Party City is immediately shutting down all of its stores and letting go of all its employees after nearly 40 years in business, announced CEO Barry Litwin. He blamed the company’s struggles on inflation, rising costs, and a shift in consumer behavior. And he’s correct on that. But he’s not giving you the full story.
Party City’s demise is just another in a long line of vulture capitalist moves from private equity firms whose whole business model is built on saddling companies with so much debt that they’ll never be able to get out of it. All while stripping the company of any avenue for paying off that debt.
Party City Shutting Down After 40 Years
Over the years, various private equity firms got involved in Party City’s ownership. Including groups like Berkshire Partners and Thomas H. Lee Partners. It’s that second group, Thomas H. Lee Partners, that acquired majority control of Party City in 2012 through a leveraged buyout.
It’s a private equity strategy that allows a group to take over a company with an enormous amount of borrowed money. Thus saddling the company with an enormous amount of debt. The new owners of the company then strip the company down to its bolts so it’s running on fumes to ensure that every dollar it makes goes toward paying off the debt.
It’s usually an amount of debt so great that the company being purchased can’t reasonably be expected to pay it off since interest payments on that debt alone chew up a significant portion of its revenue. That means the company cannot innovate. It cannot expand.
A leveraged buyout is often viewed as a death sentence for a company. It’s a predatory practice, one that the company being bought out has little control over. Mitt Romney’s Bain Capital did it with Toys’r’Us and KB Toys, and that’s what happened to Party City.
If you ever hear of a company being bought out through a leveraged buyout by a private equity firm, you might as well consider that company dead because it will be soon in some form or another. Elon Musk did it with Twitter. While Twitter (now terribly and stupidly named X) still exists, it is a shell of its former self. Elon’s leveraged buyout of Twitter was so bad that it’s actually become a risk to his other companies.
What Exactly Happened to Party City?
When it comes to Party City’s downfall, you shouldn’t just take my word for it. Take it from Steve Mandel, the founder of Party City, who launched the chain back in 1986 with a single store in East Hanover, New Jersey.
The consortium of private equity owners bought into Party City over the years and also owned a party supply manufacturer named Amscan which gave the company a monopoly on the party supply market.
Meaning, the store that was known for selling discount party supplies now did not have to discount anything. They could sell their party supplies for as much as they wanted because they didn’t have competition. Speaking to the New York Post in January 2023, Mandel said, “If you can’t afford to give discounts, maybe you can’t afford to be in business.”
He was eventually correct.
The company was able to stay afloat for a while with this tactic. But all the factors the current CEO blamed above ate away at a foundation that was built on loose mud. Don’t blame inflation, consumer behavior, or rising costs on Party City’s demise. Blame the guys who so weakened the company that those factors were able to easily topple a company that should’ve been able to survive it.
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