How Private Equity Put the Fork in Red Lobster
Red Lobster was the largest casual dining chain in the U.S.
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It wasn’t only all-you-can-eat shrimp for $20 that drove the Red Lobster restaurant chain to claim bankruptcy on 19 May, an NBC News investigation says.
“A bigger culprit in the company’s problems is…private equity,” the report alleges.
Red Lobster was the largest casual dining chain in the U.S., with more than 600 locations in 44 states. Its 36,000 employees served 64 million diners a year.
What happened?
First, it was the company’s endless shrimp debacle.
In 2020, Bangkok seafood company Thai Union became Red Lobster’s majority owner. It brought in Paul Kenny as the new CEO, who ended relationships with two other suppliers and made Thai Union the chain’s exclusive source for shrimp.
As an exclusive supplier, Thai Union was able to charge the chain a higher price for shrimp.
The Thai firm also forced the $20 shrimp promotion onto the menu as a regular item, guaranteeing it a steady, booming market for its shrimp.
As labor and supply costs rose, the promotion became a money hole, losing $11 million. That contributed to a net loss of $76 million in the company’s fiscal year 2023.
However, the Endless Shrimp Summer promotion, as it was called, was only a last straw, not a root cause, NBC said.
The company’s problems began before Thai Union became involved and dated back to 2014 when private equity firm Golden Gate Capital bought the seafood chain for $2.1 billion.
Private equity firms are known for a practice called “asset stripping,” in which a private equity firm buys a company, sells some of its assets, and keeps the proceeds for itself instead of feeding the money back into the company it bought. That leaves the company poorer.
Asset stripping has been linked to bankruptcies of retail chains Mervyn’s, Sears, and Shopko and of hospitals and nursing homes such as Manor Care and Steward Health. All were owned by private equity companies, NBC noted.
The form of asset stripping that Golden Gate brought to Red Lobster is called a sale-leaseback arrangement.
With Red Lobster, it worked like this.
As Red Lobster’s new owner, Golden Gate sold the land under 500 Red Lobster restaurants to a real estate investment firm called American Realty Capital Properties (ARCP), another private equity firm. The sale generated $1.5 billion.
However, that money did not flow back to Red Lobster.
Instead, Golden Gate took the $1.5 billion to pay for its purchase of the restaurant chain.
Then ARCP began charging those 500 restaurants rent for the land they sat on. Under the terms of the sale, ARCP jacked the restaurants’ rent by 2 percent every year.
The sudden rent charges robbed the company of working capital. The company took on debt, incurring interest costs and driving its Moody’s rating from stable to negative in 2017.
Red Lobster was in bad shape by the time the COVID lockdown closed its stores and post-COVID inflation sent its costs soaring.
By the end of 2023, rent was eating 10 percent of the chain’s gross revenues, according to its bankruptcy filing.
“Carrying a lot of debt and not owning your real estate puts companies at a disadvantage,” analyst Andrew Park at Americans for Financial Reform, said to NBC. The group advocates for a fair and ethical financial system.
“Red Lobster is yet another example of the private equity playbook of harming restaurants and retailers in the long run,” he added.
Steward Healthcare and its eight bankrupt Massachusetts hospitals is yet another instance.
Senator Ed Markey from that state has now proposed a law that would require private equity companies to publicly report sale-leaseback arrangements, fees private equity firms collect from healthcare businesses they own, and the dividends those businesses pay to their private equity owners.
“My legislation is quite simple,” Markey told NBC.
“To make sure these financial shenanigans don’t have a profound impact on communities across our country, the Department of Health and Human Services has to determine whether the sale of the land underneath hospitals and then having that land rented back to the hospitals isn’t having a negative impact on the provision of healthcare in that community,” he explained.
“The more private equity gets into the hospital business, the more this is just a preview of coming atrocities affecting our healthcare system,” he added.
TRENDPOST: Private equity firms have stretched their tentacles throughout the global economy, owning major pharmaceutical companies, cutting-edge tech businesses, rental housing, and enterprises in everything from hydraulic hose manufacturing to bridge construction.
We document this ongoing takeover of the American economy in our regular section, “Bigs Getting Bigger.”
Private equity employs about 12 million people, around 7 percent of the U.S. workforce, according to NBC.
Companies bought and thrown into debt by private equity firms go bust at 10 times the rate of other businesses, various studies have shown.
Leveraged buyouts—deals that pile debt onto acquired companies—increase the number of companies that default on their debts and cut the money available to investors when a company goes bust and restructures, NBC noted.
TRENDPOST: Each bankruptcy created when a private equity strips a business ripples across the economy, costing jobs at suppliers’ firms and sales at stores where suddenly unemployed people used to shop.
Repeating what we have long been reporting, Robert Reich, professor of public policy at the University of California and labor secretary under President Bill Clinton said that private equity’s dealings is one reason people have less faith in the economy now than in the past.
“One of the reasons people feel so insecure is that you’ve got in the background, behind the curtain, a lot of these financial games that ultimately are making the very rich richer and hurting America’s working and middle classes,” Reich said in an NBC interview.
“All of the people who were supplying Red Lobster, providing services to Red Lobster, the small businesses in the communities affected by mass layoffs, they’re next in line,” he said.
Vampire Capitalism at its finest
I'm a commercial property manager in Alberta and had a front row seat to private equity take out Sears, one of the longest operating retailers in Canada. They are responsible for alot of retail destruction.