News Journal: Toys ‘R’ Us, Sports Authority, PetSmart: How greed, short-term thinking destroyed jobs

Ted Kaufman is a former U.S. Senator from Delaware.

Back in the early 1960s when I was commuting by train to graduate school, I used to stare out the window at the miles of yards in Philadelphia that used to be American Coal and Ice, once one of the mightiest of American corporations. The empty, decaying buildings were a stark reminder of how easily great industries could be decimated by new technologies; in this case what the inventions of the refrigerator and non-coal burning heating units did to ice and coal delivery.
When I got off the train, at some point Wharton introduced me to the concept of “creative destruction.” In his 1942 book, Capitalism, Socialism and Democracy, Joseph Stumper described it as “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” He said that the essential “mutation” that was the key to this process was innovation.
Henry Ford putting horse-shoers out of business, computers making typewriters obsolete, emails making a huge dent in letter delivery by the post office — all are examples of innovation driving creative destruction. And unless you were shoeing horses, the benefits of creative destruction have always far outweighed its negative consequences.
Jobs are lost, but more are ultimately gained. Industries are destroyed, but new and larger ones are created. We all get bigger and better markets and products.
I believe in the benefits of capitalism, and there cannot be a free capitalist system without some creative destruction. But in the last 30 years or so the process has been corrupted.
I saw this first-hand a few years ago when I was invited to a meeting the News Journal editorial board had arranged with activist investor and corporate raider Nelson Peltz, along with several of his colleagues from Trian Fund management. At the time, Peltz was trying to take over DuPont. Although he was unsuccessful, his effort led to DuPont’s ultimate merger with Dow Chemical.
I listened to the Trian presentation. It was all about destruction, but there was no creativity involved and nothing of the Schumpeter concept of genuine innovation. I remember thinking it was like being in a butcher shop and listening to the man behind the counter discussing what cuts of meat the customer was interested in.
Peltz planned to cut DuPont’s Wilmington overhead by between $2 billion and $4 billion, resulting in a drastically reduced research and development budget and a huge reduction in jobs and benefits.

In the short term that can work, but what is the long-term future of a DuPont without its research and great employees?
That meeting came back to me when I read recently about the financial difficulties of Toys “R” Us, Sports Authority and PetSmart. Initially I thought the problem was the rise of Amazon. All three were box stores and targets for online giant Amazon.
That may be true, but there is a much larger story.
When I looked into what happened to these three companies, it sounded a lot like Peltz’s plan for DuPont.
All three were taken over by private equity firms that engineered a leveraged buyout, primarily paid for with billions in borrowed money that drove up costs. This was followed by bonuses to just about everyone from the incumbent management and the private equity firm.
With all the new costs, earnings crashed, new CEOs paraded through, and stores were closed.
All this destructive behavior added to the Amazon storm easily tipped all three into fatal financial difficulties.
Sports Authority threw in the towel and closed in in 2016. Toys “R” Us is liquidating its U.S. business. PetSmart, despite the fact that Americans have almost doubled their spending on their pets in the last 10 years, is in deep financial trouble.
I still believe Schumpeter was right about how an economy grows through creative destruction. Unfortunately, a lot of very smart folks who have no concerns about being either creative or innovative have often co-opted the process. They are simply interested in the destruction of companies through financial tricks that put money in their pockets and leave employees, and customers holding the bag.
We need to stop the kind of destruction that lines the pockets of a few, and return to the Schumpeter model of creative destruction that through innovation creates benefits for investors, employees and consumers.