Louis Proyect: The Unrepentant Marxist

February 2, 2020

The Fairway bankruptcy and the role of private equity

Filed under: capitalism,food — louisproyect @ 11:25 pm

Although Fairway is a chain of 15 grocery stores in and around the metropolitan NY area, its imminent Chapter 11 bankruptcy reflects broader trends in the American economy that define not only the Trump presidency but the predatory character of American capitalism of the past 25 years at least.

I may have more interest in the Fairway story than other leftists for several reasons. To start with, there’s a good chance that the store near my high-rise will be closing and thus leaving me with no alternative except to shop at Whole Foods. In New York, there are two tiers of grocery stores with Whole Foods, Fairway and Trader Joe’s constituting the high end and Gristedes and similar stores the low-end. Owned by billionaire John Catsimatidis, who once compared raising taxes on the wealthy to how “Hitler punished the Jews,” Gristedes store notorious for its price-gouging and the general unavailability of fish except for farm-raised salmon.

I also tend to be more interested in the nuts and bolts of the fruit and vegetable business since my father owned one, just like the Glickberg family that started Fairway in 1935. In a New Yorker article written by Adam Gopnik, a Fairway shopper himself, he captures what is essential about the store:

Born in the early nineteen-thirties as a fruit-and-vegetable stand on the Upper West Side, Fairway was originally the multi-generation property and obsession of the Glickberg family, starting as a more down-market variant of Zabar’s, which is still in business up the street. Fairway’s magic, as one of its former partners, Steven Jenkins, wrote in a lively and lovely memoir of his years there, “The Food Life,” lay in the juxtaposition of grungy, discount-minded practicality with genuinely inspired and discriminating product choices.

Like Gopnik and most New Yorkers, I will mourn the passing of a NY icon that was as identified with the city as Strand’s bookstore or the Sabrett’s hot-dog stands, but I will also understand it as the logical outcome of a world in which cash is king:

This produces something like a paradox of possessiveness, a contradiction of consumption. We know that a transaction of money for goods is simply that, but at the same time we feel the passing of the place where the transaction occurred as something far more than a material loss. It is no accident, to use a locution favored by the Marxists, that John Updike, in detailing the last days of his echt-American character Harry (Rabbit) Angstrom, made one of his final epiphanies the realization that the Christmas displays in the Kroll’s department store, in his mangy but beloved home town of Brewer, were merely commercial come-ons, to be discarded as soon as they stopped paying profits to the store’s owner—that what, in Harry’s boyhood, had been “those otherworldly displays of circling trains and nodding dolls and twinkling stars in the corner windows as if God Himself put them there” were not that at all.

My perspective on the Fairway story owes a lot to a friend who has worked in private equity for decades and who is very familiar with how the store became the latest victim of Wall Street greed. If you’ve seen Oliver Stone’s “Wall Street,” you’ll be familiar with Gordon Gekko, the character played by Michael Douglas based on the corporate raiders of the 1980s such as Bard College graduate Asher Edelman, Ivan Boesky, Carl Icahn, and Michael Milken. All of these financiers made fortunes out of leverage buyouts of the kind Gekko was counting on to dissolve an airline he had just bought, selling off its assets in order to cash in on the pension plan, and leaving the employees to their own devices.

You don’t hear the term LBO much nowadays but private equity firms operate on the same basis but supposedly with less of the mercenary ambitions of men like Asher Edelman and company. Edelman became notorious when after agreeing to teach a class on corporate raiding at Columbia University’s business school, he offered $100,000 to any student who came up a recommendation for a company to take over.

You can get an idea of the continuity between the bad old days and the current-day reformed private equity industry from the company that ranks number 2 in terms of assets. That is KKR, the initials that stand for Kohlberg Kravis Roberts. Kravis is Henry Kravis, who was one of the LBO’ers featured in the book “Barbarians at the Gate”. Co-written by Bryan Burrough and John Helyar, it described the battle vulture firms fought for ownership of RJR Nabisco, an unlikely merger of a tobacco company and one that made cookies. Warren Buffett, one of the players, made an observation that really displayed the mindset of buyout specialists: “I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

Another private equity firm in the top ranks is Bain Capital, Mitt Romney’s firm, which in partnership with KKR and a real estate investment firm called Vornado, bought Toys R Us in a leveraged buyout. Leveraging meant that private equity firms put up a relatively small amount of cash out of their own wallet and allow the target firm to put up most of the money by borrowing from the banks. In most cases, under new ownership, the firm is expected to use the capital to expand rapidly and show a handsome profit. If everything goes according to plan, it will be sold to new investors within five years or so. If you’ve seen the show “Flipping Out” on cable TV, you’ll get an idea of how all this works. Jeff Lewis, the star of the show, would buy a run-down house, make improvements, and then put it on the market. There’s always a risk that the house will not attract a buyer. Unlike Jeff Lewis, the private equity firm will not bear that much of a loss since the debt belongs to the target company and the one that victimized it.

In 2007, the Glickberg family decided that they would retire from the grocery business. One family member, Howie Glickberg, the founder’s grandson, decided to keep it going through a deal with Sterling Capital Investors, a Connecticut private equity firm that loaded it with debt and, with Glickberg’s agreement, embarked on an aggressive expansion plan. Within a few years, the chain would include 15 stores, including the one near me. Before long, Glickberg was eased out of the new company. Undoubtedly, his aversion to rapid expansion antagonized the Sterling partners who now ran the company and who enjoyed massive salaries, which were one of the causes of Fairway’s red ink.

In addition to the financial drain from the extravagant fees paid to the Sterling crew, there were other problems that dragged Fairway down. To start with, the suburban stores did not have the same cachet that the NY stores had. In Manhattan and Brooklyn, Fairway was an icon. In New Jersey or Connecticut, not so much. On top of that, it had to contend with Whole Food that was able to cut costs. Unlike Fairway, which was a union shop with good benefits, Whole Foods was not. Founded by libertarian John Mackey in 1981, it is the second-largest non-union grocery store behind Walmart. New employees would get a pamphlet titled “Beyond Unions.”

Going from the frying pan into the fire, Whole Foods employees began reporting to a new owner in 2017, Amazon’s Jeff Bezos. Instead of getting a pamphlet, new employees are expected to sit through a 45-minute anti-union video. Ideally, Bezos would prefer a store without human labor and is well on his way to making that happen. He is now using a robotic barista from Briggo in some of his stores and more might be on the way.

There is every possibility that Bezos will convert Whole Foods into a new entity called Amazon Go that will be cashierless. The technology would use AI-powered visual recognition and sensors to track items and tie them back to the shopper purchasing it. Shoppers then would scan their Amazon mobile app upon entering the store to get started.

It was not only Whole Foods that cut into Fairway’s profits. They also had to deal with FreshDirect. Unlike Whole Foods or Fairway, FreshDirect (based in the NY metropolitan area, like Fairway) has no stores. You order from a website and then get your order delivered to your door. Ironically, FreshDirect was started by a former Fairway executive but the funding came from Peter Ackerman, a leverage buyout specialist who made millions working with the dirtbag criminal Michael Milken at Drexel-Burnham. With the money he made out of crooked deals on Wall Street, Ackerman started something called the International Center on Nonviolent Conflict that has a lot in common with Gene Sharp’s operations. He was also the past president of Freedom House, an old-line anti-Communist think-tank.

As to Fairway’s future, there’s a good chance that the five Manhattan stores will be bought by ShopRite, a grocery chain that has been around since 1946. A retailers’ cooperative that uses economy of scale, including bulk purchases to lower prices, this would be a much better fit for Fairway than another private equity vulture. While it is by no means a workers cooperative, this type of business would likely be a return to the good old days for Fairway.

Speaking of retailers’ cooperatives, I should also put in a good word for Key Foods, which is one of my favorites. Although it is not as upscale as Fairway, if not downright funky, its bulk purchases as a co-op undoubtedly explains the eye-opening discounts. For example, a bottle of Tropicana orange juice routinely goes for $5.50 at Gristedes while the price at Key Foods, just two blocks from my high-rise, is only $3.99. I also appreciate that around half the cashiers are hijab-wearing Muslims. I can also report that Key Food is a union shop, even though UCFW has had its issues with management over the years.

Finally, it is worth mentioning that Elizabeth Warren has targeted the private equity vultures that have resulted in 10 of the largest 14 retail bankruptcies since 2012. In an article she posted on Medium titled “End Wall Street’s Stranglehold On Our Economy,” Warren took aim at private equity:

My plan would transform the private equity industry and end this looting with a comprehensive set of legal changes, including:

    • Putting private equity firms on the hook for the debts of companies they buy, making them responsible for the downside of their investments so that they only make money if the companies they control flourish.
    • Holding private equity firms responsible for certain pension obligations of the companies they buy, so that workers have a better shot of getting the retirement funds they earned.
    • Eliminating the ability of private equity firms to pay themselves huge monitoring fees and limiting their ability to pay out dividends to line their own pockets.
    • Changing the tax rules so that private equity firms don’t get sweetheart tax rates on all the debt they put on the companies they buy.
    • Modifying bankruptcy rules so that when companies go bust, workers have a better shot at getting pay and benefits and executives can’t pocket special bonuses.
    • Preventing lenders and investment managers from making reckless loans to private equity-owned companies already swimming in debt and then passing along the danger to the market by requiring them to retain some of the risk.
    • Empowering investors like pension funds with better information about the performance and effects of private equity investments and preventing private equity funds from requiring investors to waive their fiduciary obligations.
    • Closing the carried interest loophole that lets firm managers pay ultra-low tax rates on the money they loot.

I don’t plan to vote for her if she is the DP candidate, needless to say, but good for her.

5 Comments »

  1. Warren Buffett may have stolen that tidbit you quote (“made for a penny, sold for a dollar…”) from the 1950 play by John Patrick entitled The Curious Savage. It was our Senior Play in 1956 (Fontana, CA) and its exact wording was, “made for a dime—sold for a dollar—and was habit-forming.” (Ooops! This isn’t FB)

    Comment by uh...clem — February 3, 2020 @ 3:42 am

  2. Dear Mr Proyect, could you please facilitate the reading of your interesting articles by an ignorant person as myself, by writing down what acronyms stand for? If you won’t that will carry on making the reading twice as time consuming as it would otherwise be (although by researching the meanings I get useful infos too).

    Comment by Riccardo Pusceddu — February 3, 2020 @ 8:20 am

  3. I’ve read the full article and I saw a link between the Muslim cashiers and the huge bonuses and monitoring fees that Private Equity firms extort from workers: maybe if America wouldn’t have taken so many migrants since 1965, American workers could have been employed as cashiers and being paid much more than the ones who work there now in that positions, thus those Private Equity managers would not be able to loot so much revenue from their dirty operations.

    Comment by Riccardo Pusceddu — February 3, 2020 @ 10:11 am

  4. New York City does seem to be a food desert compared with other places. My so-called “neighborhood” in DC has two major chains and an IGA within easy walking distance as well as Wh*e Foods and the affectedly named Trader Joe’s. Prices are high compared with eg Columbus Ohio but food is abundantly available. There are a number of smaller specialty operations.

    Of course, this is gentrification at its finest, but New York City has always struck me as underserved. Wave of the future?

    Comment by Farans Kalosar — February 4, 2020 @ 10:30 pm

  5. You don’t hear about LBO anymore because Henwood is such a snore.

    Comment by Janet Avery — February 11, 2020 @ 12:59 am


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