Although private equity (PE) in India has barely been around for 20 years, many of us have already seen some of our favourite brands laid low by the combined incompetence of PE firms and the original owners of the franchise. Nirula’s in the NCR is one such example.
In this piece Joe Nocera describes how Stirling Investment Partners, a mid-market PE firm in the US, acquired, rapidly expanded and then oversaw the financial unravelling of Fairway “a treasured New York institution that was founded in 1933, had grown from one store on Manhattan’s Upper West Side to four stores [by 2007], three in New York City and one on Long Island. The stores were supermarket size, but they didn’t much resemble a Safeway or a Kroger. They were eclectic, with 50 brands of olive oil, dozens of varieties of olives, cheese, smoked salmon, imported beer and who knows what else. It was quintessential New York. On a per-square-foot basis, the four Fairways were among the highest grossing grocery stores in the country.”
The story begins on the usual note with the original owners looking to cash out: “Howie Glickberg, the grandson of the founder, was one of three partners who owned Fairway Market. The other two were ready to cash out, and others in management who held small equity stakes were looking for a payday. Glickberg needed to find a source of liquidity. Unfortunately for him, he found Sterling Investment Partners, a private equity firm based in Westport, Connecticut, that focuses on mid-market companies.”
Then comes the financial gearing: “In the ensuing buyout, Sterling put $150 million into the company in return for an 80% ownership stake. The majority of that was debt. Needless to say, the debt landed on Fairway’s books, not Sterling’s. Three Sterling partners, including cofounder Charles Santoro, joined the board. None of them had any grocery experience.”
Then comes the rapid expansion along expected lines: “Sterling had enormous ambitions for the company. Glickberg had envisioned expanding slowly, a store at a time. Santoro talked about turning Fairway into a national chain with hundreds of stores that would compete with Whole Foods and Trader Joe’s. Santoro did not respond to an email request for an interview.
By 2012, Fairway was up to 12 stores, including some in suburban New Jersey, where the company’s urban cachet didn’t necessarily translate. Most of this expansion was fuelled by yet more debt. Not surprisingly, the expansion eviscerated the company’s profits while adding millions more in debt to its balance sheet. By 2012, its debt burden had grown to more than $200 million, and it was losing more than $10 million a year.”
The next chapter of this familiar story is the IPO of the ailing company, something we are now accustomed to seeing in India (although we shall suppress the urge to name names), “Badly in need of cash, Sterling turned to the public markets. In April 2013, Fairway Group Holdings Corp., as the company was now called, went public at $13 a share, raising $177 million. Its prospectus said that the money would go toward “new store growth and other general corporate purposes.” But that wasn’t quite accurate; the prospectus showed that more than $80 million went to pay “dividends” to preferred shareholders i.e. Sterling Investment Partners. An additional $7.3 million went to management.”
Finally, comes the bankruptcy: “When Amazon Inc. bought Whole Foods, it meant that Fairway had a competitor with limitless cash. Fairway’s vaunted revenue-per-square-foot numbers dropped by a third. Cash flow was consistently negative. The stores looking increasingly shabby because the company couldn’t afford to keep them up. By 2016, saddled with $267 million in debt, Fairway filed for Chapter 11 bankruptcy protection. It hadn’t turned a quarterly profit the entire time it was a public company.” It took all of nine years to bankrupt a flourishing retailer in one of the most prosperous cities in the world at a time when interest rates were at a record low in the United States!
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
