On a recent afternoon, the Toys R Us big-box store in Coney Island, Brooklyn, was lively. The entrance was crowded with racks of Halloween costumes. There were aisles of Lego sets, bats and balls, Minions and Minecraft, Nerf guns, baby dolls, and fairy wands. Families were dragging their children through the store. The reassuringly typical scene belied the fact that the toy retailer had been in financial distress for months, and that many of its suppliers weren’t shipping their products to the stores, for fear that they wouldn’t be paid. On September 18th, a few days before my visit, Toys R Us, five billion dollars in debt, had filed for bankruptcy protection.
Some of the early postmortems in the press blamed the chain’s sorry state on Amazon and other online retailers, which have put undeniable pressure on traditional stores. Looked at another way, however, Toys R Us presents a powerful example of what can go wrong when private-equity firms take over a company and burden it with debt—a practice with consequences that may help explain why so many working-class voters supported Donald Trump.
Toys R Us started in the nineteen-forties as a baby-furniture store, and by the late eighties and early nineties it had become a dominant retail brand, one whose grating commercial jingle—“I don’t want to grow up, I’m a Toys R Us kid!”—is imprinted on the brain of anyone who turned on a television during the Reagan Administration. By the early aughts, however, the company was in trouble, largely due to competition from Walmart, which offered one-stop shopping and lower prices. The company’s weakened condition made it an attractive target for private-equity firms. Kohlberg Kravis Roberts and Bain Capital, along with the real-estate-management company Vornado Realty Trust, bought Toys R Us in 2005, for $6.6 billion. The transaction, like many private-equity deals, involved very little equity ($1.3 billion from the investors) and a lot of borrowed funds (more than five billion dollars from banks and other lenders). As a result, Toys R Us was saddled with huge interest payments, leaving it little room to expand or experiment. “Debt is the lifeblood of the private-equity firm, but it also sucks the life out of companies,” Rosemary Batt, a co-author of “Private Equity at Work,” told me.
Dozens of retailers have filed for bankruptcy protection since 2015, and, by one estimate, forty per cent of them had some private-equity ownership. Private-equity companies generally raise money from investors and then use that money to purchase faltering businesses, making changes that, ideally, improve financial performance, such as hiring new management, updating inventory systems, and closing less popular locations. Dollarama and Dollar General, for example, were seen as successful investments by Bain and K.K.R., respectively, in part because they bought the chains just before the financial crisis increased consumer demand for bargain shopping.
For a certain kind of midsized, past-its-prime retail company, private-equity ownership often plays out differently. In the case of Payless Shoes, for instance, the owners made hundreds of millions of dollars through fees and special dividend payments, even as the company, forced to borrow large sums to meet those obligations, failed.
A recent book, “Glass House: The 1% Economy and the Shattering of the All-American Town,” by the journalist Brian Alexander, does a remarkable job of illustrating what happens when such schemes go awry. Alexander charts the decline of Anchor Hocking, once the economic heart of Lancaster, Ohio. The company made glass tableware, jars, and bottles that were sold all over the world. Lancaster thrived. By the eighties, however, the company was struggling to compete with cheaper imported glass products. After a dizzying series of takeovers, Anchor Hocking was eventually purchased by two New York-based private-equity firms, which forced it to sell off its real-estate holdings, close plants, and fire workers. Some of these changes were the result of justifiable economic reasoning; others mainly delivered payments to the investors. Anchor Hocking filed for bankruptcy twice, most recently in 2015.
Anchor Hocking had long doubled as a kind of local government in Lancaster, helping finance parks and schools and ensuring the town a supply of stable, well-paying jobs. Once the private-equity firms came in, Alexander told me recently, “there was a generation-and-a-half erosion of the social contract in Lancaster.” As Anchor Hocking declined, so did people’s faith in everything around them. “This has lots of follow-on effects,” he went on. Lancaster is now blighted by unemployment and drug abuse. “I had a hard time finding anyone under age forty who believed in much of anything,” he said. “It wasn’t just this particular company. It was religion, the federal government, the state government, the media. Why should they? These people had been screwed.” The resulting disaffection emerged in the voting patterns of the 2016 election. Alexander recalled speaking to an Anchor Hocking worker on the morning of November 8th. She had voted for Trump, and sounded emotional. Alexander asked why she chose Trump, and there was a long pause. Then she said, “I just want it to be like it was.” ♦
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