Wall Street killed Toys R Us, not Amazon
Rep. Bill Pascrell: Chain could not escape huge debt, interest payments
The brilliant New Jersey entrepreneur Charles Lazarus died March 22 at age 94. His passing came a week after the company he founded, Toys R Us, announced its liquidation after 70 years in business. Obituaries for both have implied that Toys R Us was a retail relic. Yet the closing of one of the world’s most recognizable brands did not come solely from e-commerce but also from pillaging by pirates.
This fate has befallen many storied companies, and without congressional action, more could soon vanish.
Toys R Us is one of the classic successes of postwar America. Entering Baby Boom and suburban sprawl, Lazarus understood that families would have more money for luxuries such as children’s playthings. He built a colossus that conquered America with Geoffrey the Giraffe and a ubiquitous jingle that was music to the ears of kids.
Before a new congressional map removed it from my district in 2012, I was proud to represent the Toys R Us headquarters. I followed the company’s tribulations, and when I studied its collapse, the circumstances angered me.
The “Retail Apocalypse” can be attributed to Amazon and Walmart, but this is only part of the story. Another belongs to private equity, whose methods of leveraging immense debt are wreaking havoc on the retail landscape. Toys R Us is the most recent victim.
In 2005, three Wall Street firms paid more than $6 billion for the company, but only $1.2 billion came from their own pockets; the rest was borrowed.
When Toys R Us was purchased, new owners tethered that $5 billion debt plus annual $400 million interest payments of to its neck. Finance executives justify leveraged buyouts by claiming they allow ailing companies to become leaner and more financially nimble in a way that protects the business and its workers. But how could Toys R Us innovate or change course while weighed down by that anchor?
In practice, these deals favor the equity tycoons who help themselves to enormous bonuses. Their new posses- sions are left holding the debt.
An otter cracks open a clam before discarding the shell, and so do these firms: Toys R Us owners reportedly walked away with more than $200 million. The shell is the American worker. Once private equity squeezes out whatever dividends it can, too often the businesses close. The shuttering of Toys R Us’ more than 800 stores will mean the loss of at least 30,000 jobs, including 1,600 in New Jersey.
That Toys R Us was a mastodon facing an Amazon asteroid doesn’t hold water. Before closing, the retail chain still held about a fifth of U.S. toy sales. The company was even turning a profit, but it could not overcome its debt.
I don’t have illusions about Toys R Us. It did not make adequate investments in its stores. It hired a CEO whose previous job as a university athletic director ended in controversy. Its selling of merchandise made overseas in countries such as China and its hostility to using union labor were the wrong choices — economically and morally. But it should have survived.
Leveraged buyouts cannibalize jobs and embody the same greed that precipitated the Great Recession.
Congress does not have to be a bystander here. In the run-up to the Republican tax law’s passage, many in private equity feared it would target the deduction for interest on corporate debt. While the new law reduced financiers’ ability to exploit those deductions, it did not do nearly enough to curb Wall Street’s ways. This was one of the reasons I opposed the tax plan. It was a giveaway to the powerful at a time when Congress should be seeking ways to protect jobs and narrow the inequality gap. We can begin by eliminating loopholes such as the oft-invoked carried interest, the taxation of executive compensation, and the tax favoring corporate debt that invites investors to ransack companies.
Private equity has been able to obscure its role in the ruin of retail by hiding behind e-commerce. It is important that sunlight be shone onto their practices, or there will be many more American-made businesses that suffer the same fate as Toys R Us.