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The fall isn't covered in very much detail. I think it might be exemplified by a personal example. I went to one near the end to buy a standard, wooden block,

The fall isn't covered in very much detail. I think it might be exemplified by a personal example. I went to one near the end to buy a standard, wooden block, JENGA toy for relatives. They didn't have any in stock other than some crummy cardboard sticks version (absolutely unable to stand up to the abuse a child under 12 will dish out). I think I ended up ordering one from Amazon with Prime or hitting up a Target or something... As for the 'category killer' thing, that's probably an example of Market Failure (regulation failure). For a fungible commodity product, there probably should be a requirement to provide access to the same price to all players in the market. That might mean that the price at a generic warehouse in one of the major shipping ports is that price. Stores / groups of stores would still need to leverage shipping and distribution networks, but it'd at least give places a _chance_ to compete.

jordanb 1y ago
> they didn't have any in stock other than some crummy cardboard sticks version Private Equity hates inventory. Their first trick in buying a retail business is slashing in-store inventory. They also treat suppliers like dogshit, playing games with payment terms, etc. End result: stores don't have the products customers want and quality suppliers fire them as customers.
- ferguess_k 1y ago
  How do PEs earn money in this scenario? I don't think it can spin off the brand easily? Or by real estate?
  - filmgirlcw 1y ago
    Debt
  - variaga 1y ago
    Private Equity playbook: 1) Buy a company from the stockholders by having the company take out loans (secured by future earnings) to pay for the stock. Do not pay for it with more than a token amount of your own money. 2) Slash company expenses in a way that generates short-term returns (but which normal companies don't do because it causes long term problems) like: - don't buy new inventory to replace items sold (mentioned above) - stop doing maintenance (saves money for a while, until everything breaks) - delay paying outside vendors (works for a few months, until they stop shipping you stuff unless they get their money and/or sue you) - sell physical assets (like the stores themselves) to an outside holding company (possibly owned by you) and rent them back, getting short term income for the company from the sale (but collecting the rent yourself, and also retaining the right to sell the real estate later). 3) pay yourself huge bonuses on the basis of your cost savings. 4) When the company is no longer viable, leave the empty husk behind. The company has a bunch of loans it will never be able to pay off (sucks for the lenders) but you keep your paychecks, bonuses and any assets you sold to yourself at below-market prices. 5) move on to the next company. (basically, "the bust out" sequence from Goodfellas)
    - syedkarim 1y ago
      Who are the lenders and why do they keep lending when their is a history of default from the PE-owners?
      - variaga 1y ago
        Commonly, the bank that undewrites the loans will essentially do the same thing - they collect a commission but sell the underlying debt to someone else as (high-yield, because they are high-risk) bonds. If you've heard of "Junk Bonds", this is (one source) of where they come from. It's like a financial game of "hot potato" - you can make money as long as you're not the last person to hold the debt. So the answer to "who lends the money?" is "anyone who thinks they can sell the debt to someone else before it explodes". In the end, a lot of it goes to "unsophisticated" individual investors, who will buy it based on "Sears (or whoever) is a great company, why wouldn't I buy their bonds" without realizing the full extend of what's happening.
        ryandrake 1y ago
        > In the end, a lot of it goes to "unsophisticated" individual investors, who will buy it based on "Sears (or whoever) is a great company, why wouldn't I buy their bonds" without realizing the full extend of what's happening. Unfortunately, a lot of these and similar financial schemes end with the phrase "...eventually retail investors end up holding the bag and taking the losses." LBOs, collateralized mortgages, crypto, every equity that gets pumped and dumped. When every layer in the banking industry has skimmed its profit and did their own renaming/reselling/repackaging of these "products" finally there's some individual investor chump who takes the loss, making the numbers add up.
        scarface_74 1y ago
        This isn’t logical. A PE firm takes a company private only “sophisticated” investors can invest.
      - charlieyu1 1y ago
        Bankers who want to secure a deal that looks good on paper. When the loan defaults it would be someone else’s problem.
  - toast0 1y ago
    So, some PEs do try to run businesses sustainably. But we mostly hear about the PEs that turn a business that's slowly dying to one that will operate "as normal" until it suddenly dies, usually somewhere around 5-7 years later. The first thing is that, if at all possible, the PE wants to do a leveraged buyout where the acquired company itself has borrowed most of the funds to buy itself. This cashes out the previous investors, but leaves most of the risk with lenders rather than the PE firm. Sometimes the PE may get a cut of the financing revenue. Most of the loan will be sold on the bond market, typically as junk bonds. Junk bonds have high interest rates, because there's a good chance the loan won't be repaid, but maybe you'll collect enough between interest and the bankruptcy settlement. While the company operates under the PE's management, it's getting paid management fees. It's also likely to move valuable assets out of the company; for real estate, sale and leaseback is common; when the company implodes, the PE keeps the land and can sell or lease it to someone else. The sale price was probably under market and the lease over market, so the PE earns money here. Having a high lease payment helps the PE finance the purchase, and may help it finance similar property as well.
    - markus_zhang 1y ago
      Question is, why do lenders lend money to them? Maybe they can get the principles back somehow?
      - sct202 1y ago
        They got 13 years of payments which might have been enough to make it worth it for the lenders depending on the premium they were getting on loaning the money. Sears and Joann's also took about 13 years from buyout to bankruptcy. Party City only took 6 years.
      - toast0 1y ago
        The interest rates are high, and the lenders likely will sell off the loans in a few years. If the company sticks around for a few years and looks ok, they might even be able to sell the loan for more than they lent out. Especially if the corporate numbers look good because of short-term changes, they may be able to get out. When the company goes bankrupt, the lenders have first priority for remaining assets, sometimes lenders will takeover a business and run it away from the shore and earn a profit that way, too.
- b112 1y ago
  Compare this to the other trend I noticed the other day, JIT delivery beyond excess. Was in Walgreens, and a woman was restocking the shelves. She had a series of reusable plastic boxes, but they were all labelled by isle. So she'd take the box to isle 5 or whatnot, and there'd be 5 products in it. Literally the products sold the day before. EG, one box of toothpaste, one brush, that sort of thing. Asked her about it, and she loved it. Said before, she had to walk all over the store to restock, but not now. Later that week, I was in again and noticed a van unloading about 10 of the same reusable boxes. Definitely a powerful way to keep stock levels down, even if not working towards a squeeze to close-out path. I wonder on the comparative on daily van delivery costs vs say.. a larger truck once a week, along with stock levels. Some very interesting math there, including regional supply depots stock levels, maintenance costs of larger trucks versus a van, and so on.

jordanb 1y ago

> they didn't have any in stock other than some crummy cardboard sticks version Private Equity hates inventory. Their first trick in buying a retail business is slashing in-store inventory. They also treat suppliers like dogshit, playing games with payment terms, etc. End result: stores don't have the products customers want and quality suppliers fire them as customers.

ferguess_k 1y ago
How do PEs earn money in this scenario? I don't think it can spin off the brand easily? Or by real estate?
- filmgirlcw 1y ago
  Debt
- variaga 1y ago
  Private Equity playbook: 1) Buy a company from the stockholders by having the company take out loans (secured by future earnings) to pay for the stock. Do not pay for it with more than a token amount of your own money. 2) Slash company expenses in a way that generates short-term returns (but which normal companies don't do because it causes long term problems) like: - don't buy new inventory to replace items sold (mentioned above) - stop doing maintenance (saves money for a while, until everything breaks) - delay paying outside vendors (works for a few months, until they stop shipping you stuff unless they get their money and/or sue you) - sell physical assets (like the stores themselves) to an outside holding company (possibly owned by you) and rent them back, getting short term income for the company from the sale (but collecting the rent yourself, and also retaining the right to sell the real estate later). 3) pay yourself huge bonuses on the basis of your cost savings. 4) When the company is no longer viable, leave the empty husk behind. The company has a bunch of loans it will never be able to pay off (sucks for the lenders) but you keep your paychecks, bonuses and any assets you sold to yourself at below-market prices. 5) move on to the next company. (basically, "the bust out" sequence from Goodfellas)
  - syedkarim 1y ago
    Who are the lenders and why do they keep lending when their is a history of default from the PE-owners?
    - variaga 1y ago
      Commonly, the bank that undewrites the loans will essentially do the same thing - they collect a commission but sell the underlying debt to someone else as (high-yield, because they are high-risk) bonds. If you've heard of "Junk Bonds", this is (one source) of where they come from. It's like a financial game of "hot potato" - you can make money as long as you're not the last person to hold the debt. So the answer to "who lends the money?" is "anyone who thinks they can sell the debt to someone else before it explodes". In the end, a lot of it goes to "unsophisticated" individual investors, who will buy it based on "Sears (or whoever) is a great company, why wouldn't I buy their bonds" without realizing the full extend of what's happening.
      - ryandrake 1y ago
        > In the end, a lot of it goes to "unsophisticated" individual investors, who will buy it based on "Sears (or whoever) is a great company, why wouldn't I buy their bonds" without realizing the full extend of what's happening. Unfortunately, a lot of these and similar financial schemes end with the phrase "...eventually retail investors end up holding the bag and taking the losses." LBOs, collateralized mortgages, crypto, every equity that gets pumped and dumped. When every layer in the banking industry has skimmed its profit and did their own renaming/reselling/repackaging of these "products" finally there's some individual investor chump who takes the loss, making the numbers add up.
      - scarface_74 1y ago
        This isn’t logical. A PE firm takes a company private only “sophisticated” investors can invest.
    - charlieyu1 1y ago
      Bankers who want to secure a deal that looks good on paper. When the loan defaults it would be someone else’s problem.
- toast0 1y ago
  So, some PEs do try to run businesses sustainably. But we mostly hear about the PEs that turn a business that's slowly dying to one that will operate "as normal" until it suddenly dies, usually somewhere around 5-7 years later. The first thing is that, if at all possible, the PE wants to do a leveraged buyout where the acquired company itself has borrowed most of the funds to buy itself. This cashes out the previous investors, but leaves most of the risk with lenders rather than the PE firm. Sometimes the PE may get a cut of the financing revenue. Most of the loan will be sold on the bond market, typically as junk bonds. Junk bonds have high interest rates, because there's a good chance the loan won't be repaid, but maybe you'll collect enough between interest and the bankruptcy settlement. While the company operates under the PE's management, it's getting paid management fees. It's also likely to move valuable assets out of the company; for real estate, sale and leaseback is common; when the company implodes, the PE keeps the land and can sell or lease it to someone else. The sale price was probably under market and the lease over market, so the PE earns money here. Having a high lease payment helps the PE finance the purchase, and may help it finance similar property as well.
  - markus_zhang 1y ago
    Question is, why do lenders lend money to them? Maybe they can get the principles back somehow?
    - sct202 1y ago
      They got 13 years of payments which might have been enough to make it worth it for the lenders depending on the premium they were getting on loaning the money. Sears and Joann's also took about 13 years from buyout to bankruptcy. Party City only took 6 years.
    - toast0 1y ago
      The interest rates are high, and the lenders likely will sell off the loans in a few years. If the company sticks around for a few years and looks ok, they might even be able to sell the loan for more than they lent out. Especially if the corporate numbers look good because of short-term changes, they may be able to get out. When the company goes bankrupt, the lenders have first priority for remaining assets, sometimes lenders will takeover a business and run it away from the shore and earn a profit that way, too.
b112 1y ago
Compare this to the other trend I noticed the other day, JIT delivery beyond excess. Was in Walgreens, and a woman was restocking the shelves. She had a series of reusable plastic boxes, but they were all labelled by isle. So she'd take the box to isle 5 or whatnot, and there'd be 5 products in it. Literally the products sold the day before. EG, one box of toothpaste, one brush, that sort of thing. Asked her about it, and she loved it. Said before, she had to walk all over the store to restock, but not now. Later that week, I was in again and noticed a van unloading about 10 of the same reusable boxes. Definitely a powerful way to keep stock levels down, even if not working towards a squeeze to close-out path. I wonder on the comparative on daily van delivery costs vs say.. a larger truck once a week, along with stock levels. Some very interesting math there, including regional supply depots stock levels, maintenance costs of larger trucks versus a van, and so on.