One of Frederick Wiseman's wonderful documentaries is "The Store", which is about Neiman Marcus sometime in the 80's. Currently streaming on Kanopy.
One sequence showed the CEO giving a pep talk to his buyers, whose relationship with their suppliers was always strained at best. He told a joke about a buyer who called his supplier that went something like:
Buyer: "Hello, is Fred Jones there?"
Receptionist: "I'm sorry, Mr. Jones passed away last month"
Buyer: "Oh, sorry to hear that, goodbye."
Ten minutes later:
Buyer: "Hello, is Fred Jones there?"
Receptionist: "I told you, he died last month"
Buyer: "Oh, oh, yes. Goodbye."
Ten minutes later:
Buyer: "Hello, is Fred Jones there?"
Receptionist: "He's dead, why do you keep calling here?"
That is so spot on. I've occasionally played the role of solutions engineer/sales engineer/whatever as part of two different companies selling consumer electronics products to big box stores and that is 100% right.
The supplier/buyer relationships are very "frenemy" even in the best of times.
That is quite the abuse of statistics! US GDP (edit: inflation-adjusted) was $5 trillion in 1970, and $19 trillion in 2019. The income percentage of the middle three quintiles went down from 53% to 45%, but 45% of $19 trillion is still much, much more than 53% of $5 trillion. Income for this group did not shrink, it just grew more slowly than other groups. The income was "lost" relative to a hypothetical world in which the economy was the same size as in 2019 but the middle quintiles had a larger income fraction, not the actual world in 1970 or any other past year.
Speaking of abuse of statistics, lumping the bottom 20-40% with the top 60-80% of wage earners is extremely deceptive. It's well known that income growth is wildly different for those groups. Inflation adjusted wages for the median worker only increased by 9% from 1973 to 2014.
True. But how much did the productive output of the average American increase? Can we really expect things to "always increase" -- including wages? To me this seems like an absurd idea.
The end goal should be improving the median quality of life, through improving the efficiency of factors of production -- lower cost of goods... not through the expectation that the wages should arbitrarily grow linearly with GDP.
They probably meant median productive output. Sam Walton and Bezos made their supply chains 100% more efficient. It’s not as if warehouse workers suddenly were able to lift 100% more weight.
100% more weight per lift I'd agree. But that's hardly relevant. 100% more weight per hour, thanks to algorithmic placement of boxes, computerized dispatch and routing and general ruthless process optimization? I'd be shocked if we didn't end up at 100%.
But it's not just warehouses: efficiency changes have been top to bottom throughout the world. Things like Six Sigma, lean manufacturing, the Toyota Production System ... these have been massive drivers of efficiency nearly everywhere.
I worked manufacturing IT and was able to watch the assembly process. It's frankly amazing and us programmers have lots to learn. The worker that bolts widget A to widget B doesn't just have a box of bolts and a wrench. She pre-places the bolts in a pokayoke tray and places test templates against A and B. Are they misdrilled? Push a button on her console and they are diverted off the line for rework. Good? Templates off, place the assemblies in a work tray that can hold them in exactly one - the correct - configuration, pokayoke tray goes on and nuts screwed to bolts.
The count of nuts and bolts in her station are measured based on flow in/flow out and a runner brings and places more just in time to prevent her station from running out but not before they accumulate at her station. The environment and process is designed to absolutely minimize operator motion, with a supervisor monitoring and filling out time observation sheets to look for wasted effort and opportunities to change.
When I talked with some plant supervisors it was incredible: they were able to point to a manufacturing station and say "this worker takes twelve seconds to execute these five motions", and you could pull out a stopwatch and that was exactly what you would see.
The people who load pallets are moving just as many boxes as they used to. Sure they play a part in the productivity, but I don't see how it's unfair if they make the same amount for the same work.
It was true for decades before the mid 70s when productivity and wages decoupled. The reason why isn't clear but there was certainly the expectation that wages would increase for half a century in the US.
I think private equity has a large role to play in this. It's sad to me that people point the finger at innovative companies like Amazon, when the real culprits are people who just finance and gut medium size companies you've never heard of in order to eat up the margin that was previously going to workers and extract it for themselves and their LPs.
The numbers I used were inflation-adjusted. I gave total income because that's what the parent comment referenced, but per capita income has grown too, although not as much (US population is up 60%, compared to total income growth for this group of 223%). Also, "please familiarize yourself" is a slightly rude way of putting it.
I don't think it should have. Height is objective. I don't get taller or shorter based on other people's heights. Money isn't like that. If the amount of money in a system increases without a commensurate increase in the amount of goods and services, that could be decrease my purchasing power.
Another way of phrasing it: child 1 used to be the tallest. The other children grew and now 1 is the shortest. The objective height of 1 may have increased, but relative stature declined.
The figure to think about is purchasing power. How much stuff can you buy with your money, whatever the numerical quantity of that money is. Purchasing power has been roughly flat for the past 40 years for the middle class [1]. The economy is growing, but almost all of that growth is captured by the upper class.
Things that the middle class mostly spend their money on, healthcare, education, housing - has all been getting disproportionately more expensive too. So it's not just that the effective earnings aren't increasing, it's also that the things middle class families spend on are getting more expensive.
It's complicated to think about, but that's partly why you shouldn't trust pithy analogies that try to make stagnant income for the middle class seem acceptable. As the saying goes - for every hard problem there's an answer that's simple, elegant, and wrong. "Everyone is getting richer, just at different rates, like your children grow at different rates" is one such answer. In reality, your upper class child is gigantic, fat, and eating more while the other children haven't developed in years.
This seems like a propaganda term to endow the more aptly named 'working class' with a more prestigious title. In any case, the point holds: your argument about inflation is so clear precisely because you can explain it against the backdrop of the height analogy. It is a really neat way to explain the situation, even if it mostly explains why OP is wrong.
What a dollar (or euro, or any currency) is worth changes over time relative to other currencies which is how we can get currency trading, correct? Not only that but a currency changes relative to itself over time.
This gets called inflation. (People do argue about what inflation is and what they argue for depends on their economic ideology – there's the inflation of prices in a currency and the inflation of a currency itself through pumping more of it into the system, so-called quantitative easing)
Put simple, height is measured using a fixed or absolute measure (inches or centimetres or whatever) – a $ in 1970 is not the same $ in 2020, it's relative – but we know this intuitively anyway because when we look at old prices (for most things) they are way less.
What are we actually measuring though? Wealth is always relative, so we are trying to measure positions between different groups towards each other. If you give each of your kids 5$ and charge them 5 bucks for a pie and then one of them gets a raise of 10$ and the price of the pie raises to 7$ then the wealth of the other child effectively shrank. "Things should be made as simple as possible, but not simpler".
edit: deleted this chunk of my argument because as pointed out by dweekly Pew Research are already comparing in 2018 dollars.
What matters is that U.S. middle-income share of aggregate income fell from 62% to 43% – is this not the usual measurement? This is what people mean by "the middle class is shrinking". It doesn't matter if the average middle-income has increased, what matters in this context is the overall purchasing power of the middle class.
Even adjusted for so-called inflation you have to wonder does your 2018 $ go as far as your 1970 $ ? How would we measure that? How about we look at household debt? According to this site “In 1983, the top 5 percent had 80 cents of debt for every dollar of income, while the remaining 95 percent had 60 cents for every dollar. By 2007, after decades in which an increasing share of income flowed to the top, the situation had reversed. The top 5 percent had 65 cents of debt for every dollar of income, while the remaining 95 percent had $1.40 in debt for every dollar. The situation remains skewed today.” https://tcf.org/content/commentary/graph-household-debt-and-... – this suggests that a $ dollar does not go as far today and that today maintain a middle-income lifestyle the average family has to go deeper into debt.
1. the Pew linked source you give shows numbers in constant 2018 (inflation adjusted) dollars. You seem to be saying in your comment here that the median family in 1970 was making $58,700 in 1970 dollars. It was $9,870 in 1970 dollars per the US Census: https://www.census.gov/library/publications/1971/demo/p60-78...
2: It's interesting to look at debt, but net worth gives a more complete picture as larger assets can offset larger debts. On this front things we're looking pretty rosy for the median US household up until 2007, when the Great Recession roughly halved household net worth and hasn't seen a recovery since: https://www.financialsamurai.com/the-median-net-worth-of-us-... - the "good news" is that things aren't worse than where they were in the 60's in inflation-adjusted terms. The terrible news is the truly astonishing racial gaps in household median net worth: https://www.taxpolicycenter.org/fiscal-fact/median-value-wea...
I don't buy that explanation. A lot of traditional mall and department store retail is suffering, but other kinds of retail is doing great selling to middle-class Americans. Examples include Home Depot, Lowes, Walmart, Target, and Amazon. They are winning because they offer more convenience to customers as a result of their size, selection, and online presence.
Besides, this article is about a luxury retailer, not the kind of place middle-class Americans go to.
Neiman Marcus suffers from two additional factors imo - a lot of their retail is in pricy urban real estate markets (Beverly Hills, Palo Alto, Stockton Street, Michigan Ave, Hudson Yards, Tysons, Houston's Galleria, etc.) where rents have escalated in recent years in comparison to cheap Amazon / Walmart style giant warehouses outside of town.
Additionally, NM has been owned by PE for years putting financial strain on the company.
The way that the retail model was structured, back in the 70s and the 80s, was that the anchor would bring buyers into the area, and the landlord would make the lion's share of their income off of the stores around it, such as restaurants, jewelry stores, movie theaters, etc.
If all that makes sense, you can see that a lot of these landlords would actually be thrilled to see these department stores go away, because then they could re-purpose the space into something that generates more money.
Fry's Electronics, Sears, Macy's... they're all an example of this.
Where is Fry's acting as an anchor tenant? All of the stores I've seen were freestanding. Often in light industrial areas, not a whole lot of people are going to Fry's and then stop by at the bus upfitter, cause it's right there and they might as well get a commute vehicle for the whole office.
This creates a "tug-of-war" between the company that owns the building, and the company that is leasing it.
For instance, in the article posted above, Sears was paying $33,333 a month for their lease.
If the lease is 99 years long, and if the owner of the property can lease it to someone else for $50,000 a month, that creates a problem for the owner.
Basically the owner is in a pickle: they want to lease it to someone else, but as long as Sears is paying the lease, they can't.
So this creates a tremendous incentive for the property owner to buy out the lease holder. It also incentivizes Sears to let the property fall into disrepair. For instance, in the article I posted above, you can see that the community was eager to see something done about that derelict boarded up building.
Here's some math:
1) Sears is paying $33,333 a month on a 99 year lease
2) The property's market value is $50,000 a month
3) There's 50 years / 600 months left on the lease
If you do the math, that lease that Sears has might be worth ten million dollars or more.
Again, pure speculation on my part, but I personally believe that a lot of companies are getting wise to this scheme.
If you've ever gone to your local mall, and wondered why Sears and Roebuck is still open when there are four customers... well now you know.
Also changing tastes in clothing have reduced the gap between luxury clothing and cheap clothing by a lot, while home improvement needs remain more or less steady.
Cheap clothing has been taken to a whole new level where the quality at some of the mall stores is really terrible and the prices aren't realistic in comparison.
I think the biggest difference has been increased discoverability.
The point of NM et al. was that they currated what you could not obtain yourself (outside of a private buyer's agent and/or flight to NYC).
With the internet... suddenly manufacturers could efficiently sell direct to consumer. Or at worse, via something like Huckberry that has far lower overhead.
The value proposition of brick and mortar curration evaporated, and the only thing that kept them going was generational intertia and loyalty. And the problem with an aging customer base is eventually they age... terminally.
Financial games and leverage may have exacerbated things, but you can only shrink for so long.
It is also worth considering that basically all of the shift can be attributed to housing [0]. Exclusive zoning laws and decades of under-building have driven up housing costs so that they eat up more and more of the typical family's salary for non-homeowners (which is much of the middle class).
I took a shortcut through my local Neiman Marcus last year (I wanted a Five-Guys burger), and looking at what they had for sale and their prices, I couldn't help but think "Even if you're super rich, you'd be nuts to shop here."
They had a black t-shirt with some rhinestones (presumably) on it for $5000. It was probably from some famous designer, but still .. $5000 for a t-shirt that had been gone over with a BeDazzler?
Which countries did you have in mind and why would they care about Picasso? Western art history is probably not all that common of a study subject around the world.
true, a picasso is just acrylic on canvass but it's not acrylic on canvass mass produced in a factory.
If Miuccia Prada herself sewed together a tshirt and painstakingly put on the rhinestones with much thought, then no one would be questioning the price.
When I started interviewing out of grad school, I REALLY stretched to go buy a nice suit from Neiman-Marcus, a Valentino at $700 in 1995. The suit was gorgeous and the tailor at N-M did a beautiful job adjusting it to me.
I could be considered, barely, middle-class--certainly the lower end at best. The suit absolutely paid for itself many times over--that's a different set of stories.
That Valentino is now closer to $5,000. Inflation says that Valentino should be about $1,200. I suspect that even at $1,200 most students couldn't stretch for it today.
So, is Neiman-Marcus to blame for going further upscale given that they probably can't make any money in the middle anymore?
>> is Neiman-Marcus to blame for going further upscale
You made one purchase at N-M 25 years ago, and from that single experience, you're generalizing the entire merchandising strategy of the brand ever since then?
And your premise is false anyway. The 1 and only Valentino suit currently available at neimanmarcus.com costs $1173, which is less than $1200:
All I've taken away from this is Valentino is more expensive in 2020 than it should be. By nature of you even being physically close enough to a Neiman Marcus in 1995, chances are you were of higher income than the rest of the country. They're still located in mostly more wealthy areas of the country.
If you consider driving 3+ hours close ... And a "grad student" is generally damn poor (and I was) ...
My point was that Neiman-Marcus had a product (properly fitted business suits) that was actually (probably upper) middle class. And that product, in fact, served its purpose really well.
People still underestimate the effect that an excellent suit has on people's perception of you in business. Being tech, I normally cruise around in really casual wear. However, investor meetings demand something a little more upscale so I'm pulling out my nice suit. I chuckle at the difference in behavior of the people around me (both employees and strangers) when I show up for work in a suit.
You valued and knew to value a suit for your purposes in 1995. Most people now or in 1995 did not drive three hours to buy a suit. The number of jobs that require a suit for everyday use is definitely down vs 1995 and you can rent a suit (not vouching for fit here) if you need one for interviews which is the primary use for most people who do not wear one on a daily basis.
I'm not disagreeing with anything you said on making a good impression but that doesn't change anything on the fact that Neiman Marcus has never been for middle class shoppers. A one-off purchase does not make a customer base.
But they still didn't. I went into Neiman Marcus in Dallas in 1991, just to look around. I found a leather jacket, with red... I'm not even sure what to call it. Paint? It was a layer on top of the leather, not dye. It looked very tacky. And it was $1000. In 1991. Well, even in 1991, the middle class had a lot less expensive places to buy tacky-looking junk.
The "creditors" are usually another shell company of the PE firm, and the interest rates are absurd (I looked into the collapse of Maplin and it was something like 20%). It's basically an accounting trick to remove profits from the victim company in its declining years without having to pay tax on them.
That's not correct - creditors are usually banks for secured term debt or bondholders. The interest rates are not absurd. In this case, the bondholders are suing the private equity fund for stripping the asset. The bond in question looks like it had about a 10% interest rate
To be fair a 10% interest rate for debt sold in the last 2-3 years was kind of absurd, even for many junk bonds (of course I'm talking about the pre-virus situation).
Private equity firms raise funds (usually have a 10yr investment horizon) and use these funds to serve as the equity tranche for a buyout that the remainder is financed with debt. Banks (or other investment firms sometimes nowadays) will provide financing for these buyouts and that financing is later refinanced with syndicated financing through loans or bonds.
There are a decent amount of banks that were in the middle of this process, covid hit, and they are now stuck with those loans on their books.
in other words, yes, it is created "out of nothing" (when handing out the loans) and once the "unexpected bad things" happen it becomes "real" (as in it is on the books and will now have to be accounted for properly)?
I'm not a fan of private equity but I'm also not a fan of rants directed my way when I'm answering a question someone asked. Please take this somewhere else.
sorry if this came across as directed at you somehow. you seemed to have a more detailed understanding of the moving parts, so I figured I could throw a super simplified version of my understanding at you and see if it is a valid simplification or an invalid one. I'll interpret your answer as "invalid" for now. :)
No, it's not from thin air. Bridge financing is from cash on a bank's balance sheet (or as mentioned above, sometimes non-bank entities). Banks usually participate in bridge financing (some fees, loan on balance sheet typically on a short-term basis) because they want to also be part of syndicate financing (more fees, previous loan syndicated out to investors).
Banks infrequently get "hung" with loans and these usually are just bad deals that somehow got through. There are more hung loans now on deals that might have been okay under normal economic circumstances but are not feasible right now.
If this question is in reference to the hung loans I mentioned in my previous post, there won't be a need to; at least on those. This is small portion of overall bank business and banks are in much better shape than over a decade ago.
"24 Hour Fitness USA, Inc. announced that AEA Investors, a leader in the private equity industry; Ontario Teachers’ Pension Plan, Canada's largest single-profession pension plan – and one of the world’s largest; and Fitness Capital Partners, a fund organized by Dean Bradley Osborne and Global Leisure Partners have completed their acquisition of the Company from Forstmann Little & Co."
> Further down the corporate structure, Maplin Electronics Group (Holdings) Ltd. mainly seems to exist to drain Maplin Electronics Ltd. of profits. On the books of Maplin Electronics Group (Holdings) Ltd. is an intercompany loan to Maplin Electronics Ltd. at an interest rate of 10%. The interest charge on this loan was sufficient to ensure that Maplin Electronics Ltd. made a statutory loss in both 2016 and 2017. Meanwhile, the direct owner of Maplin Electronics Ltd, Maplin Electronics (Holdings) Ltd., appears to exist only as a vehicle to hold a £31m revolving credit facility from Lloyds Bank. All of these intermediate companies are effectively guaranteed by MEL TopCo. All of them are now therefore insolvent.
> ... When Rutland Partners acquired Maplin in 2014 it funded the purchase with debt. That debt was loaded in its entirety on to the books of MEL Topco, in the form of £15m of bank loans at Libor + 7.5% and £72m of shareholders' loan notes at 15%.
None of those entities mentioned in there are creditors except Lloyds. Private equity deals sometimes have complex capital structures with absurd entity names but creating a "shell company" as described earlier doesn't allow you to get away with theft.
When I got a mortgage and refinanced. In both cases shortly after I got letter that my debt was purchased by someone else and from now on my payments supposed to go to a different company.
I suspect it is similar here. They make the loan then sell it to someone else.
That's very different than the Enron-esque transaction described above. You are describing two separate companies. They're saying that some "shell company" takes a loss while the parent company makes all the profit.
The web of incentives behind LBOs is very complex. They happen because in reality a lot of the time many of the people involved make money. This is availability bias. You only hear about the explosions. You don't hear about the thousands of LBOs that happen which never blow up.
The financial structure of a LBO is that a PE fund uses the assets of an acquired company to pay for the acqusition. They generally put little if any of their own money down other than as earnest capital. They then take out additional loans using the acquired company assets as collateral and pay themselves distributions out of those loans. The acquired company is left to repay the massive and increasing debts.
You don't hear about the successful LBOs...because they're extremely rare. The only LBOs that worked out for the acquired companies are for those like Hilton, which occurred right before interest rates dropped, allowing the acquired companies to refinance their debts at lower rates than incurred by the LBO. The recession that occurred right after that LBO also let them fire tens of thousands of workers and shutter hundreds of locations and blame the recession rather than the shitty PE management and pillaging.
Toys R' Us and Neiman Marcus are the prototypical LBOs. Whether or not the LBO succeeds, PE gets rich, everyone else gets screwed.
There's a great CNBC show called "The Profit" which really makes it easy for a layman to understand how private equity works. On the show, it's interesting to see how the investor who is putting up his money is often uninterested in investing in a company that's growing quickly and making good profit margins.
I can only speculate on what the investor's true motivations is. But there was one episode in particular which was interesting:
1) The investor came in, offered up a few hundred thousand dollars for a 51% stake
2) He immediately had the company upgrade their equipment, purchasing new equipment
3) Eighteen months later, the company was bankrupt
When all the dust settled, the company was re-packaged and sold to another company, the original owners were gone, and the manufacturing was sent overseas.
When the investor was having them buy a bunch of equipment, I was definitely wonder if his prime motivation was to simply have some tangible assets that he could recover once the inevitable bankruptcy occurred.
It’s way, way more complicated than that. There are the LPs, who sometimes have clients / constituents, GPs, who can be complex entities or individuals or both, operating partners, banks, who obviously wouldn’t lend for LBOs if every one of them busted, equity owners of the target, debt holders of the target, management of the target. All of these parties have their own incentive structures which are lined up in order for an LBO to take place.
Private equity companies exist to purchase existing companies from their current owners and then run them better/extract more value from them. The canonical example of this is purchasing a public company by acquiring all outstanding shares.
This is often a fantastically expensive enterprise that requires that the new owners raise tons of money. The new owners do this by structuring a deal where the company will take out a ton of debt (basically its entire market capitalization of the company, plus a premium) to purchase the outstanding shares. This is known as a leveraged buyout (LBO).
So if a public company has $100M in outstanding shares and zero debt before they go private, by going private the private company will now have $100M of debt (rough numbers, illustrative but not necessarily realistic). That's why going private often results in dramatic sell offs and cost cutting- the new company needs to get the debt load down, and fast.
Definitely read Barbarians at the Gates, it's a great book and explains a lot about private equity from a dramatic case in the 80s.
Thanks for that. But why is the company now worse off than before? A company can be funded with equity or debt (different terms and obligations, I understand) but if a company converts 100% of its outstanding shares to debt, why does anything change? I assume this is what happens when a company takes itself private to escape the grind of quarterly earning, short-term growth, tyranny of Wall Street analysts, etc. If I could run a company better/extract more value from it, say, by decreasing expense, increasing revenue, and therefore profits, I'd write myself a big check quarterly and continue running the company. Something else extractive and zero-sum (I gain but the company loses) is going on and I don't know what that is.
Becuase the risk of investment is now structured differently with leverage. Let's pretend we live in world where companies are always worth 10x earnings + assets. Our pretend company $100M makes $5M in earnings and has $50M in assets (cash, real estate, etc..)
To take the company private, the lenders require an interest of 10% and 10% principal
Some PE company (or the CEO, whatever) thinks they can make this work, so they come up with $10M of principal, take the lenders money and buy the company. The first thing they do is sell as many of those underlying assets as they can to pay down the debt. You now have a company that has $5M a year in earnings before debt, $10M in assets (the principal, serviving as the required reserve for the lenders), and $50M in debt, with a debt service of ~$5M a year (so really 0 earnings).
If the the PE company does a great job managign the company and the economy is good, so they double earnings to $10M, then the company is now worth $50M ($10M in income x 10 + assets - debt) and the PE company made a 5x return already (FYI- I know I'm abusing my financial math, fake numbers, but its illustrative).
Now lets assume they were wrong and a global pandemic breaks out, and the companies start losign money to the tune of $1M a year. If the company had stayed publicly owned, they might have to cut their dividend and burn through reserves, maybe sell off some assets, but other than that all their employees and the majority of their assets are probably fine. The company's market cap is a lot less, but shareholders don't go to zero eithier.
The world where the company went private in an LBO? That $10M cushion runs out in less than 2 years. They are bankrupt. They might get a few more chances to restructure debt and such, but eventually the lenders give up and liquidate the company a la Toys R Us. The employees get fired and local landlords lose tenants. Pension funds disappear. It's not fun.
This was helpful to me. How does the PE company fare in the bankruptcy scenario? Have they put up collateral or are somehow on the hook to the lenders?
It's my understanding that the bankruptcy applies only to the purchased subsidiary, so the PE firm only stands to lose the principal they put in at the start.
If so, it sounds like the PE firm gets all the upside, but is less exposed to the downside. So they are incentivized to rachet up the risk.
> This was helpful to me. How does the PE company fare in the bankruptcy scenario? Have they put up collateral or are somehow on the hook to the lenders?
All deals are different. You're probably not going to have any collateral put up by the actual PE firm in most cases.
> It's my understanding that the bankruptcy applies only to the purchased subsidiary, so the PE firm only stands to lose the principal they put in at the start.
In most cases this is true. Depending on how aggressive the firm has been and how long they've been involved, they might have already dividended out their principal.
> If so, it sounds like the PE firm gets all the upside, but is less exposed to the downside. So they are incentivized to rachet up the risk.
This is a correct but simplified conclusion. They're incentivized but there's usually a set of checks and balances in the form of banks providing financing and investors willing to finance deals. This system of checks and balances typically erodes as the business cycle/bull market rides on.
The binding constraint in most of these deals is how much leverage you're able to get away with.
You are at the limits of my understanding- in my simple example, the entity that took the company private is only on the hook for the principal, but these deals can be super complicated- multiple layers of companies transfering or lending money to each, and PE companies can be both a lender and an owner through these arrangements.
Thank you, I understand better now with the numbers worked out. Although in this example, outcome is dependent on circumstance and LBOs are not covers for malfeasance the way they're frequently talked about.
I think the reason LBOs are so hated is difference in utility between the capitalists and the community. The capitalists (PE, management, and lenders) are putting a boatload of money at risk to make an even larger boatload of money, and are empowered to take that risk. If the bet doesn't work out? They'll lose money (but probably have lots left over) and maybe their jobs if goes bad.
The community (workers, local suppliers, and governments) are seeing their jobs, livelihoods, and institutions put at risk, and they likely are seeing no reward for success. They are not empowered to decline the increase in risk, even though they certainly have a stake in the future of the company.
It isn't always- there are certainly times where a PE company recognizes that a fundamental good company is doing stupid things with its assets. One of the reasons why LBOs and "corporate raiding" was such a cultural meme in the 80s is that there really were a ton of companies that weren't allocating capital well, and sometimes were run for management's benefit to the expense of the shareholders. A totally made up example might be a furniture manufacturer that also happened to own a some water parks and a bunch of real estate, because the CEO liked water parks. A corporate raider/PE firm might do the math and conclude the water park segment was dragging down the rest of company and the real estate would fetch a ton if the company actually sold it. So they take over the company with debt, pay off a chunk of the debt by spinning off the water park segment, sell off a bunch more real estate to people who want to use it, and then the core furniture manufacturer actually ends up with more free cash flow because they aren't supporting the dead weight businesses.
That's the idealistic case, and it does happen. But then there are the counter examples we all know...
I think it's more because the examples people are familiar with are cherrypicked "heads I win, tails you lose" examples that have recently been recognizable American brands. Someone linked a list of LBOs elsewhere in here and TXU was at the top of the list. A lot of people lost a lot of money on that deal but you didn't see the kind of press Toys R Us got. I'm guessing a tiny percentage of people here even know what TXU is. Toys was a brand everyone recognized and PE got paid on that even though they went under.
They're required to pay a fixed interest rate on the debt. So during an economic downturn when profits dip, they can become insolvent. By comparison, when the capital came from stock, the dividends could adjust up and down with their profits.
Like any form of leverage, it magnifies both the upside and downside risks.
It's a bust-out. It's much easier to look at the examples in mob movies, like when they took over the outdoor store in the Sopranos or burned the nightclub in Goodfellas.
They take over a business with existing good will and loot it, using that good will to delay the collapse until they've extracted all the money and left others holding the bag, usually creditors (especially tradeline partners like suppliers, or landlords) and employees.
> If I could run a company better/extract more value from it, say, by decreasing expense, increasing revenue, and therefore profits, I'd write myself a big check quarterly and continue running the company.
If you can. If you can't and your cash flow either stays flat or declines, you now have more debt to service. The more debt you have, the less leeway you have to execute on your plan. That's assuming you don't screw anything up in the business without considering any macroeconomic factors.
Right, and in that case I've made a bad decision and now I "own" a company that is not doing well and have more debt to service. The company declares bankruptcy, gets restructured or folds. How does that help me? That is to say, if it ends this way frequently, or fair odds ending this way, why do PEs keep structuring leveraged buy-outs? (This thread makes it sound like it's frequent enough that one person can say, Debts? Lemme guess, PE? Right you are!) There's an incentive to do this and the edge is ... what?
PE is very cyclical and rates have been very low. Massively levered PE transactions are usually tied to the business cycle. When the economy is doing well you're able to get away with larger and more levered transactions than normal. If you add on low rates to this, you can get away with larger transactions.
All debt deals have covenants and covenant protection is at an all-time low right now; investors have decided that it is worth giving up this protection for whatever the potential investment happens to be. Covenants on the amount of leverage a company can take on are common but there's no universal formula for calculating leverage. It is not atypical to have multi-page definitions of how a company calculates EBITDA. Some firms are known for being very aggressive with this and are also very aggressive with issuing dividends shortly upon the close of a transaction. Aggressive dividend policies help PE derisk transactions substantially. The more money you are able to take out of the company (and sometimes able to issue debt to do so), the more you derisk your initial investment.
I could go on for days about whether any of this is good or bad, blah blah but as far as your observation that this seems to happen with all PE deals, PE is a multi-trillion dollar industry. Just think about how the world would look if that happened with all PE-backed companies.
Your theory is good, but is it what happens in practice? In the headlines, you will find examples of "corporate raiders" who bought the company to "extract value" which means doing pretty much what a leech does. Also most of these examples showcase that the company would have been better off without the private equity buyers. Could there be good buyers, sure.
"extract value" -- what does this mean? Sell off the furniture? Fire 50% of the employees? I have image of Richard Gere saying "I buy companies that are in financial difficulties, I break it up into pieces, and I sell that off." Like stealing cars and selling them for parts, right?
Yeah, that's pretty much the canonical model. Huge in the 80s for a variety of reasons, still extremely common today.
There are other models for PE and going private- sometimes companies don't use nearly so much leverage and are effecitvely bought as part of portfolio, sometimes you see very rich individuals take their companies that they used to own private again, sometimes they do use tons of leverage but buy and run the companies mostly as is, just growing the company in place and paying down debt from cashflow.
PE's and LBOs aren't necessarily bad things at all and the economy as a whole is better for having them exist. The problem is that the risk/reward profile tends to exaberate inequality. The PE/LBO firm is already rich individuals who may make our lose millions on a bet on the company. The control their own risk and decide. The workers and communities who also have a stake in the company? They have very limited upside and the downside is that they lose their jobs and anchor institutions in their communities, and they have very little control over whether or not to accept the risk.
Stealing cars is small-time. The big deal is to steal the car factory. Or, in the case of MG Rover, sell the land the factory is built on to a holding company and pay yourself a bonus.
(The collapse of MG Rover is complicated and the directors very narrowly avoided prosecution)
The theory is that PE exists to run existing companies better than their current owners.
The financial and legal reality is that PE simply loads the target company with the debt used to acquire the company (i.e., PE doesn't actually put up any of its own money), and then pays itself by taking out more debt secured by the acquired company. And then they charge the acquired company a management fee for the privilege of having all of its useful assets being used as collateral for loans the PE company never intends to repay.
One of the tactics of a PE company is to effectively buy a company by securitizing its future revenues in the form of debt which is called a 'leveraged buy out'.
Basically a fund will invest a small amount and convince a bank to give them the money for the rest of the acquisition, which will then be in the form of debt to the company, using the revenue stream and assets of the company as collateral.
The banks get a nice loan out there and the PE firm gets full ownership with a lot of leveraged help from the bank.
There are possibly a bunch of structural benefits such as tax optimization, ie interest payments are tax-deductible etc..
It's viewed negatively because it's generally a form of financial engineering re-arranging deck chairs, not really value-creating, although it is for investors.
A company with a lot of debt can be more exposed and more likely to fail in a downturn.
Because one of the principles of private equity is to load up a company with debt while growing the bottom line and then offloading it. When it works the banks profit, the company grows and everyone is happy, when it doesn't work they are vultures that made a bad situation worse.
Instead of painful downsizing and adjusting to actual market demand they will keep things floating until it turns around or the company is so far gone that nobody will lend to them anymore.
No matter how risky it is, there's a price at which it's still profitable (in terms of risk-adjusted expected present value or whatever) to finance it. In this case, based on a sibling comment, that price was a ~8% credit spread - which, if there weren't a global pandemic, the creditors would happily be earning right now.
Ok, a potential positive sum is definitely better than zero but once again, how exactly are creditors making money off this? The grandparent's post is implying that somehow no one is losing money in this situation. I'd like to hear how it works.
So you're saying that the original creditors made money off this and new creditors through secondary market transactions are left holding the bag? That's partially true but a massive portion of this debt is in pension funds or passive investments that track index funds. They track benchmark indices so they're buying these bonds at issue or shortly after. With no active management involved, they are also losing money when a company files.
They're not making any money, but they're not universally worse off.
Depending on their status (e.g. if their debt is secured by a lien), it's totally possible that some classes of creditors could be reinstated with the same claims under the reorganization plan (assuming it gets confirmed by the court). Even if a secured class doesn't get the same value and votes against the plan, they're still entitled to a handful of protections under the Bankruptcy Code (§ 1129(b)(2)(A)). Less so for unsecured creditors and shareholders.
To be fair, if they had a PE takeover, they likely weren't in great shape before the takeover. The takeover gave them a little bit longer to live at least.
They take over companies that are in a liquidity crisis. They bring buckets of cash with them that gets the company out of the liquidity crisis. Suddenly, the value of the company increases dramatically because creditors can't take advantage of it anymore.
PE doesn't takeover companies they think can make it. Regular investors would do that. They take over companies that everyone knows are doomed.
The equation is like a curve. The price point starts at 0, shortly after providing liquidity, the price dramatically recovers. But, in the long run, the price will return to 0.
The equation PE is trying to solve, and the risk they take is: Can they make enough money selling assets in the brief inflated period to make up for the inevitable loss at the end of the curve.
They're signing up to hold a bag, and they know it. They're not buying Great American Companies. By nature, no one else would do it, or they wouldn't have been able to do the takeover.
That may have happened in some specific cases, but companies susceptible to a leveraged buyout are not in a liquidity crisis. Look at say Toys r Us just before PE showed up and they had access to plenty of capital, they just didn’t have anything to spend it on.
If anything the reverse is true as PE tends to burden companies with so much debt they can’t innovate or downsize to fit changing markets.
PE is all about maintaining the pretense of a turnaround so that liquidation proceeds can go to management (the PE firm) rather than to outstanding obligations or investors/shareholders.
It's the white-collar equivalent of walking out with the coffee machine and an aeron chair -- so, naturally, 100x worse and 100x less illegal.
Yes, they also use leverage to magnify their outcomes. Since they are equity, their downside is capped (it is a call option essentially, which means they should maximize volatility to increase the option's value). You maximize volatility with financial leverage (debt). This is more profitable when rates are near-zero.
Engaging in risky bets is not "unique" to private equity - this is true of any equityholder (take a look at VC). It is also typically why bondholders include covenants restricting particularly high-risk actions voted upon by equityholders. However creditors have no leverage nowadays because they need to stick their money somewhere (hello high-yield debt) and Treasuries do not provide a reasonable return.
Using debt is not unique to private equity. When rates are low - arguably artificially - it makes sense to binge on debt and volatility.
This is laughably false. Different PE firms (and funds within them) have different strategies, some firms may indeed by the aggressive kind that you specify, but a lot of them also help the firms growth by providing capital and management guidance. There are different stages in a company's lifecycle at which a PE firm can enter and different outcomes. A lot of PE is in doing the complete opposite of what you suggest; the focus is on improving the business and increasing cash flow while removing any obvious inefficiencies.
The PE funds you describe are only a portion of the many PE strategies. Some take over well managed family owned companies where the family wants out; other acquire parts of larger groups that are being sold off because the current owner needs cash to invest somewhere else; in many cases PE funds come in to provide the cash needed for massive international expansion etc etc. The vulture/turnaround funds you describe certainly exist, and give the acquired company some hope of survival (usually, at least initially, with massive cost cutting). The fact that all these are leveraged investments (some less than others) means that a negative turn in the economy can have a massive negative impact in the ability of the company to cover their debt obligation, hence the bankruptcy.
They plump up the turkey, borrow against it, and spread the losses across the market.
The original lenders benefit as they offload poorly underwritten debt. The owners of the distressed asset benefit because they get something. The people orchestrating the turnaround win via fees, etc.
As long term GDP growth rates decline due to demographics, an economy becomes less able to service debt. In order to keep systemic risk constant, use of leverage should decrease, not increase. Something doesn't add up.
No in fact it is precisely the opposite. As GDP growth declines, there is more accumulated investment savings (supply glut of capital) chasing fewer high-returning investments. The savings has to go somewhere, and often it goes into high-yield debt (exactly the type private equity issues). Low growth translates into the increased use of credit.
That would seem to increase risk of loss system-wide though.
I'm not arguing what you're saying is untrue as that appears to be what is happening. I'm arguing this behavior is irrational. If investment opportunities decline, investment should decline and sitting on savings should increase.
Unless you literally put your cash under a mattress, savings _is_ investment (e.g. bank deposit being lent out, money market funds invested in corporate paper, Treasury holdings, etc.). The savings is always "held" (invested) in some form of an asset, not cash under the mattress.
When you make raising debt cheaper than selling equity, and central banks print endless money making servicing such debt even cheaper, why bother doing anything else?
They all seem to have decided on a "market expansion at the expense of brand dilution" strategy. Ditto most of the formerly-consistently-good clothing brands. I'm not really sure which stores/brands replace the ones that have done this, these days.
[EDIT] I suspect part of this is because the cost of actually-good clothes hasn't dropped like shitty-clothes costs have, because (this is further speculation on my part) a good bit of the "savings" from internationalization, by the time it reaches consumers, is actually making many categories of goods worse and eliminating mid-tier stuff (formerly bottom-tier) outright so the gulf between lower-end luxury (paying for quality, not name) and plain ol' low-end has grown, putting pressure on luxury brands to cut prices... but they can't with their current products, because internationalization hasn't actually dropped the price of producing decent goods by very much, so instead they cut quality.
Yeah. It's not just department stores--which I have less direct experience with. A lot of the old line "mail order" outfits like LL Bean, J Crew, Lands' End, etc. (as well as many of the at least semi-premium outdoor clothing/gear/etc. brands) are much more of a both quality and customer service crapshoot than they once were.
At the risk of painting with an overly broad brush, when everything is made in the same, mostly Far East, factories and has to compete with essentially disposable clothing at some level, it all starts to look more or less the same.
I used to be an Eddie Bauer guy. Shirts, shoes, shorts, jeans, coats, you name it. Spent a good chunk of change at their mall store where you could try stuff on. Overtime, the fabrics got thinner on shirts and jeans. They stopped stocking my size in store. Stuff started wearing out quicker. I tried to order online, but the order fulfillment was hit and miss. Too bad for them...
I still mostly buy clothes at Eddie Bauer online - while there is a hit and miss occasionally, they have mostly consistent quality and sizing, and it’s easy to pass on inferior items by reading reviews. Easy return policy also makes it risk-free. They also have constant sales.
I bought an old Eddie Bauer Explorer model - had no idea who the guy was, but I ran the car for a while and then sold it to someone who paid me almost 30% above the asking price, because he really wanted the Eddie Bauer model.
I ordered stuff from Banana Republic Factory about a year ago. I was on their email list, saw something I liked in the ad, clicked on it, bought it. It was on sale, a shirt for like $30. I had good experiences with stuff I bought from them in an actual store years prior.
The shirt came, and it was synthetic blend of polyester IIRC- the shirt felt like wearing a garbage bag, but much worse was that the fabric was so thin that you could see through it. I had a white shirt with a light logo on it of a tech company, and you could clearly read the logo through the shirt- and even with a plain white tee on you could clearly see where the sleeve ended on the undershirt- this was something I would have expected to see in the bargain bin of a Walmart for less than $10, not for $30 (which was the sale price) from a reputable brand.
What's worse- is they wouldn't even take it back without a fee of $6- I don't live near a Factory store, and a regular Banana Republic wouldn't take it back. I told the CS rep that they should be embarrassed for even selling something of such low quality, and to not take it back is just appalling. She didn't care, and that's the last I have ever ordered from BR online.
Most brand's factory stores use different production factories or textiles than the non-factory stores. J Crew Factory and Brooks Brothers Factory stores are mostly garbage produced by the same designers but at much lower cost than their mall stores. I would recommend avoiding them unless you're looking for something disposable.
The original Banana Republic was sort of a fun, funky thing in the day of mail order catalogs. At some point, they morphed into something that always seemed pretty bland and generic. But I'm not surprised they may have gone downhill even further.
TBH, I buy very few clothes these days as I'm mostly either WFH or (normally) traveling--where I'm mostly a very light packer. I'm sure I have tons of perfectly clothes in my closets I haven't worn in years and that's with pruning.
You'd be surprised. The cost of rubbish clothing has fallen, but then the cost of very reasonable mid-quality has dramatically fallen. I used to buy Levis, then Gap for mid range. Now, I get the same quality (and literally the same factory) jeans from Joe Fresh, for 1/4th to 1/5th of the price.
Suit shirts are the same. An online tailor I've been using for a decade sells shirts at half the price of Banana Republic (comparing to Canada), but mine are bespoke, perfectly fitted, and I can make choices from a website. To wit, I've stopped buying shirts in stores and now just use their service... since 2008. To make matters worse for retailers, his quality has improved at the price point.
As someone who knows very little about the fashion business--though I have had tailored clothing made--I'm a little surprised that more of a market for bespoke online ordering hasn't developed. Sure, you'll "never" get to the level of an in-person tailor with multiple fittings. But one would think that there would be a fair number of people willing to pay something of a premium for at least roughly customized clothing. I know that exists for shirts but, as I recall from when I used to buy more business casual, it was still a very big premium over buying stuff that fit me reasonably from Lands' End.
Online tailors have solved that by partnering/paying for local alterations. They come into town X times per year (4-5?) for those who want the ongoing bespoke relationship. Then, when your clothes arrive, you can take them to a tailor to have them altered if necessary - paid for by the tailor, and your details updated, paid for by the tailor.
Every men's shirt on JoeFresh.com is either $24 or $29. What Gap do you shop at where prices are 4 or 5x higher? I'd use jeans for a comparison but they aren't on the web site.
Joe is frequently $15. Further, it's frequently 20% off at that point. But from a jeans perspective Gap jeans are $79, and the pair I'm wearing where $20. In January I paid $35 for two.
Comparing the ladies' t-shirts you can get at Gap or even their more-expensive sibling Banana Republic with ones I bought in the late 90s is amazing. I’m still wearing two old ones around the house, occasionally having to restitch a section of the bottom hems, but I’ve not been able to find any ribbed cotton fabric women's tops that come close to the thickness and durability in the past 10-15 years. The old Gap shirt I’m wearing right now was made in the Philippines around 1996 - I wore it in my school picture that year!
I even have an Old Navy t-shirt from around 2000 that is far sturdier than any current men’s t-shirts (which are still usually sturdier fabric than women’s), and by that point, they were already the discount sibling to Gap.
Every shopping mall, even ones in the middle of nowhere in Bumfucktown has a Macy's and a Victoria's secret. None of those two companies look like they are on a sustainable trajectory.
With gig work and the internet, you can find a tailor or contact someone on Etsy for less than a boutique experience.
Off the rack is globally commoditized now, so you're paying for a trendy location, labels, personal shoppers, or design IP. If those things don't matter to you...
> There used to be a clear difference between the look of clothes at different retailers but not as much anymore.
That's because nearly all the brands sold at places like NM have outsourced manufacturing to the same 3rd rate factories in Asia and Latin America and are riding on a name and those names these days command less premium than Supreme.
There's also been a huge trend reversal on "conspicuous consumption". Even the wealthy now do their wealth-signaling through minimalism, instead of flash and excess. Self-proclaimed "luxury brands" have a dwindling market.
> Self-proclaimed "luxury brands" have a dwindling market.
There's no evidence that supports that as a comprehensive statement. It very much varies from brand to brand and situation to situation.
The king of luxury, Bernard Arnault (LVMH), recently became one of the richest people on the planet (current net worth of $76 billion) because luxury has been massively expansive over the past decade. His wealth increased four fold over eight years up to the pandemic.
Another person in the same luxury boat as Arnault is Francois Pinault. $31 billion net worth. His wealth also increased four fold in roughly eight years, from $11b to $43b, up to the pandemic. Don't tell these people luxury is dwindling - their outcomes indicate it has boomed.
Ferrari's business has doubled in size and they have a market cap higher than Ford or GM because luxury has done so extraordinarily well over the last decade. Their stock hasn't crashed during the pandemic, unlike most auto stocks. Do you know why? The luxury buyers are not hurting like everyone else is (thus far). Times are good for Ferrari.
So what situations are causing this? China for one. And more broadly, the emergence of greater wealth all around the world, rather than it mostly being contained to the well-established developed nations of the post WW2 era. That global wealth increase is not matched by there being a lot more high-end luxury goods makers like Ferrari or LVMH, so the result is they've spent most of the past decade dealing with more business than they can easily keep up with.
While NM sold the likes of LVMH here it mostly made money by selling comfortable middle market rather than the top tier luxury because of the buying agreements:
The way the buying is structured, retailers cannot complete with flagships of the luxury brands they carry within a certain distance which means that the stored NYC, LA, Boston, SF, Miami which should be the most profitable can't carry the hot items of the seasons if the flagships carry them. Since flagships are not just retail but marketing and demo stores flagships always carry all the hot items.
The mid-tier market outsourced manufacturing to the same factories that at best create wear it a couple of times before it falls apart products while charging 3x-10x of the likes of Zara. That market has been shrinking for years as the likes of Zara, H&M and others cleaned up the lower end and started moving up.
Also the lion's share of luxury growth is coming from outside of the US, namely from Asia which is not accessible to NM.
> So what situations are causing this? China for one.
I think this is a key point. I was really just talking about America, where many people have rebounded from that sort of thing after embracing it 20-30 years ago. For China, traditional signals of wealth are still new and novel. People aren't sick of it yet.
I went in a Neiman Marcus a few months ago and was struck by how much they seemed to be selling "luxury". Like luxury apartments or Las Vegas facades, it all seemed like shoddy but shiny. I was asking people who their target consumer is and there really wasn't an answer. I didn't recognize any but a few of the brands and most of them seemed like they'd been invented for a thirty second scene in a TV show.
Exactly. People 20-30 years ago ate that stuff up; these days I think most people see it as garish and tacky.
Wealth signaling absolutely still happens, but today the facades it tends to orbit around involve words like "minimal", "natural", "open", "honest". Organic groceries, modernist houses, meditation retreats to exotic places, environmentally-friendly vehicles, freedom from clutter and complication. These, sadly, are unattainable for many people. And so of course, brands have co-opted and packaged up that fact to be sold as a set of signals that make people feel good about themselves in comparison to others.
I grew up in the south bay, around the early-googler generation of nouveau-wealth. I assumed the kind of wealth signalling typical then was normal. In my experience, fancy clothes were very abnormal and got you the wrong kind of looks. People liked to live in very nice houses on expensive land, but flaunting your wealth beyond that (and maybe your fast car) was generally looked down upon. Porsches were seen as a mid-life-crisis kinda thing.
I moved to NYC for after high school, and was incredibly shocked to see people actually wearing Gucci, Louis Vuitton, and not feeling self-conscious but rather better for it. I was likewise shocked to see how expensive the trendy secondhand stores were, again compared to the bay area. It all seemed designed so that, if you saw someone dressed in a certain style of clothing (either "boho-chic" or fancy brands), you could be safely confident they were rich.
I used to be repulsed and holier-than-thou about this kind of thing. But now, when I go back to the valley to visit my parents, I recognize the same things flourishing there, where I naively thought the "humble Californian spirit" wouldn't allow them to take root. It's been kind of sad to see the Santana Row-ification of the south bay take place during my lifetime, but everything moves in cycles, I suppose.
Does this match anyone else's experience? Is there a place where humility has survived as a popularly-held virtue, even in the face of not-atypical wealth/abundance?
Also grew up in the Bay. The peninsula and the South Bay are the epicenter of the Facebook, Google, and Apple wealth. As these companies have flourished, the surrounding area has become extremely flush with wealth. It was only a matter of time before the materialism that has been seen in LA and NYC set in as the Bay is in its heyday. If you're looking for humility, you'll find it centered around UC Berkeley and Oakland, as opposed to Stanford. The dichotomy between the two prestigious Bay universities is clear and they are the centers of the differences between the portions of the Bay. It's reflected by the types of students that attend and people drawn to the surrounding areas.
I was going to say the "humility" went north to SF, that's when SOMA became big and SF went from a banking center with a hippy fringe to a software center with a hipster fringe. Through it all, the old money has lived on Nob hill and shopped at Union Square (the local Nieman Marcus), but look at the gentrification of everything else. The sense of style and fashion of the newly-rich in SF drove the hipster look, which had its own issues but least it was nominally independent and not all about buying flashy brands at stores.
I do love the Stanford campus and Palo Alto downtown, but I do think they were marred by the big money. For example, Stanford literally has a luxury fashion mall (probably with a Nieman Marcus store) on campus (and it probably is the most profitable part of the endowment). As for Sunnyvale-Santa Clara-San Jose, they just chose the suburban sprawl development when the money rolled in.
I grew up in an eichler neighborhood same time as you where one out of five households bought the gen 2 Prius. That was virtue signaling.
I caught wind of some tech youtube vlog drama this week and I noticed that the newer generations view FAANG like some viewed Wall St. in the 80’s. The sorting hat for riches changes the gnomish wonder years of the Valley for sure. Also, the open air elitism is just plain tawdry now.
I would say San Diego has the closest look and feel to the South Bay when we grew up. Hard tech in the bio and life sciences provides an educational attainment culture and not so much cash chasing.
ha! I forgot about how big a deal the priuses were back then. Remember the whale-tail license plates? https://www.sgvtribune.com/2017/09/22/after-20-years-califor... If you sat on a busy suburban corner, you'd find 1 in 5 cars to be a particular-color prius with a whale tail. :)
I also totally agree that it's mostly the newcomers' barefaced pursuit of wealth and becoming "elite", that's driving this shift. People used to want to move to the bay because that's where UNIX geeks and internet enthusiasts went to find like-minded individuals (after Bell's decline) and get funding. Now it's where the aspiring class goes to join the top 10%, and the goods and services cater to it.
Last time I went back (immediately before the whole COVID situation), my SO and I did a road trip from LA to Sacramento, staying mostly with family along the way. We found San Luis Obispo and the various towns between it and Santa Barbara to be varied and delightful (Los Osos, Solvang, Avila & Shell Beach). Cambria also seemed nice, but we blazed through it. The little communities west a north of Santa Cruz, in the mountains also have a special place in my heart. Next time we're back, I'll try to visit SD.
However, I can't help but notice that all of these towns are smaller and much less of a mixing pot than the greater San Jose area, though. I thought one of the coolest parts of my early life was how it was extremely normal to be surrounded by people of diverse socioeconomic and ethnic backgrounds (I went to a public school), and also how normal it was to dream big (social mobility was all around you). Maybe it's a time and place thing, and it doesn't come together very often.
If you liked those small towns, I recommend walking/biking in Ojai. There's something special about it, which is hard to describe. It's one of my favorite places on Earth (yes, it could be the time and place thing).
Thank you for the suggestion, I've bookmarked it for the next time we're down there. Seems like the greater foothills of Los Padres National Forest is a favorable environment for the congregation of these great towns. :)
Bay area people value signal, if anything, more, but just in different ways. Not to distill it too much, but generally through social media posts about experiences, social issue positions, and "genuine"-ness.
>I went in a Neiman Marcus [. . .] I was asking people who their target consumer is [. . .]
This strikes me as hilarious for some reason. I'm not trying to be difficult, but did you honestly think anyone working on the salesfloor of the store to know what their target consumer was? That is a corporate strategy. In the store, their target is whoever comes in the door. They don't set style, they don't buy trends or fashions, they just put it on a shelf.
Many people on the store floor are primarily salespeople. They may not know the corporate strategy, but they know who comes in and what it takes to sell something to them.
Do the numbers reflect this? I'm just looking at the stock prices of a few luxury companies like LVMH and and Kering and it seems they were are at all time highs prior to COVID.
It might be because of China and the Chinese market/customers. It's only anecdotal, but last October I got to visit Vienna for one day (I live in Europe) and I was surprised to see a a lengthy queue outside the Louis Vuitton store close to the St. Stephen's Cathedral. First, I was surprised because I couldn't understand why would anyone still wait in that sort of queue for something to purchase in this day and age (when everything it's at a few clicks distance), and second I was also a little surprised by the fact that about 75% of the people waiting in that queue were of Asian origin, most probably Chinese.
These people are probably wealthy enough not to care but if I were buying a $5000 purse I'd want to do it in person, like I'd test drive a car before I bought it.
Also if I were traveling on vacation, ordering online and shipping to my hotel would not be my first choice.
Go to Vegas and there are whole shopping malls where, to indulge in just a degree of hyperbole, I'd have to look hard to find something I could afford. Or at least would even consider affording.
> Go to Vegas and there are whole shopping malls where, to indulge in just a degree of hyperbole, I'd have to look hard to find something I could afford. Or at least would even consider affording.
IIRC, Americans don't really shop at those stores. Their costumers are mainly foreign nouveau rich people.
It's on the upswing among the youth. I'm seeing a lot more plain black hoodies with BALENCIAGA screen printed across the front. Gucci and versace have seen a resurgence, even their rubber slides which are probably less comfortable than a $15 pair are coveted and featured in music videos. Dressing nicely to some might mean a gaudy branded t shirt under a blazer, percieved by the wearer as passable for nice attire due to the three figure price tag, but really it's the same material as the $5 undershirt I have under my button down.
To be fair, the materials and labor used by high end brands (at least the ones you mentioned) are different from cheap brands. Most of the labor is Italian or Portuguese, and those workers get a paid month off every year in addition to benefits, even if they aren't highly paid. Likewise, the materials they use are generally higher quality and are sourced more carefully. High end brands also do a shitload of QC.
I'm not a fan of $100 t-shirts but there is absolutely a difference including much fairer practices in how the garment is manufactured.
Even that depends now. For awhile there was a strategy for diffusion lines where brands would sell cheaper goods under a slightly different label. Think Burberry Brit, Versace Collection, or Polo Ralph Lauren.
Nowadays the trend is to put everything under the mainline brand, which I find kind of deceptive. You really have to check garment quality and price for everything.
Sometimes I can tell. Usually you get better detailing with the expensive stuff, in the same way that you get nicer interiors on a Lexus than a Toyota.
Granted the difference in quality is definitely not worth the difference in cost (like many luxury goods you'll end up paying 5x in price for what feels like a 1.2x improvement in quality).
I recently replaced 20 or so $10 target shirts with a handful of $60 shirts from Nordstrom (NM sells them too) and they're much more comfortable, hold up better in the wash too.
Absolutely not, that's why I'm questioning why any of these are being described here as "luxury brands." A t-shirt from a luxury brand could cost several hundred dollars, none of these stores carry anything like that. This is all shopping mall grade.
Someone out there is wearing haute couture hand-sewn by artisans. Your hundred dollar shirt is laughable to that tier. But for the majority of the world, I think Nordstrom would largely count as "luxury"
The idea of "fast fashion" is noxious! All those faddish things worn for a season then to take up space in landfills. I don't think I've found affordable clothes made to last anymore (a good quality wool sweater, maybe?) I can't remember when was the last time I was at the mall, or what was the last thing I reallyreally like to buy to wear.
I don't think quality clothing has ever been cheap. Fabrics like wool and silk are still not cheap and definitely can't be found at a fast fashion store.
Another key difference between fast fashion and expensive clothing is simplification of pattern-making.
I'm not glad these stores are doing bad, but I just never understood how a pair of sneakers can cost $700 - $900 when I can buy a decent laptop with that kind of money.
Conspicuous consumption. The price is the point. It’s a signaling thing. In the case of something like sneakers with a big brand logo on them, it’s likely someone “low” trying to signal to their peers that they’ve made it (whether they have or not). See: Fussell’s Class, or The Official Preppy Handbook for signaling rules specific to the upper-middle and upper classes (very expensive sneakers with swooshes: big no. Somewhat expensive tennis shoes with wear patterns from serving: yes)
It reminded me a Russian anecdote about so called newly rich Russian businessmen. For those the whole life was constant signaling.
One newly rich Russian shows another a tie he bought a minute ago for 3000 USD. That guy replied, “This is stupid. You had to go to the shop over there. They sell the same tie for 5000 USD”.
Haha I will try to find a copy. Anecdotally, the goods I saw were far from conspicuous. They all looked straight out of some music videos (heard of the "Ugly" shoes?).
As long as the intended audience recognizes them, they’re doing their job.
There is also a significant subculture or sneaker collectors who buy them like someone might a rare run of “collectible” action figures, where rareness is all that matters over the value of the item per se. Some crazy-seeming sneaker prices are just companies catering to that market. Of course there’s overlap and symbiosis with the signaling crowd, too.
Some of it (and Class) is just plain good advice. Prefer nice clothes/things, but use the hell out of them and don’t be afraid to repair them. Don’t comment on how nice something someone bought is (this middle-class habit seems really weird after having it pointed out). Avoid “collectibles” and for god’s sake don’t think of them as an investment. That sort of thing.
I wore my copy out actually. That book single handily was responsible for my brief infatuated phase for wearing polos and no-sock penny-loafers while sporting a locust valley lockjaw. I'm laughing about it as I write this...
Hey now, loafers may be the best daily-wear shoe, and being socks-optional for popping over to the coffee shop or out on a quick errand is no small part of that :-)
But yeah, the book’s full of actually-decent fashion advice as long as you avoid the jokes (you can, in fact, wear polos with a button fastened) and are careful not to fall into affectation (probably avoid Nantucket reds if you’re not part of that set, for example) or it’s easy to accidentally become a walking parody. Fine line, hahaha.
TBH, I still probably naturally gravitate towards polos or button-downs, khakis, boating shoes, etc. It's really only been in the past few years (when I still traveled, sigh) that I began deliberately dressing down a bit at certain types of events, at least some of the time, because I wasn't dressed "right" for the event.
Oof, yeah, even worse. $390 for sneakers with “BURBERRY” in huge letters all the way down the side (just checked the price). Even more for shoes that must be expensive because they’re so goddamn ugly, impractical, and flashy. You can get custom-made oxfords for the price of some of these. Pure signaling for an audience that thinks in prices first.
I can't tell what kind of point you're trying to make. A $700 laptop is generally about specs and performance, and that level of hardware performance becomes cheaper every year. This is not true of $700 sneakers.
$700 sneakers, probably marked up too much for the brand, but $300 sneakers are reasonable if you want minimally branded leather sneakers with high quality construction. If you don't care for that kind of stuff though then that's cool, but that's personal preference.
I can almost hear it: Where oh where will I buy a fluorescent fuchsia sports coat for $8000 now?
Amazon and similar are no good for luxury goods because of the lack of service that luxury shoppers expect. Perhaps they need to shift to an online-first model with video-conferenced personal shoppers who can browse store-like inventory while serving qualified shoppers who can concurrently navigate their wardrobe?
Personally, I like Neimy's, but not as a go-to retailer but as a once-every-twenty-years-buy-something-nice-and-crazy; their service is/was fantastic, they know their products/fashion, and their employees aren't/weren't like standard American retail salespeople. Ordinarily, I go to Salvation Army and Goodwill for outer clothing only, and eBay for new-but-discontinued b-stock or liquidated inventory of other clothing that I can no longer find.
I hope individuals and businesses start saving again. When I was a kid, everyone saved money. We spent it too, but we all saved for rainy days. Maybe that idea will make a come back now. Be prepared. You never know what may happen.
There is no incentive (for businesses) with bailouts though. You can't buy out your competitor during a downturn because the government bailout to your competitor is already in the mail. We don't see the airlines that saved for a rainy day going out and buying out the ones that have no cash reserve, because the latter were bailed out. So then the industry as a whole decides not to save because they know the bailout will be there.
We need some kind of law where if you take a bailout you give the Fed a controlling interest, you have something like 60 or 90 days to buy that interest back by repaying the bailout. After that other entities have the right to purchase that controlling interest and then they now own you.
The tax code actively discourages savings for a corporation. If a company wants to make 5% on a relatively safe investment, they have to pay the corporate tax rate first, then invest the money. If instead they calculate a business expansion can bring them 5%, they can hire new employees/buy a business and not pay that tax and still get the 5%.
All savings are someone else's debt, as a matter of accounting definition.
In some ways we are seeing a "savings glut", which is why interest rates are so low, but those savings are overwhelmingly from the minority of mega-rich.
If the public start saving en masse, and not in equity but just banking, interest rates will have to go negative, at which point people will really question why they should be doing it.
Yes. We should not go over board. Keep spending and supporting local businesses, but save some too. Say 15% of your earnings. Put it in the bank.
I remember when my wife tried to get a credit card right after we got married. She could not get one. Back then, there was only Visa and Mastercard. Then Discover card came out and she was able to get one with a very low limit. She used that to build her credit over the years. Today, the grand kids get card offers in the mail several times a month. We need to be somewhere in the middle and not at either extreme.
That's partially because photos used to be rarer. So either the subjects were richer to have access to photos, or the subjects dressed their best when getting their photographs taken.
Better materials, the basic ingredients, generally increases the price (cloth from quality fabric mills, finer wools, nice dyes, shell buttons, leather, etc...). And the cut matters, to pay for a tailored shirt in England or Italy will cost you -- that is, the labor, design, and construction.
Sure, a high price tag does not necessarily imply quality -- but let's not be fools about the matter.
I'd been to the Neiman Marcus in SF maybe.... once a year when in lived in SF. And a few times in Newport Beach over the last 20 years. I've never seen more than a few people per floor.
It's not surprising to me they are going under. I don't know who their market was. It was all very high end. But, seeing almost no one in those giant stores always seemed like the end was near.
They just opened a huge new store at Hudson Yards in NYC. I’m sure lack of foreign rich tourists(mainly rich Chinese) during COVID months must have hurt them big time as well.
The definition of luxury has changed. It's now more about value, utility, and stability. Luxury means owning property in a high-end location, a MacBook Pro, fast optical networks, clean drinking water, and a reliable car.
that's... a sweeping statement without much evidence beyond your personal experience.
do you really think that people buying Saint Laurent jeans last year are now worried about "fast optical networks, clean drinking water, and a reliable car"?
There are few more expensive laptops so I'd say so. The 16-inch 2019 MacBook Pro starts at $2400 and you only get a 512 GB SSD for this price. Apple itself is more of a premium brand.
Prof G had mentioned that Nordstroms could be in a position to be acquired by Amazon back when he made the Wholefoods acquisition prediction. I wonder how their books are fairing these days
One sequence showed the CEO giving a pep talk to his buyers, whose relationship with their suppliers was always strained at best. He told a joke about a buyer who called his supplier that went something like:
Buyer: "Hello, is Fred Jones there?"
Receptionist: "I'm sorry, Mr. Jones passed away last month"
Buyer: "Oh, sorry to hear that, goodbye."
Ten minutes later:
Buyer: "Hello, is Fred Jones there?"
Receptionist: "I told you, he died last month"
Buyer: "Oh, oh, yes. Goodbye."
Ten minutes later:
Buyer: "Hello, is Fred Jones there?"
Receptionist: "He's dead, why do you keep calling here?"
Buyer: "I just like hearing you say it"