I’m a bit late to discuss the bankruptcy, or more accurately, the second bankruptcy, of the well-loved New York City grocery chain, Fairway. As we’ll discuss, while some Fairway stores may continue under their current format, the suburban ones don’t appear to have a possible buyer in the wings and may be shuttered. And even for the New York City operations that are currently slated to remain under the Fairway banner, its workers, which many observers argue was part of the store’s appeal, are slated to lose union protection and face probable pay and benefit cuts, particularly cuts of their existing pensions.

Fairway was iconic enough to merit a New Yorker requiem by Adam Gopnik when the bankruptcy was official and the magazine has continued to chronicle what happens, with an insider update last week. Private equity maven Eileen Appelbaum made the sad demise of Fairway the centerpiece of a new piece in The Atlantic, demonstrating clearly that the chain’s slide into distress and failure was the direct result of too much debt in combination with misguided expansion plans.

Fairway was emblematic of an older, more egalitarian Manhattan, and it had adapted to the increasing affluence of the city until private equity started calling the shots. I moved to the Upper West Side in the early 1980s, right before it became a cool place to live. Back then, stooped, presumed Jewish old ladies were a common sight, particularly around Fairway’s shabby section of Broadway. The store had large crates of bargain-priced fruits and vegetables outside, and sawdust-strewn floors indoors. That Fairway always seemed chaotic, overcrowded, both with goods and with people, with the buzz of a bazaar, but the “we can’t be bothered with presentation” was deceptive. As Gopnik explained:

Fairway is one of those odd original New York institutions that grew up organically, on the sidewalk, unlike the Whole Foods and Trader Joe’s stores that have competed with it in recent years, which were dropped down on the street from a retail empire headquartered elsewhere. No less a magus of social history than Simon Schama once wrote of Fairway that if it were possible to award the congressional Medal of Honor to a food market, Fairway would already have won one for its service to appetite, and that its cheese department alone turned “Rabelaisian excess into a stationary New York festival of aroma, color and texture.” Born in the early nineteen-thirties as a fruit-and-vegetable stand on the Upper West Side, Fairway was originally the multi-generation property and obsession of the Glickberg family, starting as a more down-market variant of Zabar’s, which is still in business up the street. Fairway’s magic, as one of its former partners, Steven Jenkins, wrote in a lively and lovely memoir of his years there, “The Food Life,” lay in the juxtaposition of grungy, discount-minded practicality with genuinely inspired and discriminating product choices. The store, with its proudly garish packaging and bags and an elevator that bore a sign boasting of its bad functioning, is stuffed with the usual supermarket staples, but it also offers some of the finest of fine things in the city. The olive-oil counter alone is worth the price of admission: seven or eight styles—Spanish, Italian, and Greek—to sample, with sliced baguettes on hand, around which a father and daughter could arrange a weekly tasting, while a mother shuddered at the unsanitariness of it… The democratic energy of the place was so extraordinary that someone coming home to New York from a place like, say, Paris—where the division between the gastronomic and the generic, the élite and elementary is still strong—would be knocked sideways by the coexistence of those seemingly contradictory principles. As Jenkins wrote about his own emigration there, from a “classier” downtown boutique, “I had essentially been ripped from the urbane, everything-has-its-place, serene, haughty world of fancy food and thrust headlong into a peasant-like, sawdust-on-the-floor, ‘We’ll sell anything that sells’ commoners’ market.” That market engendered anecdotes. A friend remembered having been called away from her shopping cart the day before Thanksgiving and, wandering back into the store a few hours later, finding it still full, pushed and prodded like a bumper car among the throngs.

Fairway was also egalitarian on the managerial side. It was unionized, and not only provided health care but even a pension plan. The Fairway employees in the just-about-always busy Upper East Side store I later frequented were on the ball and usually good spirited.

Fairway had been losing money for some time and was rumored to be headed for a Chapter 7 bankruptcy, a liquidation. Even though the store’s owners opted instead for a Chapter 11, which in theory could also a leaner, meaner, probably smaller and less debt burdened Fairway to survive, that is not in the cards. Fairway stores are still open, but the most likely fate of five Manhattan stores and the Fairway warehouse is that they will be purchased by Shoprite, which among other things operates three Gourmet Garage stores in New York City. The fate of the stores outside Manhattan is under wraps.

So what dirty deeds did private equity do to Fairway? A retiring founder wanted to cash out in 2007 and a second of the three founders joined him. Sterling Ventures, a private equity firm that targets mid-sized and small companies, usually family owned, acquired a controlling stake.

Sterling both loaded the company with debt and went on an expansion binge. $87 million of the $137 million purchase price was borrowed, and Sterling had Fairway borrow even more between 2009 and 2012. By 2016, Fairway had 16 stores in the New York metro area, one of which it closed after a mere two years.

Eileen Appelbaum describes how the company started losing money in 2010 as a result of its debt load, but nevertheless managed to launch an IPO in 2013 based on the notion that Fairway could go national with 300 stores. But the IPO was yet another exercise in looting. Per Appelbaum:

Fairway went public at $13 a share, bringing in about $177 million ostensibly to the benefit of the grocery chain. Tucked away in the IPO filing, though, was a paragraph detailing how Sterling would be able to use the proceeds to pay itself a dividend of nearly $80 million. PitchBook, a highly regarded source of data on private equity, reports that Sterling investors also paid themselves and their management team an additional $17 million from Fairway’s funds.

Former Fairway employee Hannah Howard gave the insider’s view in New York Magazine:

“The beginning of the end started in 2007,” the employee says. “[Sterling] raped and pillaged the company.” They opened stores in “places they had no business opening,” and the urban idiosyncrasies didn’t quite translate in Stamford, Connecticut, or Nanuet, New York. Everyone seems to agree that Sterling was, at best, incompetent, or, at worst, outright evil. They simply “siphoned money out of the company and paid themselves,” says a source close to the firm, loading the company with an impossible amount of debt. (Bloomberg reports that Fairway’s “directors — a number of them Sterling executives — were paying themselves absurd amounts of money: $12.1 million in 2013, according to the company’s 2014 proxy.” Sterling co-founder Charles Santoro “took down $5.4 million that year.”) “They just spent money like drunken sailors,” says the corporate staffer, sacrificing the company and the employees whose life’s work was making it something truly special.

It didn’t help that Fairway was facing more competition from the likes of Trader Joes, Whole Foods, and Fresh Direct. I could see a decline in the busyness of my local Fairway when a Whole Foods opened a mere four minute walk away. The traffic largely rebounded, at least during my normal shopping hours, within a month or so. But who knows how much in revenues that Fairway lost, and whether that skewed towards high margin goods.

Sterling left the scene in 2016 but Fairway was no better served by its new owners. Fairway did emerge bankruptcy with less debt and with one-time debt investor, Blackstone’s GSO Partners, as owner of 45% of the equity. GSO sold it position to Goldman in 2018.

More important, new investors did not install better management. From Howard:

After Sterling left in 2016, the new regime proved equally disastrous. Kenneth Martindale, a director of the board, brought in his close friend Abel Porter to run Fairway as CEO, and another friend, Erwin Koenig, as the executive vice-president of sales and merchandising. “Ernie and Ken’s connection dates back to Pathmark and Rite Aid, and now GNC,” a corporate employee told me. “It’s interesting to see that all three companies have gone bankrupt. It’s a pattern; it’s not an accident.” It was Martindale’s wife, Sharon Aulicino, who oversaw a $2.5 million rebranding project. Among my former co-workers, Fairway’s 2018 “Place to Go Fooding” campaign was especially embarrassing. It was a far cry from the genuine passion for quality ingredients we had once worked hard to source, sell, and celebrate.

I remember those banners in the store. Gah. They had stereotypical smiley TV actor types stuffing their faces. You could only see generically what they were eating, like “sandwich” or at best “sandwich made from a baguette.” It felt really wrong in Manhattan, where locals have weight fetishes and diet neuroses. The photos by contrast looked like they belonged in an “all you can eat” buffet.

And not surprisingly, the numbers got uglier. From Appelbaum:

Despite ridding itself of $140 million of its loans in the bankruptcy process, Fairway soon found itself again loaded with debt and struggling to stay afloat. By 2019, its sales had grown to $643 million, but the burden of the leases on its stores and the interest payments on its debt led the grocer to lose a whopping $68.8 million. Late last month, with $227 million in debt and another $67 million in unfunded pension liabilities, Fairway again filed for bankruptcy.

Finally, Fairway proves Tolstoy to be wrong. Unhappy families, at least when made miserable by private equity, are considerably alike. Crushing debt loads, particularly for retailers, create vulnerability to economic downturns and deny businesses the cushion they need to make investments to adapt to changing tastes. And even in less inherently fragile industries, too much debt turbo charges private equity’s native short-termism, too often leading companies to cut costs and in so doing, alienate customers.

Appelbaum wants private equity to be forced to curb its company wrecking for fun and profit:

A lack of transparency disguises private equity’s role in the retail apocalypse. When General Motors in November 2018 decided to halt production at five North American plants and cut up to 15,000 jobs, Congress summoned the company’s CEO, Mary Barra, to answer for its decision. In contrast, few people outside finance know what Sterling or KKR or Blackstone is. Even after companies owned by private-equity firms go bankrupt, the investors suffer no public approbation or damage to their professional reputation. They can still raise money from pension funds and other institutional investors to buy out other companies under the guise of saving them…. If private-equity firms cannot be socially responsible stewards of capital, then Congress will need to act. One possible reform would involve fully taxing the advisory and other fees that private-equity investors extract from the companies they own. Another potential reform would impose restrictions on dividends paid out in the two years following a buyout. Since the current system allows private-equity firms to reap much of the positive gains from successful acquisitions, they could also be required to bear some of the liability for a company’s debt when the buyout ends in bankruptcy.

Elizabeth Warren has made a much more aggressive call for private equity to eat its bad cooking by ending limited liability for private equity bankruptcies and effectively putting the controlling persons of the private equity firms on the hook. The time is long overdue to put an end to private equity’s “Heads I win, tails you lose” deal.