Myth-busting this uneasy relationship between private equity and retail with Tom Trkla, Chairman and Chief Executive Officer of Brookwood Financial Partners LLC
The retail landscape has experienced a continuum of constant change for the past several years, earning the term “Retail Apocalypse” its own Wikipedia page. The future of brick and mortar retail seemed to hinge on whether they could survive the loss of market share to large e-commerce retailers and navigate their relationships with Private Equity.
By late 2019, consumer preferences had clearly changed as consumers exhibited a preference to shop from the comfort of their homes, at any time they liked. Choice, convenience, and control were the defining terms of the new “digital” customer.
The market conditions in play for retailers at the outset of 2020 continued to favor the shift to online retail and the steady pattern of retail bankruptcies served as the most obvious symptom of a systemic problem. The sudden impact of the Covid-19 pandemic shuttered brick and mortar retail in early March and accentuated the pain points of the entire retail industry.
A rocky few years in retail
There were 23 retail bankruptcies in 2019, up from 17 in 2018. The trend continued in 2020, with 14 firms filing for bankruptcy as of early June. Brands as varied as Barney’s, Charming Charlies, Payless Shoes Pier 1, True Religion, and Modell’s were impacted ahead of the COVID-19 outbreak. Since that time additional big names J. Crew, Nieman Marcus, J.C. Penney, and Tuesday Morning have filed.
Pre-Covid-19, critical industry voices targeted the impact of private equity investors on the retail industry. The easy, headline-grabbing story to create is that private equity invested in and took management control of many retailers and saddled the business with enormous debt to fund what used to be described as a leveraged buyout. Combining the burden of debt service with hefty management fees and incentive compensation structures skewed in favor of the investors, and it would seem logical to conclude that the cause and effect relationship of private equity was at the root of many publicized bankruptcies.
It's too easy to blame private equity for retail failures
But there is always another side to the story and that is what interested us in this topic. In some cases, private equity may have contributed to the hastening of the demise of some retailers in which they invested, but they shouldn’t be saddled with all the blame. My years in commercial bank lending remind me that both parties agreed to the financial agreements in place, with eyes wide open. One of the most uncomfortable conversations to have with a borrower when they are complaining about terms of a deal is to remind them “you signed the papers, didn’t you?” That said, doesn’t the retailer and its management team share responsibility with their private equity investors in its operating performance and eventual results?
The methodologies the private equity firms bring to growing retailers are intended to make operational improvements and ultimately help them grab market share vital to their success. Be as skeptical as you wish, but we should assume good intent on the part of private equity firms when the investment is made.
Researching this topic without bias, we discovered many voices, often the loudest, citing the role of private equity firms as they help with the struggles of retailers. However, the unavoidable truth is that many retailers were experiencing difficulty prior to the start of 2020, spawned through poorly defined brands, subpar inventory management, and the pressure of increasing rent, operational costs, and rising wages, all of which were accentuated by online competition. The introduction of Covid-19 into these already unstable circumstances didn’t directly trigger more bankruptcies — but accentuated the continuation of a trend established over recent years.
Myth-busting: Private Equity and Its Impact on Retail
Others have documented the role of private equity as is should play out, with key factors influencing a successful partnership. Experience in the sector is important and finding a firm that not only understands your brand, but the business you are in is a key to a successful partnership. As a retailer, we found that you should seek out a partner who can help you identify and build branding around what you want to be known for in the market. Whether it’s service, price, convenience, or a combination of the three, a private equity firm with seasoned executives on the team can help you find the best answers to these questions.
To better understand the perspectives of this conversation from the point of view from a private equity firm, we talked with Tom Trkla, Chairman and Chief Executive Officer of Brookwood Financial Partners, LLC (Brookwood). The company was focused as a private equity real estate company for over 20 years and smartly sold their entire real estate portfolio leading up the crash of 2008.
In 2015, Brookwood formed Yesway, a convenience store chain that has grown significantly through acquisition over the past 5 years and is now the #14 convenience store chain in the US based on locations. Mr. Trkla serves as the CEO of Yesway. The relationship between Brookwood and Yesway has been accretive to Yesway’s growth and financial results, in all senses of that word. Our brief interview with Mr. Trkla follows here:
Wise Marketer (WM): How did Brookwood make the initial decision to invest in the convenience and fuel channel and what can you share about your approach to that investment?
Tom Trkla (TT): The convenience retailing business had the right set of “skeletal bones” to support steady future growth. Historically, it has proven to be recession resistant and is a part of the daily life of many consumers and as has been proven during the pandemic, it is an essential business. At the worst, many convenience retailers experienced declines in inside store sales of between 10-25% and fuel volumes dropped by about 40%, but those numbers have rebounded dramatically since the early days of the pandemic. Sales in specific product categories (cigs, beer, lottery, and grocery items) have been strong and increasing. Over the past four years, Brookwood has invested over $450 Million in equity in Yesway. As we were growing the company, we adopted a strategy of equity before debt for the health of the business and our recent acquisition of the Allsup’s brand in Texas last November was the first time we employed debt in any meaningful way.
WM: Are the criticisms that private equity firms have taken relative to the fortunes of brick and mortar retail fair? Where did some of these relationships go wrong?
TT: There are well publicized statistics about there being over 1.3 million jobs lost by retailers with private equity as partners. There are a myriad of reasons that contribute to the losses, and in many cases the fundamental business had problems before the investment was made. To be sure, there have been instances in which private equity firms charged the retail companies in which they invested exorbitant “consulting “ or “administrative” fees, saddled the companies with too much debt, and also paid themselves special dividends, which resulted in decreased equity and increased risk in the business. In addition, most private equity funds have terms of seven to ten years and investment periods of only a couple of years. With so much money raised in the past decades by private equity firms, there is intense pressure to get the money out. While these factors have contributed to private equity’s maligned reputation when it comes to investing in retailers, I believe that the most significant reason that so many of the investments private equity has made in the retail sector have failed is that they simply made bad business decisions, primarily due to their inability to properly understand and anticipate the impact of Amazon and other online retailers.
WM: How has Brookwood done it differently?
TT: We take the approach that we are operators, not just investors or bankers. We look at the long term and resist the oft seen short term profit myopia. And, as I mentioned, we do not over lever the businesses in which we invest — as evidenced by our equity first approach in Yesway. Also, we will not pay the high multiples that have been characteristic of high profile acquisitions in the convenience industry over recent years.
WM: If you take a look into the future, what do you think will influence growth and success in convenience retail in the near term?
TT: A continuing focus on transforming the customer experience and embracing new technologies will be critical to continued success in convenience retailing. We are on a path to adding more speed and convenience to that experience in our Yesway and Allsup’s stores and the Covid-19 pandemic has certainly accelerated interest as an industry in creating a touchless purchasing experiences, online ordering, and curbside pickup. As an industry, we can learn a lot from other forms of retail as well. There will always be a bifurcation among convenience retailers in their adoption of technology. Some are more fearful of tech than others. Amazon Go is inspirational, but not for everyone. Considering adding something in the physical realm like a drive-thru could be another innovation helpful to future growth.
It is clear that labeling private equity firms as the villain in the current retail “apocalypse” is unfair. Then again, a broad label rarely paints an accurate picture of a situation. Each private equity firm has its unique perspective on investment and partnership, and Brookwood’s partnership with Yesway is a case worthy of study for any retailer considering outside investment. There are a host of meaningful benefits that private equity firms can provide beyond capital itself to make a significant impact on the retail industry.