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Sat Dec 29, 2018, 11:49 AM

Take a look at how a Private Equity Firm dismantles stores, and then think of Sear's unfolding saga.

Private Equity Pillage: Grocery Stores and Workers At Risk

The private equity business model is to strip assets from companies that they acquire. The latest victims: retail grocery chains

by Rosemary Batt & Eileen Appelbaum
October 26, 2018

This article appears in the Fall 2018 issue of The American Prospect magazine. Subscribe here.

Since 2015 seven major grocery chains, employing more than 125,000 workers, have filed for bankruptcy. The media has blamed “disruptors”—low-cost competitors like Walmart and high-end markets like Whole Foods, now owned by Amazon. But the real disruptors in this industry are the private equity owners who were behind all seven bankruptcies. They have extracted millions from grocery stores in the last five years—funds that could have been used to upgrade stores, enhance products and services, and invest in employee training and higher wages. As with the bankruptcies of common household names like Toys “R” Us, private equity owners throw companies they own into unsustainable debt in order to capture high returns for themselves and their investors. If the company they have starved of resources goes broke, they’ve already made their bundle. This is all perfectly legal. It should not be.

The bankrupted private equity–owned grocery chains include East Coast chains A&P/Pathmark, Fairway, and Tops; West Coast chains Fresh & Easy and Haggen; the Southeastern Grocers chains (BI-LO, Bruno’s, Winn-Dixie, Fresco y Más, and Harveys); and in the Midwest, Marsh Supermarkets. We could find no comparable publicly traded grocery chains that went bankrupt during this period.

The future of regional supermarket chains is a major concern for consumers, vendors, local communities, workers, and their unions. Grocery workers are by far the most unionized of all retail workers. The United Food and Commercial Workers International Union (UFCW) has 1.3 million members in the United States and Canada, with 60 percent working in supermarkets and another 15 percent employed in meatpacking and food processing. Most UFCW members (two-thirds) are employed by the top five supermarket chains, with Kroger and P.E.-owned Albertsons-Safeway clocking in at first and second respectively in market share and accounting for the lion’s share of unionized supermarket workers.

P.E. firms, famously, have no commitment to the long-term sustainability of the companies they buy; their time horizon is three to five years until, ideally, they exit these investments. The heart of the private equity business model is the “leveraged buyout” (LBO). This is a deal in which a P.E. fund uses capital supplied by pension funds, endowments, wealthy individuals, and other investors as a down payment, and buys out a company using high levels of debt that it loads on the company—typically in the range of 70 percent of the purchase price. Post-buyout, P.E. firms often add on more debt in order to pay themselves a dividend, or they sell off assets or real estate, reducing financial stability. Strangled by debt and newly obligated to pay rent, these grocery chains have neither the ability to cut prices to compete with low-cost chains nor the resources to invest and compete with upscale markets. And in an industry like grocery, where profit margins are thin, a small drop in revenue may undermine a P.E.-owned supermarket’s ability to keep up with interest payments on the debt.

https://prospect.org/article/private-equity-pillage-grocery-stores-and-workers-risk

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Reply Take a look at how a Private Equity Firm dismantles stores, and then think of Sear's unfolding saga. (Original post)
turbinetree Dec 29 OP
SharonAnn Dec 29 #1
onethatcares Dec 29 #2
elocs Dec 29 #3
winstars Dec 29 #4
JHB Dec 29 #5

Response to turbinetree (Original post)

Sat Dec 29, 2018, 02:05 PM

1. They call it a "bust out" when organized crime does this. Takeover, sell assets, plunder revnue

leave a shell, declare bankruptcy.

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Response to SharonAnn (Reply #1)

Sat Dec 29, 2018, 02:20 PM

2. "Goodfellas"

the movie is a prime example. (might have been "goodfellows", IDK

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Response to turbinetree (Original post)

Sat Dec 29, 2018, 02:32 PM

3. When they are all done, Sears will be gone forever, just a memory.

Ten years from now there will be young people who will have heard of Sears, but never been in one.

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Response to turbinetree (Original post)

Sat Dec 29, 2018, 02:34 PM

4. Goodfellas it is:

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Response to turbinetree (Original post)

Sat Dec 29, 2018, 02:41 PM

5. Worse, it's been going on for a long, long time

These practices date back to the 70s. They picked up steam during Reagan's deregulation, and has kept going on, as the OP makes plain.

Trade deals get the lion's share of attention, but IMO this is the big unsung driver of wage stagnation and rising inequality.

The following story ran Oct. 26, 1991, on Day Seven of the nine-day "America: What went wrong?" series published in the Philadelphia Inquirer.

http://www.philly.com/philly/news/From_the_archive_Raiders_work_their_wizardry_on_an_All-American_company.html
Raiders work their wizardry on an all-American company
When takeover artists targeted Simplicity Pattern Co., it had $100 million in reserves. Today, it is $100 million in debt.

by By Donald L. Barlett and James B. Steele, INQUIRER STAFF WRITERS

It was the fall of 1979 when the first of the moneymen descended on Simplicity Pattern Co. By the time they were finished a decade later, a company that once had $100 million in the bank was more than $100 million in the hole.

***

But, as with many mature companies, the earnings from Simplicity's major business - the sale of [fabric] patterns - had begun to trail off in the late 1970s, a problem the company's management had yet to deal with. Then came the moneymen.

***


They had, in fact, driven Simplicity to the edge of bankruptcy. In that decade, the moneymen:

Bought and sold the company four times and made tens of millions of dollars running up the price of Simplicity stock in threatened and actual takeovers.
Drained $100 million that Simplicity had in its bank account and investment portfolio.
Raided the company's pension funds on two occasions, taking out $10.7 million.
Issued bonds and borrowed from banks, sending the company's debt soaring from near-nothing to $100 million.
Sold off properties to raise badly needed cash after they had depleted the company's $100 million cushion.
Created so much debt that Simplicity could no longer generate enough cash to make the interest payments.
Defaulted on the interest payments on bonds and bank loans.


It was just one more American business success story - if you measure success by how much money assorted investors made buying and selling Simplicity stock, buying and selling the company itself.

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