Double Exposure Retail workers nationwide hammered by the combo crisis of pandemic and private equity December 2020 Double Exposure: Retail workers hammered by combo crisis of pandemic and private equity Table of Contents Executive Summary ........................................................................................................................ 1 Introduction ..................................................................................................................................... 4 Predatory private equity practices shattered retail chains ............................................................. 5 Leveraged buyouts burden retailers with unsustainable debt loads: ......................................... 6 Extracting debt-funded dividends enrich private equity firms but imperil retailers: ................... 6 Requiring retailers to pay exorbitant fees: .................................................................................. 7 Siphoning away valuable retail real estate: ................................................................................ 7 Stripping out other valuable assets: ........................................................................................... 8 Private equity takeovers led to widespread retail bankruptcies ..................................................... 8 Before the pandemic, private equity-owned retailers cut over 540,000 jobs ............................... 10 Over 215,000 jobs at private equity-owned retailers vulnerable during pandemic ..................... 11 Women and people of color hit hardest by private equity layoffs ................................................ 12 Conclusion and Recommendations .............................................................................................. 14 Methodology.................................................................................................................................. 15 Appendix: Private equity-owned retailers by net job losses from takeover to February 2020 .... 16 Endnotes ....................................................................................................................................... 21 Americans for Financial The Center for Popular United for Respect (UFR) is the Reform Education Fund Democracy (CPD) is a nonprofit largest non-profit organization (AFREF) is a nonpartisan, organization that promotes equity, fighting to elevate the voices and nonprofit coalition of more than 200 opportunity, and a dynamic experiences of working people in civil rights, community-based, democracy in partnership with retail, including those who worked at consumer, labor, small business, innovative base-building private equity-controlled retailers investor, faith-based, civic groups, organizations, organizing networks such as Toys R Us, Sears/Kmart, and individual experts. We fight for and alliances, and progressive unions ArtVan, Shopko and others. UFR is a fair and just financial system that across the country. also working with essential frontline contributes to shared prosperity for workers at PetSmart and Petco to all families and communities. www.populardemocracy.org hold their private equity owners publicly accountable to the health, www.ourfinancialsecurity.org safety and well-being of their employees, and to ensure that workers are protected in the event of a bankruptcy. https://united4respect.org/ Copyright © 2020 by Americans for Financial Reform Education Fund. Acknowledgments: This report was researched and written by Patrick Woodall and Oscar Valdés-Viera of AFREF with editorial guidance from Maggie Corser and Charles Khan of CPD and Bianca Agustin and Eddie Iny of UFR. Cover photo credit Amanda Marmor of UFR. Executive Summary over scores of national and regional retail chains. The private equity business model Private equity has had a disastrous impact on poses considerable risks to retailers and the retail industry, driving dozens of firms workers. Private equity relies on extractive into bankruptcy, shutting down tens of financial engineering — including imposing thousands of stores, and costing hundreds of high-debt loads from leveraged buyouts, thousands of jobs nationwide. These layoffs wringing out value in fees and dividends, and upend the already fragile economic security stripping out real estate assets — that impose of the low-paid and often Black and Brown severe burdens on the retail takeover targets. women who work in retail. Private equity retail shutdowns also undermine local The private equity-owned retailers have often economies when retailers large and small collapsed into bankruptcy as they are unable disappear, compromising the future of to service the large debt loads. While the shopping centers and eroding local sales and private equity firms and executives walk away business tax revenues. largely unscathed or even profiting from the deals that led to the retailer’s collapse, Private equity is an especially predatory type hundreds of thousands of women and people of Wall Street investment firm that has taken of color in frontline retail jobs have lost their Double Exposure livelihoods, often with no severance and no Mervyn’s (West and Southwest), and Shopko recourse. (Midwest to West). Over one-third (26 of 65) of the chains covered in this analysis taken The Coronavirus pandemic is exacerbating over since 2003 had disappeared by February the headwinds challenging the brick-and- 2020. mortar retail industry, but the extractive private equity business model compromised Key findings include: the economic viability of retailers long before the pandemic. Changing consumer tastes and • Private equity has been a driving online and big box retail competition have force in retail bankruptcies: More created difficulties for the retail industry, but than half (55.4 percent) of retail what has been called the “retail apocalypse” bankruptcies since 2015 were at private over the past few years has been driven equity chains. Before the pandemic, largely by the collapse of private equity- from 2015 to 2019, nearly two-thirds owned retailers. Private equity-backed (62.5 percent) of retail chains that retailers have accounted for a substantial entered bankruptcy were owned by portion of retail bankruptcies before and private equity firms. During 2020, when after the pandemic. the pandemic drove a broader retail downturn, nearly two out of five These private equity-driven bankruptcies and (39.3 percent) of bankruptcies were at jobs losses have hit every state. This analysis private equity-owned chains. estimates state-level retail store job losses from 65 private equity-owned retailers where • Private equity-owned retailers state store locations were identifiable at the had slashed over half a million time of private equity takeover and in jobs before the pandemic: They February 2020, just before the pandemic, cost nearly 542,000 jobs and closed and found widespread job losses in every nearly 18,000 stores by February 2020. state. Total job losses were substantial and widespread with more than 10,000 jobs The pandemic has added fuel to the already lost in 20 states and more than 30,000 well-fed fire created by private equity greed jobs lost in California, Florida, and New and added new uncertainties for the millions York (see Map 1 on page 3). of women and people of color who work at these retailers. The twin crisis has left these • These job losses retailers uniquely ill-equipped to weather disproportionately hit women and 2020’s economic downturns due to the people of color: Low-wage retail jobs mismanagement and heavy debt loads are often the only ones available to imposed by private equity firms. marginalized and oppressed communities and are predominantly Many private equity-owned retail chains that held by women and people of color. An have disappeared over the past two decades estimated 300,000 women, 101,000 caused devastating layoffs across the country Latinx, and 68,000 Black workers lost — like the failures of Payless Shoes, Toys R their jobs at private equity-owned Us, and the downsizing of Sears/Kmart. retailers based on their share of the retail Other private equity-driven failures have workforce. destroyed popular regional chains like A&P (Northeast), Fred’s (Southeast and Midwest), 2 December 2020 Map 1: State private equity job losses through February 2020 (in thousands) • Private equity retail job California, Ohio, New York, destruction was nearly quadruple Pennsylvania, New Jersey, and Illinois). job creation: Although some private equity chains added jobs through • Precarious private equity-owned mergers or expansions, these gains were retailers employed over 215,000 swamped by the job losses (542,000 jobs workers as the pandemic broke: lost compared to 145,500 jobs added). As the pandemic unfolded, twelve of the private equity-owned chains were at risk • Private equity-owned retailers of collapse and some went into had net job losses of nearly bankruptcy, such as J. Crew, Neiman 400,000: The private equity-driven Marcus, and Guitar Center. There were retail failures and downsizing caused a more than 215,000 workers at these 12 net job loss of 396,300 by February chains at heightened risk of job loss in 2020, even accounting for the more 2020. Some of these workers may have modest job growth at private equity already lost their jobs as retailers shutter retailers. Most states had substantial net locations or reorganize during the private equity retail job losses. Seven bankruptcy process. Thirteen states have states had