Preserving Capital through Bankruptcy

The New York Times recently published a piece entitled “When Kmart Moved Out, Churches and Flea Markets Moved In.” The article, penned by Kevin Williams, provides an instructive subtitle: “The retailer’s former stores are being used by tenants that might not typically get a crack at such a large haul of commercial space at an affordable price.” 

“When it merged with Sears in 2005, Kmart had 2,085 locations. With the abrupt closing of the Astor Place Kmart in Manhattan last month, the number of open Kmart stores is down to 17,” Williams writes.

Sears filed for bankruptcy in 2018, with the assets sold to hedge fund manager Edward Lambert’s Transformco. But, while bankruptcy has a negative connotation in the business world, as Jörg Guido Hülsmann wrote in The Ethics of Money Production, “Bankruptcy fulfills the crucially important social function of preserving the available stock of capital. And it plays this role in all conceivable scenarios: when it results from fraud, when it results from insolvency, and when it results from illiquidity.”

The capital in Kmart’s case once featured blue-light specials, now people flock to some of the repurposed buildings to see the light. For instance, Elevation Church, a Baptist ministry with 20 locations, was looking to expand further and now occupies a portion of a former Kmart. Not needing all the space, an unlikely neighbor is a bowling alley with the last unused 38,000 square feet to possibly be a call center.

Royal Emerald Pharmaceuticals found the perfect space in a closed Kmart in Desert Hot Springs, California in 2019. “We needed a lab, and we needed it fast for government contracts,” Royal Emerald’s chief executive, Mark Crozier, told the Times. “It would have cost us millions of lost dollars in contracts to build a box like this from scratch.”

The company was up and running in 30 days and has since made $30 million in improvements to the buildings. 

While the bankruptcy is recent, Kmart’s entrepreneurial errors began decades ago. Robert Lang VP of real estate for Kamin Realty Group in Pittsburg explained that when the company expanded in the 1960s and ’70s, company executives ignored the impact of interstates and never changed course, while competitors such as Walmart located stores next to interstate interchanges, focusing on growth areas beyond suburbs known as exurbs.

While old Kmarts are not for every tenant, given the dated construction and potential asbestos issues, “A lot of these inner-city locations are really good for last-mile delivery for online products,” said Professor Strong of William & Mary. Also, all Kmarts have loading docks which make for easy deliveries.“The Kmart footprint has lots of alternative uses as opposed to a typical big-box store,” he said.

The beauty of capitalism is the adjustments that entrepreneurs make to use existing capital stock. As Professor Hülsmann wrote about bankruptcy, “It puts an end to wasteful—and therefore socially undesirable—firms, and it forces their stakeholders (laborers, capitalists) to invest their human and material resources in other firms, where the rewards are lower, but which produce more than they consume.” 

While in the following Hülsmann writes about deflation, the point applies to bankruptcy, “from the aggregate (social) point of view, it does not matter who controls the existing resources. What matters from this overall point of view is that resources remain intact and be used. Now the important point is that deflation does not destroy these resources physically. It merely diminishes their monetary value, which is why their present owners go bankrupt. Thus deflation by and large boils down to a redistribution of productive assets from old owners to new owners. The net impact on production is likely to be zero.”

Williams writes, “Approximately 230 million square feet of commercial footage from shuttered Kmarts has gone on the market, much of it in the past decade, the equivalent of 100 MetLife Stadiums or 50 Mall of Americas.”

A huge amount of capital stock is being put to good use.