Is Private Equity To Blame For Retail Job Losses And Bankruptcies?
Private equity firms have been in retail news recently for all the wrong reasons: private equity ownership appears to be a common denominator with many bankruptcy filings over the past two years, such as Toys ‘R’ Us, Mattress Firm, Claire’s Stores and Payless, among many other casualties.
Now, private equity’s impact has been translated into hard numbers. As many as 597,000 U.S. employees working for retailers owned by private equity firms and hedge funds have lost their jobs, while the sector as a whole added more than a million positions, according to a report by The Center for Popular Democracy and the Private Equity Stakeholder Project. Additionally, the study estimates that another 728,000 “indirect jobs” have disappeared at suppliers and local businesses, bringing the total casualties to approximately 1.3 million.
The RTP editors share their thoughts on the effects of private equity ownership on retail jobs and discuss whether there are alternate sources of capital that retailers could tap going forward.
Adam Blair, Editor: Has private equity really cost 1.3 million retail and retail-related jobs over the past decade? It’s always tough to assign specific numbers, particularly when you’re dealing with industries as complex as finance and retail. It’s also worth noting that the spokesperson from the private equity trade group defends the industry and calls the report biased. But even if we admit that correlation is not causation, it’s certainly interesting that private equity ownership that saddles a company with unsustainable debt seems to be a common thread among retailers declaring bankruptcy: Toys ‘R’ Us, Brookstone, David’s Bridal, Gymboree — the list goes on and on. Brick-and-mortar retail also is in the unenviable position of owning juicy assets (in the form of prime real estate) that are usually too tempting for owners to resist. The solution would seem to be along the lines of what presidential candidate Elizabeth Warren has proposed: greater oversight of the private equity industry, with restrictions on what can and can’t be sold off and mandated requirements to meet pension and other employee-related obligations. Retail is a tough enough business without laboring under the burden of astronomical debt.
Glenn Taylor, Senior Editor: I’m always curious to find out how the conditions of private equity deals play out internally. PetSmart, for example, has a whopping $8 billion in debt remaining from its acquisition by BC Partners in 2015, and Neiman Marcus still owes nearly $5 billion from not just one, but two leveraged buyouts. This makes me wonder how the retailers agreed to those numbers in the first place, and if those really were the best buyout terms available. It’s very, very hard to improve worker conditions and make the best environment possible for thousands of employees when a big portion of the money you make every quarter has to go back to the owner. Unfortunately, it seems many of the retailers that agree to terms like this already had their hands tied by the time they looked for the cash flow that a private equity owner could provide. At this point, I think more retailers are realizing that this type of ownership isn’t always the answer if they are trying to get more funding. This may be outside of the box, but maybe there’s greater potential going ahead for non-PE companies/hedge funds (perhaps in tech or health care) that already make significant capital to take over ownership of struggling retailers. With the convergence of retail and tech becoming more of an inevitability, who’s to say a major data company couldn’t have a financial interest in a retail business?
Bryan Wassel, Associate Editor: While private equity probably isn’t the only contributing factor to the decline of these retailers, it is entirely possible that these ownership models are at least an indirect cause. This is simply because the goals of a private equity firm (maximize money for the firm) are at odds with the goals of a retailer (make money, but expand sales and footprint). While these two objectives aren’t necessarily mutually exclusive, one needs to look no further than the Amazon success story for an example of the key problem: Amazon took the throne as the king of e-Commerce by plowing most of its profits back into the company for more than a decade, which is behavior that no PE firm would support. After all, few in the 1990s would look at an online book store and assume that its future wasn’t in selling more books, but as a tech giant with fingers in every pie from retail to web hosting. Certainly, successful retail operations bring in plenty of money, but that can’t be their only goal, while venture capital firms exist solely to make returns on their investments. It’s simply a clash of ideals.