How Private Equity Buried Payless

Some large hedge funds operate similarly to private equity firms, by buying and operating companies. One such fund, Alden Global Capital, controlled Payless from 2017 to 2019, the years that included the World Cup blunder. Other hedge funds use votes to get executives of publicly traded companies to act more aggressively and thus increase returns to shareholders.

The result: Financial managers exert greater control over nearly all American companies than they once did.

Their willingness to cause some pain — to close factories, lay people off, renegotiate arrangements with longtime suppliers — is, many economists argue, a feature, not a bug. Society becomes richer over time by devoting resources to its most productive uses. The pain should be temporary, and in theory result in a more vibrant economy for everyone.

In 2012, private equity firms and hedge funds set their sights on the troubled retailing sector, and one set of investors made the pilgrimage to Topeka, where they acquired Payless.

More shoes, fewer salesmen

Payless, founded in 1956 by two cousins in Topeka, Louis and Shaol Pozez, was a business built on an innovation: that shoe salesmen weren’t entirely necessary.

Rather than keep inventory in a back room and employ lots of salespeople, as department stores did, Payless kept boxes of shoes on open display in the store, where customers could help themselves to try on. It needed fewer workers for every pair of shoes sold, which, among other cost-savings measures, allowed it to keep prices lower than many competitors could. The company became a mainstay of the indoor malls and strip shopping centers that boomed in the second half of the 20th century.

By the time a private equity group led by Golden Gate Capital and Blum Capital, both of San Francisco, took over in 2012 in a $2 billion acquisition, Payless had 4,300 stores worldwide and $2.4 billion in revenue. But it also faced profound challenges.

Article source: https://www.nytimes.com/2020/01/31/upshot/payless-private-equity-capitalism.html?emc=rss&partner=rss