennials" and their unwillingness to part ways with their diets of expensive fruits on toast? It may have something to do with decades of wage stagnation and a devastating recession that only the wealthy seemed to ever quite recover from.
It may be because, with the advent of smartphones and Facebooks and your social network what-have-yous, Americans do not need the public spaces they once did, in order to meet with friends or spend an afternoon puttering. There is no need to go to a mall, and possibly run into a pervy middle-aged man looking for his next date. There is no need to wander through stores comparing your tastes to those of your friends; we've got Pinterest for that these days, grandpa.
But another reason for retail America's steep decline is a bit less theoretical, and more measurable: Killing off a well-regarded retail chain by purchasing it, loading it with debt, and sticking others with the bill is, as David Dayen notes, the latest in Wall Street fashion.
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.
Dayen points out that such cannibalism could be curtailed by legislators and regulators—if they wanted to do it. There is little appetite for taking on the equity firms over this, or on anything else, however—they are, after all, some of the top political donors in the country.
That’s too bad, because private equity is accelerating a decline that will be felt by millions in every major city. Inaction is a choice. This apocalypse didn’t have to happen.