The brilliant New Jersey entrepreneur Charles Lazarus died March 22 at age 94. His passing came one 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 before Toys R Us, and without congressional action, more businesses may soon vanish.
Toys R Us is one of the classic business successes of postwar America. Entering baby boom and suburban sprawl, Lazarus understood that families would have more money for luxuries like children’s playthings. Through his farsightedness 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 so-called Retail Apocalypse can be attributed to Amazon and Walmart, but this is only part of the story. Another part 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 over $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, its new owners tethered that $5 billion of debt plus annual interest payments of $400 million to its neck.
Finance executives justify leveraged buyouts by claiming that 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. Simultaneously, their new possessions are left holding debt they cannot pay. An otter cracks open a clam before discarding the shell, and so too do these firms: Toys R Us’s owners reportedly walked away with over $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 all 800 stores will mean the loss of over 30,000 jobs, including 1,600 in New Jersey. Worse yet, Toys R Us notified its workers that their severance plans were being nullified.
In recent weeks, Remington, the 200-year old gunmaker, and Winn-Dixie, the popular supermarket chain, filed for bankruptcy. Both were acquired by private equity executives that loaded them up with unsustainable debt. Their closings will create thousands more lost jobs.