As we are all aware, the Red Lobster chain is declaring bankruptcy, and the media take is something to the effect of, "All you can eat shrimp did them because Americans are gluttonous fat f%$#s."
While the shrimp was a money loser for the seafood restaurant, those losses were an insignificant part of the problem.
The real problem was (no surprise) that private equity (PE) looted them after buying the chain.
This is not a surprise.
Classic PE tactics are things like loading the companies they buy in debt, selling off the real estate underneath these companies to themselves and taking the proceeds for themselves, etc.
There are lots of stories you can tell about why Red Lobster declared bankruptcy this week. You can point to the impact of the COVID pandemic, which put a dent in the full-service dining market that Red Lobster never recovered from. (According to its bankruptcy filing, Red Lobster’s guest count is down 30% from 2019.) You can cite the impact of inflation and higher wages for restaurant workers, which has raised the cost of dining out and made cheaper fast-casual restaurants more appealing to consumers. And you can enumerate the chain’s marketing missteps, including its introduction of the now-infamous Ultimate Endless Shrimp for $20 promotion in May 2023, which cost Red Lobster $11 million in losses in less than a year. But the biggest reason Red Lobster went under is pretty simple: Its owners sank it.
The first of the owners in question was a private-equity firm called Golden Gate Capital, which bought Red Lobster in 2014 from Darden Restaurants, which owns a number of different restaurant brands, including Olive Garden and LongHorn Steakhouse. Typically, when a private-equity firm takes over a company, it finances the acquisition by loading the company down with debt, which makes the deal cheaper for the PE firm but also makes it harder for the company to thrive. In Red Lobster’s case, though, the problems went beyond that. While Golden Gate Capital did add debt to Red Lobster’s balance sheet, it also made another move, selling off Red Lobster’s real-estate assets for $1.5 billion, forcing Red Lobster to lease those locations back.
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The rents on many of these properties are also, according to the bankruptcy filing, priced above market rates. The result is that last year, the company spent almost $200 million leasing locations, a full third of which it spent on locations for what it calls underperforming stores. (Golden Gate did not respond to a request for comment.)
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That wasn’t the only time a Red Lobster owner helped itself while hurting the company. In 2016, Golden Gate sold a 25% stake in the company for $575 million to a seafood company called Thai Union, which was (and is) one of Red Lobster’s biggest suppliers. And four years later, in the middle of the pandemic, Golden Gate sold off its remaining stake to Thai Union and a consortium of other investors. That was a good move by Golden Gate. But it meant that Red Lobster was being controlled by owners without much restaurant experience at a moment when the chain was confronting some of the biggest challenges in its history. And this problem was compounded by the fact that the company’s longtime CEO Kim Lopdrup stepped down the following year. Over the next three years, the company would have four different CEOs.
Thai Union’s acquisition of Red Lobster also created an odd set of incentives. Thai Union, as one of Red Lobster’s biggest suppliers of shrimp, had a clear incentive to increase the amount of shrimp Red Lobster bought from it, as well as the prices it paid for that shrimp. And Red Lobster’s CEOs had an incentive to keep the owners happy. So perhaps it was no coincidence that in 2023, Red Lobster’s former CEO Paul Kenny made the Ultimate Endless Shrimp deal, which had previously been only a short-lived promotion, a permanent part of the menu—even though, according to the bankruptcy filing, there was “significant pushback” against the idea from other members of the management team.
This is looting, and this should be fraud under the law, and the proceeds that Golden Gate made from this deal, particularly the (not mentioned in the article) management fees should be subject to claw-back in bankruptcy.
This is really a microcosm of what is wrong with business and finance in the United States.
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