Retailer Forgot What It’s About; Wal-Mart Didn’t
The still unanswered question, after thousands of words have been expended on Macy’s filing for bankruptcy protection, is: Where did all the money go?
Macy’s public stock was bought in a 1986 leveraged buyout for $3.5 billion. Chairman Edward S. Finkelstein has boasted of increasing sales since the buyout to almost $7 billion. Yet the company cannot pay suppliers, and employees fear for their jobs.
As with many parts of American society, the company is a facade of big-time finance with no money left for essentials--a fitting symbol of the illusionary 1980s and a lesson for the 1990s. Founded in 1858, Macy’s withstood two economic depressions, numerous financial panics, a civil war and two world wars. But in the last decade, the company forgot that America is a mass market and was undone by management ego and scavenger capitalism.
It thus stands in sad contrast to the most successful retailer of these times--Sam Walton of Wal-Mart Stores, who built a fortune and a company by remembering the mass market and who serves today as a model for American business to return to.
For more than 120 years, Macy’s meant quality merchandise for customers from all walks of life. It wasn’t the most prestigious store, but it built a world-renowned business in the broad market, selling goods a little fancier than Sears Roebuck. Then, in the 1980s, Macy’s went for more expensive merchandise, catering to higher-income clientele.
Finkelstein, now 67--a 43-year Macy’s veteran--was hailed as a merchant prince for switching Macy’s focus from traditional customers, many with declining discretionary income, to “upscale” customers who could afford pricier goods.
And Finkelstein listened when Wall Street offered a chance at big money. With help from investment bankers Goldman Sachs, he led Macy’s into a leveraged buyout, meaning the company borrowed $3.5 billion to buy out its own shareholders.
Finkelstein received $9.7 million for his shares, but that was peanuts. He reinvested $4.4 million in stock of the new, leveraged company, where he and 480 of Macy’s top managers along with such professional investors as Laurence A. Tisch, Alfred Taubman and Hong Kong’s Run Run Shaw would have made a killing if Macy’s had been able to pay off debt and go public again. Only two years ago, Finkelstein’s holdings were valued by Forbes Magazine at $140 million.
The idea of loading a company down with debt so that executives could strike it rich if the firm survived was popular in the 1980s. It was said to offer incentives to management. Less was said about incentives for footsore sales clerks--but like traditional customers, employees didn’t really count.
Investors in LBOs were not creating anything new, as were the venture capitalists who backed Apple and other computer firms or Genentech, Amgen and the entire biotech industry.
Rather, LBO investors were playing a tax angle. While a traditionally financed company--typically two-thirds equity, one-third debt--would pay taxes on its profit, a company operating with almost all debt would pay no tax because of all its deductible interest.
So an LBO company could devote all its cash income to paying debt, hastening the day when its executives and investors could sell stock to the public again and reap their bonanza. Taxpayers, like customers and employees, were rubes to be conned by city slickers.
In Macy’s case, however, policy and finance worked against each other. Going “upscale” restricted the market at a time when cash had to be maximized to pay debt. Then came the economic downturn of recent years, and the scheme unraveled.
Finkelstein’s stock will be worthless now. Macy’s will come out of bankruptcy, but it may have a hard road ahead--needed investment in modernization and computer systems has been neglected during five years of working to pay debt.
Meanwhile Sam Walton of Bentonville, Ark., seized opportunities in the mass market to build Wal-Mart from $2.4 billion in sales to almost $40 billion in the last decade. He shrewdly placed Wal-Mart stores on the outskirts of towns, where real estate is cheap, and invested in computer and warehouse systems to bring merchandise to shoppers at the lowest possible price.
Walton borrowed for expansion, but his policies were the opposite of Macy’s: If customers’ pocketbooks were tight, Wal-Mart’s prices would be low; to pay the bank, he went after all the customers he could get.
To keep employees on their toes, Walton, now 73 and still going despite bone cancer, visits stores and encourages stock ownership and profit sharing for all. Wal-Mart will invest up to $4 billion in new stores and computers in this recession year.
That’s the way you get rich--Walton family holdings in Wal-Mart are now worth about $25 billion.
Make no mistake--Sam Walton is no angel of mercy. Main Street merchants and grocers have been driven out of business by Wal-Mart’s aggressive pricing. But nobody said business should be gentle, only that it should be smart.
