WEBVTT 00:00:00.000 --> 00:00:01.520 okay I want you to close your eyes for a second 00:00:01.520 --> 00:00:04.099 let's let's go to a party all right I'm with 00:00:04.099 --> 00:00:07.440 you it's late 2018 we're in Santa Monica California 00:00:07.440 --> 00:00:10.580 the weather is you know perfect obviously of 00:00:10.580 --> 00:00:12.939 course it's Santa Monica and we are at a former 00:00:12.939 --> 00:00:15.660 Armani boutique now that alone tells you something 00:00:15.660 --> 00:00:18.809 about the real estate right mm -hmm Prime location, 00:00:19.050 --> 00:00:21.890 expensive vibe from the jump. Exactly. And it's 00:00:21.890 --> 00:00:25.410 the grand opening for a brand new, very exclusive 00:00:25.410 --> 00:00:29.170 luxury designer. His name is Bruno Palessi. Palessi. 00:00:29.170 --> 00:00:31.469 Okay, sounds Italian. Sounds fancy. It's all 00:00:31.469 --> 00:00:35.109 incredibly immaculate. We're talking gold mannequins, 00:00:35.229 --> 00:00:38.429 you know, angel statues, trays of champagne making 00:00:38.429 --> 00:00:40.929 the rounds every 30 seconds. The whole nine yards. 00:00:41.130 --> 00:00:44.380 The whole nine yards. And the guests. These are 00:00:44.380 --> 00:00:46.060 the people who are supposed to dictate taste. 00:00:46.960 --> 00:00:49.179 Influencers, fashionistas, that whole L .A. crowd. 00:00:49.420 --> 00:00:51.500 The people who claim they can spot the difference 00:00:51.500 --> 00:00:54.280 between Gucci and Prada from 50 paces away. Right. 00:00:54.340 --> 00:00:56.640 Or at least they project that they can. And they 00:00:56.640 --> 00:00:58.960 are trying on these shoes, these pumps, these 00:00:58.960 --> 00:01:01.320 really sleek heels. They're strutting up and 00:01:01.320 --> 00:01:03.340 down this little faux runway they've set up. 00:01:03.439 --> 00:01:06.019 And they are, I mean, they're losing their minds. 00:01:06.200 --> 00:01:07.989 They're eyeing it. They are completely buying 00:01:07.989 --> 00:01:09.750 it. You have footage of them telling the cameras 00:01:09.750 --> 00:01:12.349 the stitching is exquisite. And, oh, I'd pay 00:01:12.349 --> 00:01:15.549 $400, maybe $500 for these. Wow. They are buying 00:01:15.549 --> 00:01:18.150 the story. They are buying the whole Plessy vibe. 00:01:18.510 --> 00:01:20.609 Yeah. There's this one woman, she's holding up 00:01:20.609 --> 00:01:22.569 a sneaker, and she says, it's just so elegant 00:01:22.569 --> 00:01:26.069 and sophisticated. A sneaker! And then comes 00:01:26.069 --> 00:01:29.079 the big moment. The prestige, as they say in 00:01:29.079 --> 00:01:31.420 magic. Yeah. They go to ring up the sales. And 00:01:31.420 --> 00:01:34.299 the prestige is just a hammer blow. The sales 00:01:34.299 --> 00:01:36.299 team waits until they're at the register, credit 00:01:36.299 --> 00:01:38.540 card in hand, and says, actually, these aren't 00:01:38.540 --> 00:01:42.019 $600 shoes. They're... They're $20 shoes. Oh, 00:01:42.040 --> 00:01:44.680 the reveal. And this isn't Pellessi. It's Payless. 00:01:44.879 --> 00:01:47.200 The famous Pellessi experiment. I mean, it is 00:01:47.200 --> 00:01:50.060 probably the single most effective, most brutal 00:01:50.060 --> 00:01:52.920 piece of gotcha marketing from the last 20 years. 00:01:53.060 --> 00:01:55.620 It was incredible. It just completely exposed 00:01:55.620 --> 00:01:59.120 the psychology of brand perception versus. actual 00:01:59.120 --> 00:02:01.420 product value. It was so brutal. You can see 00:02:01.420 --> 00:02:03.840 the color literally drain from their faces in 00:02:03.840 --> 00:02:06.359 the video. But it raises this question that I've 00:02:06.359 --> 00:02:08.659 just been obsessing over while reading through 00:02:08.659 --> 00:02:11.400 all these documents. If the product was good 00:02:11.400 --> 00:02:14.400 enough to fool a so -called fashionista, why 00:02:14.400 --> 00:02:17.099 was the brand itself failing so badly? Because 00:02:17.099 --> 00:02:19.219 at the exact moment they were pulling this brilliant 00:02:19.219 --> 00:02:22.680 prank, the actual company was, you know, circling 00:02:22.680 --> 00:02:24.620 the drain. And that is the central tension of 00:02:24.620 --> 00:02:26.379 this whole story we're covering today. It's so 00:02:26.379 --> 00:02:28.000 easy to laugh at the influencers, right? Oh, 00:02:28.000 --> 00:02:30.830 yeah. But the stunt revealed this massive, massive 00:02:30.830 --> 00:02:35.270 disconnect. The shoes, they were fine. The brand, 00:02:35.389 --> 00:02:38.810 however, was toxic. So today we're doing a deep 00:02:38.810 --> 00:02:41.750 dive into Payless Shoe Source. And I know what 00:02:41.750 --> 00:02:43.409 you're probably thinking right now, looking at 00:02:43.409 --> 00:02:46.110 your phone like, Payless, really? The place that 00:02:46.110 --> 00:02:48.050 smelled like rubber and where my mom dragged 00:02:48.050 --> 00:02:50.509 me to buy Velcro sneakers before school started. 00:02:50.789 --> 00:02:54.030 Yes, that place. But if you look at this research 00:02:54.030 --> 00:02:56.409 deck we have here today, Payless isn't just a 00:02:56.409 --> 00:02:59.949 story about cheap shoes. It's really a masterclass 00:02:59.949 --> 00:03:02.689 in the entire history of modern American retail. 00:03:02.909 --> 00:03:04.990 It really is. It covers everything. Everything. 00:03:05.090 --> 00:03:07.569 The invention of self -service shopping, the 00:03:07.569 --> 00:03:10.030 rise of the massive corporate conglomerate, the 00:03:10.030 --> 00:03:12.889 absolute devastation caused by private equity 00:03:12.889 --> 00:03:16.129 and these leveraged buyouts. And then this bizarre 00:03:16.129 --> 00:03:18.909 zombie phase, which we have to get into, where 00:03:18.909 --> 00:03:22.189 the company completely dies in America, but somehow 00:03:22.189 --> 00:03:25.370 keeps on living in like. the Philippines and 00:03:25.370 --> 00:03:27.729 Latin America. It's a truly wild ride. It is. 00:03:27.750 --> 00:03:30.310 We go from this small family business in Kansas 00:03:30.310 --> 00:03:33.250 to a multi -billion dollar disaster involving 00:03:33.250 --> 00:03:35.229 some of the biggest banks in the world. So yeah, 00:03:35.289 --> 00:03:37.530 let's get into it. Let's dive in. Okay, so to 00:03:37.530 --> 00:03:39.449 really understand how big this thing got and 00:03:39.449 --> 00:03:41.650 just how far it fell, we have to rewind way back. 00:03:41.810 --> 00:03:44.750 We're going to Topeka, Kansas. The year is 1956. 00:03:45.229 --> 00:03:47.870 A very specific moment in the American economy. 00:03:48.810 --> 00:03:52.370 The post -war boom is in full swing. Consumption, 00:03:52.370 --> 00:03:54.250 you know, it's the engine of the entire country. 00:03:54.469 --> 00:03:57.629 And we meet these two cousins, Louis and Chelle 00:03:57.629 --> 00:03:59.949 Pozes. They have a company. Originally, it's 00:03:59.949 --> 00:04:02.610 called Payless National. And they have a problem. 00:04:03.110 --> 00:04:05.870 Or maybe more accurately, they see a problem 00:04:05.870 --> 00:04:08.310 with how everybody else is selling shoes. Yeah, 00:04:08.370 --> 00:04:10.400 they saw an inefficiency in the market. Paint 00:04:10.400 --> 00:04:13.039 that picture for us. What was the status quo 00:04:13.039 --> 00:04:16.660 of shoe shopping in the mid -50s? Because I think 00:04:16.660 --> 00:04:18.639 we really take for granted how we shop now. Oh, 00:04:18.639 --> 00:04:21.800 we absolutely do. If you walked into a shoe store 00:04:21.800 --> 00:04:26.959 in, say, 1955, it was what you'd call a gatekeeper 00:04:26.959 --> 00:04:29.160 experience. A gatekeeper experience, okay. You 00:04:29.160 --> 00:04:31.939 walked in, you sat on a stool, and a salesman, 00:04:32.019 --> 00:04:34.879 and it was almost always a man in a suit, would 00:04:34.879 --> 00:04:37.839 come over and measure your foot. with that metal 00:04:37.839 --> 00:04:39.920 brannock device right i remember those from when 00:04:39.920 --> 00:04:42.019 i was a kid you didn't browse you couldn't just 00:04:42.019 --> 00:04:44.279 wander the aisles and pick things up all the 00:04:44.279 --> 00:04:46.639 shoes were hidden away in the back room in the 00:04:46.639 --> 00:04:48.720 stock room so i couldn't just look around i'd 00:04:48.720 --> 00:04:50.579 have to what ask the guy i'm looking for a brown 00:04:50.579 --> 00:04:52.620 loafer and he just decides what he thinks i should 00:04:52.620 --> 00:04:55.620 see precisely it was a very high touch model 00:04:55.620 --> 00:04:59.800 but it was also incredibly high friction And 00:04:59.800 --> 00:05:02.399 from a business standpoint, it was really expensive. 00:05:02.639 --> 00:05:04.740 You needed a ton of staff. And they had to be 00:05:04.740 --> 00:05:07.000 trained, right? They had to be trained. A single 00:05:07.000 --> 00:05:09.839 transaction could take 30, 40 minutes because 00:05:09.839 --> 00:05:12.079 this one salesman is running back and forth, 00:05:12.100 --> 00:05:14.680 back and forth to the stockroom trying to find 00:05:14.680 --> 00:05:17.540 your size. Which means high labor costs. And 00:05:17.540 --> 00:05:19.860 high labor costs mean high prices. You're not 00:05:19.860 --> 00:05:21.199 just paying for the leather, you're paying for 00:05:21.199 --> 00:05:23.839 that guy's time. Exactly. So the Pozes cousins, 00:05:24.199 --> 00:05:26.379 they look at this model and then they look over 00:05:26.379 --> 00:05:28.060 at what's happening in grocery stores. Right. 00:05:28.480 --> 00:05:30.680 Supermarkets like Piggly Wiggly had already, 00:05:30.779 --> 00:05:33.540 you know, completely revolutionized food shopping 00:05:33.540 --> 00:05:36.540 by just letting people pick their own cans off 00:05:36.540 --> 00:05:39.620 the shelf. And the cousins think, why can't we 00:05:39.620 --> 00:05:42.000 do that with shoes? It seems so completely obvious 00:05:42.000 --> 00:05:44.220 now. Just put the shoes on the floor. But it 00:05:44.220 --> 00:05:46.259 was a radical disruption at the time. They moved 00:05:46.259 --> 00:05:49.160 the entire inventory from the back room out onto 00:05:49.160 --> 00:05:51.639 the sales floor. All the boxes. All the boxes. 00:05:51.660 --> 00:05:54.139 And they organized it by size, not by style, 00:05:54.240 --> 00:05:57.519 which is key. Ah, so you go to the size 8 aisle 00:05:57.519 --> 00:05:59.740 and all the size 8s are there. All of them. Yeah. 00:06:00.019 --> 00:06:02.819 This did two things immediately. One, it empowered 00:06:02.819 --> 00:06:06.040 the customer. You could try on 10 pairs in 10 00:06:06.040 --> 00:06:08.180 minutes without feeling guilty or having to wait 00:06:08.180 --> 00:06:10.620 for the clerk to come back. Right. But two. and 00:06:10.620 --> 00:06:13.379 this is the absolute key to their entire fortune, 00:06:13.600 --> 00:06:16.639 it completely decimated their labor costs. They 00:06:16.639 --> 00:06:18.800 didn't need the army of salesmen in suits anymore. 00:06:19.040 --> 00:06:21.019 They needed a cashier. That's pretty much it. 00:06:21.079 --> 00:06:22.980 And by stripping out that whole service layer, 00:06:23.180 --> 00:06:25.300 they could lower their price point aggressively. 00:06:25.639 --> 00:06:28.120 Hence the name, Payless. Hence the name. And 00:06:28.120 --> 00:06:30.000 the growth. I'm looking at the numbers in our 00:06:30.000 --> 00:06:33.220 documents here, and it was just explosive. They 00:06:33.220 --> 00:06:35.699 went from three stores to 103 stores between 00:06:35.699 --> 00:06:40.990 1956 and 1971. That's just... That's viral growth 00:06:40.990 --> 00:06:43.689 for a brick and mortar business in a pre -Internet 00:06:43.689 --> 00:06:45.350 era. It's almost unheard of. And they didn't 00:06:45.350 --> 00:06:46.970 just build them all from scratch, right? They 00:06:46.970 --> 00:06:49.069 were acquiring other companies. They did it through 00:06:49.069 --> 00:06:51.350 acquisition, too. Yeah. They bought the Hill 00:06:51.350 --> 00:06:53.649 Brothers Shoe Company in Kansas City, then another 00:06:53.649 --> 00:06:56.129 chain with the same name, confusingly, in St. 00:06:56.250 --> 00:06:59.199 Louis. And... The documents, they mention the 00:06:59.199 --> 00:07:01.560 aesthetic of these early stores. They call it, 00:07:01.579 --> 00:07:04.420 what is it, bare bones minimalism? Bare bones 00:07:04.420 --> 00:07:06.699 minimalism, which is, you know, a very polite 00:07:06.699 --> 00:07:08.839 business school way of saying it looked cheap. 00:07:08.939 --> 00:07:11.300 It looked really cheap. It was industrial. We're 00:07:11.300 --> 00:07:13.180 talking fluorescent tube lighting, metal racks, 00:07:13.459 --> 00:07:16.360 no carpets, concrete floors. But you have to 00:07:16.360 --> 00:07:18.819 understand the psychology of the bargain hunter. 00:07:19.379 --> 00:07:23.220 If the store looks too nice, like that fake Polessi 00:07:23.220 --> 00:07:26.379 store we were talking about. the customer instinctively 00:07:26.379 --> 00:07:28.300 assumes they're paying for the chandelier. Right. 00:07:28.420 --> 00:07:31.000 My money is going to this fancy decor. Exactly. 00:07:31.180 --> 00:07:34.759 But when you walk into a store with bare bones 00:07:34.759 --> 00:07:38.240 minimalism, the environment itself signals value. 00:07:38.750 --> 00:07:40.750 It tells you we aren't wasting a dime of your 00:07:40.750 --> 00:07:43.490 money on decor. It's all going into the low price. 00:07:43.670 --> 00:07:45.730 That is a fantastic point. The ugliness is a 00:07:45.730 --> 00:07:47.670 feature, not a bug. It actually builds trust 00:07:47.670 --> 00:07:49.269 that the price you're seeing is the absolute 00:07:49.269 --> 00:07:52.110 bottom dollar. It absolutely does. Speaking of 00:07:52.110 --> 00:07:54.050 price, we have to talk about the slogan from 00:07:54.050 --> 00:07:56.829 this early era. It's a classic. Two for five 00:07:56.829 --> 00:07:59.720 men alive. A classic. Two for five man alive. 00:07:59.959 --> 00:08:02.980 I love it. And it referred to the fact that women's 00:08:02.980 --> 00:08:05.160 and children's shoes were literally selling for 00:08:05.160 --> 00:08:08.040 two pairs for five dollars. Two pairs for five 00:08:08.040 --> 00:08:10.480 dollars. I mean, even adjusting for inflation, 00:08:10.579 --> 00:08:13.259 that is aggressively, aggressively cheap. How 00:08:13.259 --> 00:08:15.759 were they possibly making money? Was the quality 00:08:15.759 --> 00:08:19.459 just abysmal? The quality was functional. Let's 00:08:19.459 --> 00:08:21.660 call it functional. But the margin came from 00:08:21.660 --> 00:08:25.699 pure, unadulterated volume. By selling thousands 00:08:25.699 --> 00:08:27.920 and thousands of units with minimal overhead, 00:08:28.259 --> 00:08:31.079 they could scrape a tiny profit off every single 00:08:31.079 --> 00:08:33.500 sale. It was a numbers game. And it worked. By 00:08:33.500 --> 00:08:35.860 1972, they consolidated all these different chains, 00:08:35.960 --> 00:08:38.460 Hill Brothers, Payless National, under that single 00:08:38.460 --> 00:08:40.379 banner that we all know, Payless Shoe Source. 00:08:40.500 --> 00:08:42.840 They had cracked the code on volume retailing 00:08:42.840 --> 00:08:44.679 for footwear. They really had. They owned that 00:08:44.679 --> 00:08:47.120 space. So the 70s, that's the era of consolidation. 00:08:47.220 --> 00:08:50.710 But the 80s and 90s... This is where Payless 00:08:50.710 --> 00:08:53.009 becomes like a part of the cultural furniture 00:08:53.009 --> 00:08:55.250 in America. And it starts with a big corporate 00:08:55.250 --> 00:08:58.149 shift. In 1979, they get acquired by the May 00:08:58.149 --> 00:09:00.129 Department Stores Company. And this is really 00:09:00.129 --> 00:09:03.250 important context. The late 70s and early 80s 00:09:03.250 --> 00:09:05.769 was the era of the conglomerate. Department stores 00:09:05.769 --> 00:09:08.269 were trying to own the entire retail ecosystem 00:09:08.269 --> 00:09:11.330 from high end to low end. So being owned by May 00:09:11.330 --> 00:09:14.429 gave Payless, what, just a ton of cash? Access 00:09:14.429 --> 00:09:16.879 to massive capital. It allowed them to scale 00:09:16.879 --> 00:09:19.879 from being a strong regional player to a true 00:09:19.879 --> 00:09:22.419 national behemoth. They weren't just a Kansas 00:09:22.419 --> 00:09:24.240 company anymore. They were a corporate asset, 00:09:24.419 --> 00:09:27.100 a division of a giant. But they do eventually 00:09:27.100 --> 00:09:30.100 spin off again, right, in 1996 to become independent. 00:09:30.440 --> 00:09:32.840 They do. They become Payless, ShoeSource, Ankh, 00:09:32.919 --> 00:09:35.059 and go public. But before we get too deep in 00:09:35.059 --> 00:09:36.620 the finance stuff, we have to talk about the 00:09:36.620 --> 00:09:38.559 product. Because if you were a kid in the 80s 00:09:38.559 --> 00:09:41.480 or 90s, Payless wasn't about stock prices or 00:09:41.480 --> 00:09:43.899 corporate acquisitions. It was about one thing. 00:09:44.360 --> 00:09:47.740 Pro Wings. Ah, yes. Pro Wings. The shoes that 00:09:47.740 --> 00:09:50.399 launched a thousand playground taunts. I feel 00:09:50.399 --> 00:09:52.059 like we need to have a moment of silence for 00:09:52.059 --> 00:09:54.399 every single person who had to wear these to 00:09:54.399 --> 00:09:56.960 gym class. The source material highlights them 00:09:56.960 --> 00:09:59.679 specifically. What was the deal with Pro Wings? 00:09:59.879 --> 00:10:02.179 They were the quintessential store brand answer 00:10:02.179 --> 00:10:07.139 to Nike and Reebok. Yeah. But they had this distinct 00:10:07.139 --> 00:10:10.730 design feature that became... A bit of a scarlet 00:10:10.730 --> 00:10:13.129 letter for kids. The Velcro. The Velcro strap. 00:10:13.409 --> 00:10:15.409 The two or three straps, yeah. Instead of laces. 00:10:15.690 --> 00:10:18.129 Often, yes. And look, from a parent's perspective, 00:10:18.509 --> 00:10:22.730 pro wings were a godsend. They were actually 00:10:22.730 --> 00:10:25.110 pretty durable, they were incredibly cheap, and 00:10:25.110 --> 00:10:27.490 you didn't have to tie them. If you have three 00:10:27.490 --> 00:10:29.649 kids and you're trying to get them out the door 00:10:29.649 --> 00:10:32.210 for school in the morning, Velcro is a technology 00:10:32.210 --> 00:10:34.429 that saves your sanity. Okay, from a practical 00:10:34.429 --> 00:10:37.480 standpoint, sure. But in the brutal social hierarchy 00:10:37.480 --> 00:10:40.580 of an American middle school cafeteria, they 00:10:40.580 --> 00:10:43.330 were a signal. A huge signal. They signaled that 00:10:43.330 --> 00:10:45.730 your parents were not buying you the $100 Air 00:10:45.730 --> 00:10:48.809 Jordans. Exactly. And that cool gap is something 00:10:48.809 --> 00:10:51.009 that Payless struggled with for its entire existence. 00:10:51.450 --> 00:10:53.610 They were ubiquitous. By the 90s, they were in 00:10:53.610 --> 00:10:56.590 every town. But they had absolutely no cultural 00:10:56.590 --> 00:10:58.870 cachet. They were the place you had to go, not 00:10:58.870 --> 00:11:01.289 the place you wanted to go. Nike was selling 00:11:01.289 --> 00:11:03.110 an aspiration. They were selling performance, 00:11:03.610 --> 00:11:06.649 even though most kids weren't professional athletes. 00:11:07.690 --> 00:11:11.460 Payless was selling utility. And utility is rarely 00:11:11.460 --> 00:11:14.580 cool. But business -wise, I mean, they were printing 00:11:14.580 --> 00:11:17.960 money. In the 90s, they went on another buying 00:11:17.960 --> 00:11:20.860 spree. They bought a chain called Pickway Shoes, 00:11:20.860 --> 00:11:24.500 then another one called Parade of Shoes. It feels 00:11:24.500 --> 00:11:26.539 like they were trying to just completely corner 00:11:26.539 --> 00:11:29.559 the market on low to mid -tier retail. They were. 00:11:29.700 --> 00:11:31.799 And they were also trying to diversify their 00:11:31.799 --> 00:11:34.559 sales channels. Buying Parade of Shoes in 1997 00:11:34.559 --> 00:11:37.000 got them into department stores like Shopko. 00:11:37.179 --> 00:11:39.919 They were trying to saturate every possible place 00:11:39.919 --> 00:11:42.240 a person could buy an affordable shoe. But this 00:11:42.240 --> 00:11:44.539 is where we see the first cracks appearing in 00:11:44.539 --> 00:11:47.039 the facade, because in 2004, they have a major 00:11:47.039 --> 00:11:49.039 restructuring. Right. They announced they're 00:11:49.039 --> 00:11:51.799 closing the entire parade chain and another 100 00:11:51.799 --> 00:11:54.549 payless outlets on top of that. So even in what 00:11:54.549 --> 00:11:57.330 we think of as the good times, before the Internet 00:11:57.330 --> 00:11:59.669 really took over, they were pruning. It seems 00:11:59.669 --> 00:12:02.490 like that model of expansion at all costs has 00:12:02.490 --> 00:12:04.789 a natural limit. Eventually, you just have too 00:12:04.789 --> 00:12:06.789 many stores selling the same cheap shoes, sometimes 00:12:06.789 --> 00:12:08.809 on the same block. That's the danger of retail 00:12:08.809 --> 00:12:10.809 saturation. When you're on every single corner, 00:12:10.889 --> 00:12:12.649 you start cannibalizing your own sales. Your 00:12:12.649 --> 00:12:14.669 new store just steals customers from your old 00:12:14.669 --> 00:12:17.549 store. Exactly. But that restructuring in 2004. 00:12:18.759 --> 00:12:21.059 It seems like it leads us into what I would call 00:12:21.059 --> 00:12:23.279 the identity crisis era or maybe the ambition 00:12:23.279 --> 00:12:26.419 era. This is when Payless decides they don't 00:12:26.419 --> 00:12:28.159 want to be the pro -wings store anymore. They 00:12:28.159 --> 00:12:30.539 want to be a titan. They want respect. This is, 00:12:30.620 --> 00:12:32.740 without a doubt, the most ambitious pivot in 00:12:32.740 --> 00:12:35.500 the company's entire history. And it all centers 00:12:35.500 --> 00:12:38.840 on the year 2007. In 2007, they acquired the 00:12:38.840 --> 00:12:40.919 Stride Right Corporation. Which was a massive, 00:12:41.000 --> 00:12:43.379 massive deal. Stride Right wasn't just, you know, 00:12:43.399 --> 00:12:45.860 baby shoes and kid shoes. They owned a portfolio 00:12:45.860 --> 00:12:48.759 of legitimate, high equity heritage. brands. 00:12:48.980 --> 00:12:51.159 So all of a sudden, the company that sells $10 00:12:51.159 --> 00:12:54.779 Velcro sneakers now also owns Sperry Top Sider. 00:12:54.919 --> 00:12:58.860 Scary. The Bo shoe, the icon of preppy culture. 00:12:59.000 --> 00:13:02.179 I remember in like 2010, 2011, you couldn't walk 00:13:02.179 --> 00:13:04.259 across a college campus in America without seeing 00:13:04.259 --> 00:13:06.360 a pair of Sperrys. They were the absolute uniform 00:13:06.360 --> 00:13:09.279 of the preppy revival. And Payless, the home 00:13:09.279 --> 00:13:12.059 of pro wings, owned them. They also got Keds. 00:13:12.259 --> 00:13:15.679 Keds, the classic canvas sneaker. And Saucony, 00:13:15.820 --> 00:13:18.480 which is a... Very serious, respected running 00:13:18.480 --> 00:13:20.639 shoe brand. So they rebrand the whole company. 00:13:20.779 --> 00:13:24.100 They stop being Payless Shoe Source, Inc., and 00:13:24.100 --> 00:13:26.639 they become Collective Brands, Inc. It's a huge 00:13:26.639 --> 00:13:29.259 strategy shift. They're telling the market, we 00:13:29.259 --> 00:13:32.120 are not just a retailer anymore. We are a brand 00:13:32.120 --> 00:13:34.840 house. Right. It's a difference between being 00:13:34.840 --> 00:13:37.940 a grocery store like Kroger and being the manufacturer 00:13:37.940 --> 00:13:40.820 like Procter & Gamble. Exactly. They wanted to 00:13:40.820 --> 00:13:43.220 own the intellectual property. Because if you 00:13:43.220 --> 00:13:46.100 own the brand, You capture the margin at every 00:13:46.100 --> 00:13:49.299 single step of the process. You can sell Sperry's 00:13:49.299 --> 00:13:52.480 wholesale to Macy's and you make money. You can 00:13:52.480 --> 00:13:54.679 sell Sperry's in your own Payless stores and 00:13:54.679 --> 00:13:57.519 you make money. It's vertical integration. And 00:13:57.519 --> 00:13:59.480 they didn't stop there. They also had this other 00:13:59.480 --> 00:14:01.360 division called Collective Licensing International, 00:14:01.759 --> 00:14:04.919 or CLI. And this part, to me, is fascinating 00:14:04.919 --> 00:14:06.919 because it seems like they were literally trying 00:14:06.919 --> 00:14:09.120 to buy cool. That's exactly what they were trying 00:14:09.120 --> 00:14:10.340 to do. They were trying to capture the youth 00:14:10.340 --> 00:14:12.820 lifestyle market. The source material lists a 00:14:12.820 --> 00:14:14.960 bunch of brands they acquired. Brands like Airwalk. 00:14:15.200 --> 00:14:18.679 Airwalk. Which was huge in the 90s skate scene. 00:14:18.840 --> 00:14:21.399 I remember begging my parents for a pair of Airwalks. 00:14:21.399 --> 00:14:24.750 They were the shoe to have. They were. And Payless 00:14:24.750 --> 00:14:29.009 also owned Vision Streetwear, Sims, Lamar. These 00:14:29.009 --> 00:14:31.549 were all course skate and snowboard brands. So 00:14:31.549 --> 00:14:34.009 what was the strategy there? Buy these cool, 00:14:34.029 --> 00:14:36.909 slightly faded brands and do what with them? 00:14:37.049 --> 00:14:39.690 The strategy was we will take these cool skate 00:14:39.690 --> 00:14:42.110 brands and we will mass produce them and sell 00:14:42.110 --> 00:14:44.610 them at a mass market price point in our thousands 00:14:44.610 --> 00:14:47.230 of Payless stores. They were trying to verticalize 00:14:47.230 --> 00:14:49.669 cool, take the credibility from the skate park 00:14:49.669 --> 00:14:52.019 and sell it in strip mall. Precisely. They wanted 00:14:52.019 --> 00:14:54.460 to own and control the entire cultural narrative, 00:14:54.620 --> 00:14:57.460 from the high -end boat shoe crowd to the action 00:14:57.460 --> 00:15:00.039 sports kids. On paper, it actually sounds kind 00:15:00.039 --> 00:15:01.639 of smart. You've got the high -end stuff like 00:15:01.639 --> 00:15:03.720 Sperry selling in department stores, generating 00:15:03.720 --> 00:15:05.860 cash, and then you have the cool stuff like Airwalk 00:15:05.860 --> 00:15:08.039 driving new, younger traffic into your discount 00:15:08.039 --> 00:15:10.720 stores. It was a bold vision. For a moment there, 00:15:10.820 --> 00:15:13.159 they were on top of the world. The stock is up. 00:15:13.200 --> 00:15:15.039 They have thousands of stores. They own this 00:15:15.039 --> 00:15:17.879 incredible portfolio of brands. They're a multi 00:15:17.879 --> 00:15:21.940 -billion dollar empire. But. We all know how 00:15:21.940 --> 00:15:23.919 this movie ends. The sharks begin to circle. 00:15:24.059 --> 00:15:26.320 And by sharks, you mean private equity. Indeed. 00:15:26.419 --> 00:15:28.340 Okay. This is the part of the story where we 00:15:28.340 --> 00:15:30.399 need to slow down and really explain the mechanics. 00:15:30.720 --> 00:15:34.320 Because the source says that in 2012, the company 00:15:34.320 --> 00:15:38.539 was bought out for $1 .32 billion by a group. 00:15:38.679 --> 00:15:41.620 Right. That group included Wolverine Worldwide, 00:15:41.799 --> 00:15:45.159 Bloom Capital, and Golden Gate Capital. And then 00:15:45.159 --> 00:15:47.519 it says the company became heavily loaded with 00:15:47.519 --> 00:15:49.940 debt. This is the turning point. This is the 00:15:49.940 --> 00:15:52.779 precise moment where Payless stops being a retailer 00:15:52.779 --> 00:15:55.100 and it starts being a financial instrument. Okay, 00:15:55.139 --> 00:15:56.899 so walk me through it. What actually happened 00:15:56.899 --> 00:15:59.720 in that deal room in 2012? So it wasn't a straight 00:15:59.720 --> 00:16:02.879 purchase. It was a partition, a breakup. Wolverine 00:16:02.879 --> 00:16:05.179 Worldwide, they're a major shoe manufacturer 00:16:05.179 --> 00:16:07.159 themselves. They own brands like Merrill and 00:16:07.159 --> 00:16:10.120 Hush Puppies. They wanted the crown jewels. They 00:16:10.120 --> 00:16:12.419 looked at Collective Brands' portfolio and said, 00:16:12.580 --> 00:16:16.590 we want Sperry, Keds, and Saucony. The good stuff. 00:16:16.669 --> 00:16:18.789 So the most profitable, highest status brands 00:16:18.789 --> 00:16:21.470 get carved off and leave the building. Wolverine 00:16:21.470 --> 00:16:24.450 takes them and runs. Right. Now, what was left? 00:16:24.610 --> 00:16:27.490 You had the 4000 plus Payless retail stores, 00:16:27.649 --> 00:16:30.350 which were, you know, lower margin. And you had 00:16:30.350 --> 00:16:32.990 the collective licensing stuff like Airwalk. 00:16:33.129 --> 00:16:36.870 OK. That rump company was taken by the two private 00:16:36.870 --> 00:16:40.090 equity firms, Golden Gate and Blum Capital. Yeah. 00:16:40.169 --> 00:16:43.210 And they formed a new private entity called Payless 00:16:43.210 --> 00:16:46.009 Holdings. And this is a leveraged buyout, an 00:16:46.009 --> 00:16:50.049 LBO. A classic textbook LBO. Here's the simplified 00:16:50.049 --> 00:16:51.850 version, and it's really important to understand. 00:16:52.330 --> 00:16:54.429 Imagine you want to buy a house that costs a 00:16:54.429 --> 00:16:56.789 million dollars. Okay. But you only have $100 00:16:56.789 --> 00:17:00.070 ,000 in cash. So you go to a bank and you borrow 00:17:00.070 --> 00:17:02.750 the other $900 ,000 to complete the purchase. 00:17:03.169 --> 00:17:05.569 Standard stuff so far. Right, a mortgage. But 00:17:05.569 --> 00:17:07.509 here's the trick, and this is the part that always 00:17:07.509 --> 00:17:10.250 blows people's minds. With an LBO, you don't 00:17:10.250 --> 00:17:12.670 take out the mortgage in your name. You structure 00:17:12.670 --> 00:17:14.490 the deal so that the mortgage is put on the house 00:17:14.490 --> 00:17:16.309 itself. Wait, what? So the house is suddenly 00:17:16.309 --> 00:17:18.390 responsible for paying its own mortgage? Exactly. 00:17:18.650 --> 00:17:21.670 The company being bought, in this case Payless, 00:17:21.829 --> 00:17:24.509 is forced to take on all the debt that was used 00:17:24.509 --> 00:17:28.109 to buy it. So Payless, the company, now has hundreds 00:17:28.109 --> 00:17:29.950 and hundreds of millions of dollars in new debt 00:17:29.950 --> 00:17:31.750 on its balance sheet that wasn't there the day 00:17:31.750 --> 00:17:34.950 before. The private equity firms own it, but 00:17:34.950 --> 00:17:36.829 the company itself has to service the massive 00:17:36.829 --> 00:17:39.490 loan. That just seems, I mean, that seems incredibly 00:17:39.490 --> 00:17:41.789 reckless. You just stripped away its best, most 00:17:41.789 --> 00:17:44.450 high margin brands like Sperry, so its income 00:17:44.450 --> 00:17:46.829 is less diverse. And then you've saddled the 00:17:46.829 --> 00:17:48.730 remaining discount stores with a massive mortgage 00:17:48.730 --> 00:17:51.529 they never asked for. It is unbelievably risky. 00:17:51.690 --> 00:17:54.470 The entire model requires the company to generate 00:17:54.470 --> 00:17:57.990 consistent, high and predictable cash flow just 00:17:57.990 --> 00:18:00.369 to pay the interest on that debt. If business 00:18:00.369 --> 00:18:02.960 slows down even a little bit. You are in very 00:18:02.960 --> 00:18:05.140 deep trouble. And remember the timing. This is 00:18:05.140 --> 00:18:07.099 2012. What is happening in the background of 00:18:07.099 --> 00:18:09.839 all of this? The inexorable rise of Amazon. Amazon. 00:18:09.980 --> 00:18:13.880 E -commerce is exploding. Foot traffic in malls 00:18:13.880 --> 00:18:17.180 is just beginning to dip. It's the worst possible 00:18:17.180 --> 00:18:19.869 timing. So you have a company that now needs 00:18:19.869 --> 00:18:22.750 perfect performance just to stay afloat and pay 00:18:22.750 --> 00:18:25.269 off its new debt. And it's entering an environment 00:18:25.269 --> 00:18:27.809 where retail performance is getting harder and 00:18:27.809 --> 00:18:30.170 harder every single day. It's a pressure cooker. 00:18:30.490 --> 00:18:33.069 And the source mentions that eventually Moody's 00:18:33.069 --> 00:18:35.970 downgrades their credit rating. They had, I think, 00:18:35.990 --> 00:18:39.230 $100 million in loans that were coming due. And 00:18:39.230 --> 00:18:42.009 they just couldn't pay. This is the debt trap. 00:18:42.150 --> 00:18:44.710 When you have that much leverage, that much debt 00:18:44.710 --> 00:18:47.400 to service. You can't invest in the business. 00:18:47.559 --> 00:18:49.660 You can't upgrade your stores. You can't build 00:18:49.660 --> 00:18:52.180 a better website. You can't fix the ugly fluorescent 00:18:52.180 --> 00:18:54.279 lighting or the smelly carpets we talked about. 00:18:54.420 --> 00:18:56.720 Because every spare dollar is going to the bank. 00:18:56.920 --> 00:18:58.960 Every single spare dollar goes to the bank to 00:18:58.960 --> 00:19:01.799 pay interest. So the stores get worse, which 00:19:01.799 --> 00:19:03.960 means sales drop further, which means the debt 00:19:03.960 --> 00:19:06.579 gets even harder to pay. It's a death spiral. 00:19:06.839 --> 00:19:08.559 It honestly sounds like they were being hollowed 00:19:08.559 --> 00:19:10.720 out from the inside. They were. From a financial 00:19:10.720 --> 00:19:12.819 perspective, they were being strip -mined for 00:19:12.819 --> 00:19:15.000 cash flow until there was absolutely nothing 00:19:15.000 --> 00:19:18.460 left. So the bomb finally goes off in April 2017. 00:19:19.539 --> 00:19:22.640 Bankruptcy number one. Chapter 11. Now, it's 00:19:22.640 --> 00:19:24.619 important to make a distinction here. Chapter 00:19:24.619 --> 00:19:27.740 11 is a reorganization. It's not a final death 00:19:27.740 --> 00:19:30.319 sentence. It's basically asking the court for 00:19:30.319 --> 00:19:33.799 a timeout to restructure your debts and try to 00:19:33.799 --> 00:19:35.900 fix the business. An attempt to save the patient. 00:19:36.099 --> 00:19:38.579 Exactly. But as part of that, they immediately 00:19:38.579 --> 00:19:42.940 closed 673 stores. That is a lot of real estate 00:19:42.940 --> 00:19:45.809 to go dark. All at once. Imagine walking through 00:19:45.809 --> 00:19:47.710 your local mall and suddenly seeing three or 00:19:47.710 --> 00:19:50.849 four big empty storefronts in a row. It's a massive 00:19:50.849 --> 00:19:53.609 contraction. But interestingly, they moved through 00:19:53.609 --> 00:19:56.410 this first bankruptcy process very, very quickly. 00:19:56.589 --> 00:19:59.450 They officially emerged from bankruptcy in August 00:19:59.450 --> 00:20:02.450 of 2017, just a few months later. And the source 00:20:02.450 --> 00:20:05.029 material notes they were actually the first among 00:20:05.029 --> 00:20:08.089 a whole group of troubled retailers to successfully 00:20:08.089 --> 00:20:11.470 restructure in that big wave of retail bankruptcies. 00:20:11.569 --> 00:20:13.619 They were. So for a minute there, it must have 00:20:13.619 --> 00:20:15.180 looked like they made it. They had survived. 00:20:15.720 --> 00:20:18.279 They trimmed the fat. They shed some of the crippling 00:20:18.279 --> 00:20:19.859 debt. And the management team came out and said, 00:20:19.960 --> 00:20:22.460 OK, we're lean. We're mean. We survived the retail 00:20:22.460 --> 00:20:24.819 apocalypse. It definitely looked like it from 00:20:24.819 --> 00:20:27.440 the outside. But in finance, there's a term for 00:20:27.440 --> 00:20:30.039 this. We often call it a dead cat bounce. That's 00:20:30.039 --> 00:20:32.359 a brutal term. It is, but it fits perfectly. 00:20:32.660 --> 00:20:36.019 It means a temporary, brief recovery and an asset 00:20:36.019 --> 00:20:38.019 that is, for all intents and purposes, dying. 00:20:39.019 --> 00:20:41.259 Because they hadn't fixed the core problem. Which 00:20:41.259 --> 00:20:43.880 was what? They were still a boring shoe store 00:20:43.880 --> 00:20:46.279 in a dying mall, and they still had a lot of 00:20:46.279 --> 00:20:48.960 debt. They just had less debt than before. They 00:20:48.960 --> 00:20:50.799 basically bought themselves another 18 months 00:20:50.799 --> 00:20:52.559 of runway, but the plane was still crashing. 00:20:52.740 --> 00:20:55.480 And that runway ran out very, very fast. Less 00:20:55.480 --> 00:20:58.539 than two years later, February 2019. The death 00:20:58.539 --> 00:21:01.119 blow. Bankruptcy number two. And this was not 00:21:01.119 --> 00:21:04.599 a let's close a few underperforming stores kind 00:21:04.599 --> 00:21:07.240 of bankruptcy. This was a turn out the lights. 00:21:07.299 --> 00:21:09.859 The party's over liquidation. It was a complete 00:21:09.859 --> 00:21:12.299 liquidation of the entire North American footprint. 00:21:12.480 --> 00:21:15.480 And the scale is just staggering to comprehend. 00:21:15.660 --> 00:21:18.039 They announced the closure of all twenty one 00:21:18.039 --> 00:21:20.140 hundred stores in the United States. Two thousand 00:21:20.140 --> 00:21:21.960 one hundred store. I mean, that is everywhere. 00:21:22.119 --> 00:21:24.460 Every mall, every strip center, every downtown 00:21:24.460 --> 00:21:27.900 gone. And almost immediately after that announcement 00:21:27.900 --> 00:21:30.789 on February. They announced they would also be 00:21:30.789 --> 00:21:33.410 closing all 248 of their stores in Canada, too. 00:21:33.589 --> 00:21:36.170 Wow. They also shut down their e -commerce platform 00:21:36.170 --> 00:21:38.650 in North America. For all intents and purposes, 00:21:38.990 --> 00:21:41.769 Payless ceased to exist as a retailer in its 00:21:41.769 --> 00:21:44.390 home continent. I want to dig into the why here 00:21:44.390 --> 00:21:46.250 a little bit more. We've talked about the debt 00:21:46.250 --> 00:21:48.490 load. We've mentioned the Internet. But the source 00:21:48.490 --> 00:21:51.609 quotes a marketing professor from Texas A &M, 00:21:51.690 --> 00:21:54.509 Cheryl H. Bridges. And she had a really sharp 00:21:54.509 --> 00:21:57.319 insight. She did. She noted that Payless had 00:21:57.319 --> 00:21:59.660 failed to reinvent its stores quickly enough 00:21:59.660 --> 00:22:02.400 for an increasingly crowded market. Which brings 00:22:02.400 --> 00:22:04.059 us right back around to Pellessi, doesn't it? 00:22:04.140 --> 00:22:06.299 It brings us full circle. The Pellessi stunt 00:22:06.299 --> 00:22:08.900 proved that the product wasn't necessarily the 00:22:08.900 --> 00:22:11.700 core problem. People like the shoes if you put 00:22:11.700 --> 00:22:13.200 them in a different context, if you made them 00:22:13.200 --> 00:22:15.819 feel cool. Right. The problem was the store, 00:22:16.000 --> 00:22:20.259 the experience, all of that brand baggage. Right. 00:22:20.539 --> 00:22:23.579 Walking into a Payless in 2018 felt exactly like 00:22:23.579 --> 00:22:27.140 walking into a Payless in 1998, but just sadder. 00:22:27.299 --> 00:22:30.059 The carpets were worn out. The lighting was that 00:22:30.059 --> 00:22:32.680 awful humming fluorescent kind. It just felt 00:22:32.680 --> 00:22:35.220 like a place where dreams went to die. It did. 00:22:35.380 --> 00:22:38.200 And in a crowded market where you could buy cheap 00:22:38.200 --> 00:22:40.400 shoes on Amazon without ever leaving your couch, 00:22:40.519 --> 00:22:42.460 or you could go to Target where the experience 00:22:42.460 --> 00:22:44.759 is bright and clean and you can buy groceries 00:22:44.759 --> 00:22:47.430 at the same time. Why would you ever go to Payless? 00:22:47.609 --> 00:22:49.009 They didn't have an answer to that question. 00:22:49.170 --> 00:22:51.549 They offered no compelling experience. They had 00:22:51.549 --> 00:22:53.970 completely failed to update that bare -bones 00:22:53.970 --> 00:22:57.470 minimalism of the 1960s for a 2010s audience 00:22:57.470 --> 00:23:00.210 that expected more. So they were stuck. Stuck 00:23:00.210 --> 00:23:02.109 in the middle. Not cool enough to be a destination. 00:23:02.549 --> 00:23:05.230 Not convenient enough to beat Amazon. And all 00:23:05.230 --> 00:23:07.450 the while, weighed down by so much debt that 00:23:07.450 --> 00:23:09.789 they couldn't afford to fix any of it. It's really 00:23:09.789 --> 00:23:12.690 a retail tragedy. It is, but. And here's where 00:23:12.690 --> 00:23:15.359 the story gets really, really weird. Payless 00:23:15.359 --> 00:23:17.640 didn't actually die. Right. This is the huge 00:23:17.640 --> 00:23:20.180 plot twist I was promising. If this were a movie, 00:23:20.279 --> 00:23:22.339 the screen would fade to black right there. You'd 00:23:22.339 --> 00:23:26.799 see a title card. Payless, 1956 -2019. Roll credits. 00:23:27.500 --> 00:23:30.799 But looking at these documents, there is this 00:23:30.799 --> 00:23:34.200 massive glaring anomaly. While every store in 00:23:34.200 --> 00:23:36.059 the US and Canada was putting up everything must 00:23:36.059 --> 00:23:39.339 go signs, there were hundreds of Payless stores 00:23:39.339 --> 00:23:42.369 around the world that were just... business as 00:23:42.369 --> 00:23:45.769 usual. It's this fascinating split reality. The 00:23:45.769 --> 00:23:48.630 bankruptcy filings that were made in the US explicitly 00:23:48.630 --> 00:23:51.390 excluded any stores operating outside of North 00:23:51.390 --> 00:23:54.190 America. The international operations were legally 00:23:54.190 --> 00:23:56.369 and financially insulated from the American collapse. 00:23:56.670 --> 00:23:59.809 So we have this zombie brand situation. The body 00:23:59.809 --> 00:24:02.250 is dead in America, but the brand is still walking 00:24:02.250 --> 00:24:04.869 around elsewhere. So where was Payless actually 00:24:04.869 --> 00:24:07.569 surviving? It's a global tour. Let's start in 00:24:07.569 --> 00:24:10.250 Asia. Specifically the Philippines. In 2019, 00:24:10.490 --> 00:24:12.309 while U .S. stores were being liquidated, the 00:24:12.309 --> 00:24:15.109 Philippines had 76 active and profitable Payless 00:24:15.109 --> 00:24:18.309 stores. 76. That is a massive footprint for a 00:24:18.309 --> 00:24:20.869 single country that size. It's huge. And Indonesia 00:24:20.869 --> 00:24:23.009 had 73 stores. They had launched there back in 00:24:23.009 --> 00:24:25.630 2011, and it was a big success. Okay, so a strong 00:24:25.630 --> 00:24:27.609 presence in Southeast Asia. What about elsewhere? 00:24:27.849 --> 00:24:30.470 The Caribbean. Payless is an absolute giant in 00:24:30.470 --> 00:24:32.049 the Caribbean. I was looking at the list in our 00:24:32.049 --> 00:24:33.890 source material, and it's just extensive. St. 00:24:33.950 --> 00:24:37.670 Lucia, Antigua, Grenada, St. Kitts, Dominica, 00:24:37.910 --> 00:24:41.069 St. Vincent. Barbados as well. They opened their 00:24:41.069 --> 00:24:44.250 first store in Barbados in 2012 and grew to five 00:24:44.250 --> 00:24:48.259 locations in Trinidad and Tobago. They have 23 00:24:48.259 --> 00:24:51.539 stores. 23 stores in Trinidad and Tobago alone. 00:24:51.700 --> 00:24:55.240 That is incredible density. Why did the brand 00:24:55.240 --> 00:24:58.599 work so well there when it was failing so spectacularly 00:24:58.599 --> 00:25:01.019 in Topeka? It's a combination of a few key factors. 00:25:01.240 --> 00:25:03.279 First, the competitive landscape is completely 00:25:03.279 --> 00:25:05.660 different. Amazon is a global juggernaut, of 00:25:05.660 --> 00:25:08.460 course. But last mile delivery in many developing 00:25:08.460 --> 00:25:11.180 markets is much harder and more expensive than 00:25:11.180 --> 00:25:13.160 it is in the U .S. Right. You can't just get 00:25:13.160 --> 00:25:15.420 prime delivery in two hours in every corner of 00:25:15.420 --> 00:25:18.059 Indonesia or on a small Caribbean island. So 00:25:18.059 --> 00:25:20.140 the inherent convenience of a physical store 00:25:20.140 --> 00:25:22.539 is still very, very real. That makes perfect 00:25:22.539 --> 00:25:24.339 sense. The physical store is actually solving 00:25:24.339 --> 00:25:26.779 a logistics problem for the customer. Second, 00:25:27.460 --> 00:25:30.049 mall culture is different. In places like the 00:25:30.049 --> 00:25:33.690 Philippines or the UAE, the mall is still the 00:25:33.690 --> 00:25:36.309 absolute center of social life. It's where you 00:25:36.309 --> 00:25:38.630 go for air conditioning, for food, for entertainment, 00:25:38.849 --> 00:25:41.690 for community. Foot traffic hasn't fallen off 00:25:41.690 --> 00:25:43.509 a cliff there like it did in the American Midwest. 00:25:43.890 --> 00:25:45.809 OK, so market conditions are different. But was 00:25:45.809 --> 00:25:48.170 there a structural difference in how the company 00:25:48.170 --> 00:25:50.769 itself was run internationally? A huge difference. 00:25:51.130 --> 00:25:53.369 And this is probably the most crucial piece of 00:25:53.369 --> 00:25:56.710 the puzzle. The franchise model. Ah, like a McDonald's 00:25:56.710 --> 00:25:59.630 or a Subway? Exactly like a McDonald's. In the 00:25:59.630 --> 00:26:02.150 U .S., Payless owned and operated most of its 00:26:02.150 --> 00:26:04.470 stores. That meant they paid the rent, the staff 00:26:04.470 --> 00:26:06.630 salaries, the electric bill. All the risk was 00:26:06.630 --> 00:26:09.569 on them. But internationally, many of the operations 00:26:09.569 --> 00:26:12.490 were partnerships or franchises with large local 00:26:12.490 --> 00:26:15.009 retail operators. So they found a local expert 00:26:15.009 --> 00:26:18.480 to run things. Yes. For example, in the UAE and 00:26:18.480 --> 00:26:20.279 other parts of the Middle East, the brand is 00:26:20.279 --> 00:26:23.240 operated by the Alshaya Group. They're a massive, 00:26:23.359 --> 00:26:26.220 sophisticated retail operator who runs dozens 00:26:26.220 --> 00:26:29.180 of Western brands there. In Thailand, it's the 00:26:29.180 --> 00:26:31.339 Central Marketing Group. These are local giants 00:26:31.339 --> 00:26:33.740 who know their specific markets inside and out. 00:26:34.029 --> 00:26:37.609 So Alshaya pays Payless a licensing fee to use 00:26:37.609 --> 00:26:40.509 the name and the branding, but Alshaya takes 00:26:40.509 --> 00:26:42.710 on all the risk of actually running the stores. 00:26:42.990 --> 00:26:45.549 Correct. If the store in the Dubai mall has a 00:26:45.549 --> 00:26:49.390 bad month, Alshaya takes the financial hit, not 00:26:49.390 --> 00:26:51.549 the Payless corporate entity back in America. 00:26:51.630 --> 00:26:54.230 It's a much safer, higher margin way to exist. 00:26:54.630 --> 00:26:57.130 So internationally, Payless basically became 00:26:57.130 --> 00:26:59.349 an intellectual property company. They were selling 00:26:59.349 --> 00:27:01.750 the idea of Payless to people who really knew 00:27:01.750 --> 00:27:03.839 how to run stores in their home country. That 00:27:03.839 --> 00:27:06.440 is brilliant. It insulates the mothership from 00:27:06.440 --> 00:27:09.299 all the local risks like rent and payroll. But 00:27:09.299 --> 00:27:10.819 there was one exception, though, wasn't there? 00:27:10.920 --> 00:27:12.960 One place where the international strategy failed 00:27:12.960 --> 00:27:15.720 pretty badly. Australia. Right. The land down 00:27:15.720 --> 00:27:17.599 under. This is a really interesting sidebar to 00:27:17.599 --> 00:27:20.680 the story. In 2013, the U .S. Payless bought 00:27:20.680 --> 00:27:24.109 the Australian Payless shoes chain, which. just 00:27:24.109 --> 00:27:26.089 to make things confusing, had been operating 00:27:26.089 --> 00:27:28.769 completely independently in Australia since 1980 00:27:28.769 --> 00:27:31.630 with no affiliation to the U .S. company. Wait, 00:27:31.690 --> 00:27:33.990 wait. So there was a totally different, unrelated 00:27:33.990 --> 00:27:36.230 company called Payless Shoes in Australia for 00:27:36.230 --> 00:27:39.369 30 years. Yes. The name is generic enough that 00:27:39.369 --> 00:27:41.509 multiple people came up with it. So the U .S. 00:27:41.509 --> 00:27:43.829 Payless bought them out, planning to unify the 00:27:43.829 --> 00:27:46.710 brand globally and run the Australian stores 00:27:46.710 --> 00:27:49.230 themselves. And it didn't work. It was a disaster. 00:27:49.720 --> 00:27:51.759 They tried to run it directly, but the exact 00:27:51.759 --> 00:27:53.819 same issues that were plaguing the U .S. market 00:27:53.819 --> 00:27:56.559 high rents online competition hit them there 00:27:56.559 --> 00:27:59.799 just as hard. By December of 2016, they closed 00:27:59.799 --> 00:28:03.299 all 150 stores in Australia and cut 730 jobs. 00:28:04.279 --> 00:28:06.359 So in a way, Australia was a canary in the coal 00:28:06.359 --> 00:28:08.039 mine for the U .S. collapse that would come a 00:28:08.039 --> 00:28:10.099 few years later. OK, so Australia is out, the 00:28:10.099 --> 00:28:12.480 U .S. is out, Canada is out. But Latin America, 00:28:12.720 --> 00:28:14.940 Asia and the Caribbean are keeping the heartbeat 00:28:14.940 --> 00:28:17.589 of the brand going. Which brings us to the final 00:28:17.589 --> 00:28:20.849 improbable act of our story. The resurrection. 00:28:21.500 --> 00:28:23.759 Because in the world of modern corporate finance, 00:28:24.039 --> 00:28:26.859 nothing ever truly stays dead if there's even 00:28:26.859 --> 00:28:28.680 a little bit of brand equity left to squeeze 00:28:28.680 --> 00:28:32.440 out of it. It's January 2020. The world is, you 00:28:32.440 --> 00:28:34.440 know, about to change for a lot of other reasons, 00:28:34.500 --> 00:28:37.779 obviously. But in the business world, Payless 00:28:37.779 --> 00:28:40.519 officially emerges from its second bankruptcy. 00:28:40.859 --> 00:28:43.119 They have new owners now. It's a group of investors 00:28:43.119 --> 00:28:46.500 led by two firms, Alding Global Capital and Axar 00:28:46.500 --> 00:28:49.339 Capital Management. And they have a plan to bring 00:28:49.339 --> 00:28:51.279 the Payless brand back to the United States. 00:28:51.420 --> 00:28:53.400 And the very first thing they did was a subtle 00:28:53.400 --> 00:28:57.200 but important rebrand. On August 18, 2020, they 00:28:57.200 --> 00:28:59.900 officially dropped Shoesource from the name. 00:29:00.059 --> 00:29:02.700 Just Payless. It's cleaner, more modern. It's 00:29:02.700 --> 00:29:05.960 like Cher or Madonna. One word is all you need. 00:29:06.119 --> 00:29:08.279 And they moved the headquarters. This is a big 00:29:08.279 --> 00:29:11.460 symbolic move. Goodbye, Topeka, Kansas, the home 00:29:11.460 --> 00:29:13.740 of the Pozes cousins and the company since 1956. 00:29:14.279 --> 00:29:17.000 And hello, Edgewater, Florida, which is basically 00:29:17.000 --> 00:29:19.730 a suburb of Miami. Which makes total and complete 00:29:19.730 --> 00:29:22.490 sense given everything we just discussed. If 00:29:22.490 --> 00:29:25.250 your only surviving profitable business is in 00:29:25.250 --> 00:29:27.789 Latin America and the Caribbean, why would your 00:29:27.789 --> 00:29:31.269 C -suite be in Kansas? Miami is the logistical 00:29:31.269 --> 00:29:35.250 and cultural gateway to your actual market. Exactly. 00:29:35.250 --> 00:29:38.230 It's a clear symbolic shift away from the American 00:29:38.230 --> 00:29:41.309 heartland and toward a global international hub. 00:29:41.759 --> 00:29:44.799 And the strategy shifted, too. Right. They relaunched 00:29:44.799 --> 00:29:47.180 the U .S. e -commerce site. Finally, a digital 00:29:47.180 --> 00:29:49.680 first approach. But they also announced plans 00:29:49.680 --> 00:29:52.240 to open physical stores in the U .S. again. They 00:29:52.240 --> 00:29:54.380 did. But not the same old stores, right? They 00:29:54.380 --> 00:29:55.980 aren't just going to go back into all those dying 00:29:55.980 --> 00:29:58.079 malls they just left. Correct. The plan they 00:29:58.079 --> 00:30:01.279 announced was to open between 300 and 500 freestanding 00:30:01.279 --> 00:30:04.039 stores over the next five years. And freestanding 00:30:04.039 --> 00:30:06.059 is the crucial distinction there. It's everything. 00:30:06.480 --> 00:30:08.220 They are moving away from the mall dependency 00:30:08.220 --> 00:30:11.440 that killed them in 2017 and 2019. They want 00:30:11.440 --> 00:30:13.559 standalone locations on busy roads where they 00:30:13.559 --> 00:30:15.900 can control the rent, the parking, and the entire 00:30:15.900 --> 00:30:18.500 customer experience from the curb to the cash 00:30:18.500 --> 00:30:21.299 register. It is so ambitious trying to reopen 00:30:21.299 --> 00:30:23.799 hundreds of stores right after you just liquidated 00:30:23.799 --> 00:30:26.720 thousands. It is a very bold bet that there is 00:30:26.720 --> 00:30:29.099 still some love left for that brand among American 00:30:29.099 --> 00:30:32.000 consumers. Or at the very least, a real need 00:30:32.000 --> 00:30:34.799 for that price point. Inflation is real. People 00:30:34.799 --> 00:30:37.380 still need affordable shoes for their kids. The 00:30:37.380 --> 00:30:41.160 core innovation of 1956, self -service, low cost, 00:30:41.359 --> 00:30:44.380 is still a completely valid business model. So 00:30:44.380 --> 00:30:46.299 the question is whether they can execute it now 00:30:46.299 --> 00:30:48.920 without all the baggage of the past. without 00:30:48.920 --> 00:30:51.900 the decrepit stores. Can they start fresh? So 00:30:51.900 --> 00:30:54.859 here we are. Payless is back, sort of. They're 00:30:54.859 --> 00:30:57.019 online. They're slowly opening new stores. Their 00:30:57.019 --> 00:30:59.559 headquarters is in Miami. And there's still a 00:30:59.559 --> 00:31:02.039 huge deal in the Philippines and Trinidad. It's 00:31:02.039 --> 00:31:04.480 just a wild, wild journey. It really is. I mean, 00:31:04.480 --> 00:31:06.980 you go from the Pozes cousins having this brilliant 00:31:06.980 --> 00:31:09.599 idea to invent self -service shoes in Kansas. 00:31:10.380 --> 00:31:12.759 To the pro -wings era, to the massive collective 00:31:12.759 --> 00:31:15.019 brands empire. Then the private equity strip 00:31:15.019 --> 00:31:17.180 mining, the total collapse in its home country, 00:31:17.279 --> 00:31:20.039 and now this weird digital hybrid resurrection. 00:31:20.519 --> 00:31:22.359 It's the whole life cycle of modern American 00:31:22.359 --> 00:31:25.140 capitalism in one company. It makes you think 00:31:25.140 --> 00:31:27.960 about that Polessi stunt again, doesn't it? Polessi 00:31:27.960 --> 00:31:30.319 was a joke, but it showed that people want to 00:31:30.319 --> 00:31:32.759 believe in quality. They want to buy into a story. 00:31:32.880 --> 00:31:35.539 Payless spent, what, 60 years being the cheap 00:31:35.539 --> 00:31:38.160 option? Can they actually rebrand themselves? 00:31:39.150 --> 00:31:41.670 as the smart option. That is the multimillion 00:31:41.670 --> 00:31:43.890 dollar question, isn't it? Can a legacy retailer 00:31:43.890 --> 00:31:46.890 truly reinvent itself after liquidating its entire 00:31:46.890 --> 00:31:50.349 home base? It is incredibly rare. Usually when 00:31:50.349 --> 00:31:53.089 a chain like Circuit City or Borders liquidates, 00:31:53.130 --> 00:31:55.849 it's gone forever. Right. Maybe the IP gets bought 00:31:55.849 --> 00:31:58.990 by some online only company. But to try and actually 00:31:58.990 --> 00:32:01.750 rebuild the physical footprint, that is a very, 00:32:01.769 --> 00:32:05.009 very steep hill to climb. But hey. Everyone loves 00:32:05.009 --> 00:32:06.950 a comeback story. And let's be honest, everyone 00:32:06.950 --> 00:32:09.130 still loves a good deal. Maybe there is a future 00:32:09.130 --> 00:32:10.990 where Payless is, I don't know, kind of cool 00:32:10.990 --> 00:32:13.170 again. Or maybe Pellessi was the only glimpse 00:32:13.170 --> 00:32:15.329 of cool we'll ever get from them. It does raise 00:32:15.329 --> 00:32:17.410 a really provocative thought, though, about the 00:32:17.410 --> 00:32:19.930 cyclical nature of retail and corporate finance. 00:32:20.690 --> 00:32:23.609 We often think of bankruptcy as the end, as the 00:32:23.609 --> 00:32:26.970 tombstone for a company. The final chapter. But 00:32:26.970 --> 00:32:29.609 in modern corporate finance, Chapter 11 bankruptcy 00:32:29.609 --> 00:32:32.960 is often just a tool. It's a car wash. You go 00:32:32.960 --> 00:32:35.400 in dirty, covered in debt, and bad real estate 00:32:35.400 --> 00:32:38.180 leases, and you come out the other side smaller, 00:32:38.440 --> 00:32:41.190 cleaner, and ready to try again. That is a great 00:32:41.190 --> 00:32:43.650 point, but it's also a slightly terrifying one 00:32:43.650 --> 00:32:45.930 for all the employees and the landlords and the 00:32:45.930 --> 00:32:48.109 creditors who get completely washed away in that 00:32:48.109 --> 00:32:50.170 process. It's the brutal efficiency of the market. 00:32:50.289 --> 00:32:53.230 The brand survives, even if the people and the 00:32:53.230 --> 00:32:55.809 original stores don't. And for you, the listener, 00:32:56.049 --> 00:32:59.049 the next time you see a grand opening sign for 00:32:59.049 --> 00:33:01.630 a brand you thought was dead or you click on 00:33:01.630 --> 00:33:04.890 an ad for a nostalgic brand online, maybe ask 00:33:04.890 --> 00:33:07.970 yourself, are you buying the actual shoes or 00:33:07.970 --> 00:33:09.869 are you just buying the memory of what that brand 00:33:09.869 --> 00:33:12.220 is? used to be and maybe more importantly does 00:33:12.220 --> 00:33:14.440 the company behind that logo today even look 00:33:14.440 --> 00:33:16.380 anything like the one you remember check your 00:33:16.380 --> 00:33:18.720 labels and check the balance sheet that wraps 00:33:18.720 --> 00:33:22.299 up our depth dive into the rise the fall and 00:33:22.299 --> 00:33:25.839 very strange return of Payless from Topeka to 00:33:25.839 --> 00:33:27.859 Trinidad it's been a heck of a walk thanks for 00:33:27.859 --> 00:33:29.440 listening we'll see you on the next one keep 00:33:29.440 --> 00:33:30.420 questioning the price tag