What happens when you spend most of your life doing a job only to see it disappear?
"I'm from the generation from where hard
work should pay off and I said that was the least that they owed us because they were
all still making money." What happens when one of your town's largest financial contributors leaves?
This is the story of how one company's failure impacted
people, places, and a nation.
When Toys "R" Us said it was closing all its U.S. stores,
it didn't just mean the end of an iconic brand, it was also the end of thousands
of jobs and millions in tax revenue. The losers in this case, of course in the
first instance, are the workers. They've lost their jobs and they're being denied
severance. Hey fam. I'm Imaeyen and this Sunday we're telling you how one retail
giant collapsed and why we might be seeing a lot more stores following in
its footsteps. Spoiler alert. It's not just Amazon's fault.
Wall Street's involved too.
So yeah, it's kind of funny that uh, that's how much
help I needed. (Laughs) That’s how bad it was. That’s the finished product so I'm proud of that one.
This is the first time Ann-Marie Reinhart has ever had to do a
resume. When she began working at Toys "R" Us 29 years ago, she didn't need one.
When I first sat down to do the resume I was like, “Alright, you know I’ve done this.
and I was just jotting those one or two words down. I had someone look at it from the Department of Labor,
she went, “Ooooh", it was not so good.” (giggles)
Reinhart spent the first 25 years of her time at Toys "R" Us in New York, before she
moved to North Carolina. She thought she'd retire from Toys "R" Us.
She thought that even as she saw signs of its financial difficulties and its
restructuring. She thought that even after the company tried to reassure
employees. "I don't want to get too emotional because when I really start
talking about it... I guess...
Can you give me napkins? I feel it coming on. In September they had filed
for Chapter 11. Obviously, you know, that was a red flag for all of us. Then Dave
Brandon sent a letter to everyone in the country stating, you know, nobody
to be alarmed, everything's gonna be fine. We're just restructuring this loan."
Everything would not be fine for Toys "R" Us. Reinhardt is one of 33,000
employees who lost a job when Toys "R" Us went bankrupt. Her store in Durham shut
down in the first wave of closures in February. The last doors closed shop at
the end of June. "I'm starting to get scared. I'm not gonna lie. I'm starting to
get scared because I've been looking for a job and unemployment runs out in about
four weeks." The store's road from profitability to bankruptcy is the tale
of what can happen when Wall Street steps in to try and turn a company
around. Economist Eileen Applebaum says when private equity buys retailers like
Toys "R" Us, often the investors win while the company and its employees suffer.
"When private equity owns the company and sells off the real estate, the company
does not get the money. The money goes directly to the private equity firm and
its investors. There's nothing in it for them. For the, for the retail company and
this makes no sense from the perspective of having a strong business. It only
makes sense from the point of view of the private equity firms." See even if a
company like Toys "R" Us goes bankrupt, the private equity firms still make money
through things like charging millions in fees to the retailer, or selling off
all the company's real estate. Toys "R" Us was actually turning a profit when it
filed for bankruptcy. How profitable was it? It was responsible for one out of
every five toys sold in the U.S. in 2017. But the retailer was saddled with
millions of dollars in debt thanks to the private equity firms that bought it --
too much debt for its profits to make a difference. "The interest expenses alone
were four hundred million dollars a year. So, if you're paying a four hundred
million dollars a year in just interest expenses, not to mention that you're also
paying rent, not to mention that you're also paying these advisory fees,
there's not a whole lot left to invest in the company." Private equity firms
found Toys "R" Us enticing in 2005, even though competitors like Wal-Mart
were already putting the squeeze on the company. That's when Bain Capital, KKR &
Company, and Vernado Realty Trust bought the toy retailer. What often happens with
private equity is that they say their goals are to invest money, cut costs, and
improve efficiency, and all while trying to maximize profits. Private equity makes
its money if it boosts the company's perceived value and then sells it. And
the majority of the dollars and cents they're using in this game aren't even
their own. The companies who are owned by private equity firms are at risk of
bankruptcy if they can't pay off their debt. "The private equity firm puts in a
little bit of money to that fund, very little. And the pension funds and other
investors put up the rest. So they're basically playing with other
people's money. The private equity firm puts in one or two dollars for every
hundred that the investors put in. So the private equity firms have very little
skin in the game, very little that they can lose." Companies like Bain Capital
helped save stores like Burlington Coat Factory, Dollar General, and Restoration
Hardware. And they've made plenty of money in the process. But for every
Burlington, there's a Sports Authority, a Gymboree, a Payless, and a Toys "R" Us.
"Yeah, they took the letters off the building.
Oh my goodness. Wow."
Those are just a few of the retailers that went bankrupt in 2016 and
2017. PE-owned businesses are accounting for an increasing share of Chapter 11
bankruptcies. Part of why we're seeing these companies go bust right now
is because of over investment in property during the mid-2000s. Large
big-box stores kept going up, as did property values. Many considered
purchasing big-box retail space as savvy investment at the time. The bet didn't
pay off, and the effect of the so-called retail apocalypse has been widespread.
Overall retail employment has been falling. You've probably seen your local
mall with a few empty storefronts. Department stores like Macy's and JC
Penney shed nearly a hundred thousand jobs between October 2016 and April 2017.
That's more than the total number of coal miners or steel workers we so often
hear President Trump talk about. The retail problem is impacting every region.
The nation's richest cities are also seeing retail struggle. New York City had
three years of falling employment at clothing stores as of 2017. A streak like
that hasn't happened since the early 1990s. When stores disappear, jobs vanish,
and so does the money those companies contribute to local economies. "People
came to downtown in a small town because they were going to go shopping for toys
and while they were there they visited the other stores as well. And the same
thing is true of malls. These malls and main streets are losing a major anchor
store. So communities suffer. Lenders suffer. Vendors suffer, and worst of all
the employees suffer." Now, some of those laid off retail workers, like Reinhart,
are fighting just to get severance. "Now, is the end of February, the end of March,
we're about halfway through our liquidation, still not no word on what
the severance package was. And that's when we found out that we were not
getting any severance. And we found out, via a phone call."
"This is a company that traditionally paid severance
all the way up to 2016. The year before the
bankruptcy, they were still paying severance when they laid off workers and
now they've refused to do that." Toys "R" Us is headquartered in Wayne, New
Jersey. It paid more than $2.7 million to the town on its property in
taxes last year. The former toy giant is Wayne's third largest taxpayer, according
to Moody's. Wayne is now out exactly 1,159 jobs, which is the equivalent to 2
percent of its population and millions in taxes to fund town services. When
Toys "R" Us leaves, the lot it sits on will decrease in value if it's vacant
for too long. That's true of all 740 Toys "R" Us stores that's shut down in the U.S.
Right now the future of all those vacated properties is as unclear as
Reinhart's employment prospects. We don't know what will happen. The one thing that
is certain is that Reinhart is done looking for retail work. "I'm definitely
not looking to go back into retail. It did leave a little bit of a bad taste in
my mouth. I never ever dreamed at my age, that I would be out there
needing, and looking for a job. So that part gets a little emotional."
Hey fam, thanks for watching. Don't forget to like, share, and subscribe. This is the first of two
stories we're doing on bankruptcy. Come back next weekend to see the other one,
and we'll see you next Sunday!