Angry that your favorite Red Lobster has closed? This was largely due to the magic of Wall Street.
red lobster was America’s largest casual dining restaurant chain, serving 64 million customers annually at nearly 600 locations in 44 states and Canada. Bankruptcy application dated May 19 and the closure of nearly 100 locations across the country has devastated its legion of fans and 36,000 workers. This chain is iconic enough to be featured in a Beyoncé song.
Attaching blame for a company’s failures is difficult. But some analysts say the root Red Lobster’s Troubles did not have endless promotions on shrimp which some blame. Yes, the company lost $11 million on the shrimp escapade, its bankruptcy filing shows, and was hit by inflation and higher labor costs. But the bigger culprit behind the company’s woes is a financing method favored by a powerful force in the financial industry known as private equity.
This method, colloquially known as stripping, was part of the bankruptcies of retail chains such as Sears, Mervyn’s and ShopKo, as well as bankruptcies involving hospital and nursing home operations such as Steward Healthcare and Manor Care. All of them belonged to private shareholders.
Divestment occurs when the owner or investor of a company sells part of his assets, taking the benefit for himself and hindering the company. This practice is favored by some private equity firms, which buy companies, load them with debt to finance the purchases and hope to sell them at a profit a few years later to someone else. A common form of divestment is known as sale/leaseback and involves the sale of real estate to a company; this type of transaction was hindering Red Lobster.
In recent years, private equity firms have invested heavily in all areas of industry, including retail, restaurants, media and healthcare. About 12 million workers work for private equity-backed companies, or 7% of the workforce. Companies bought out and indebted by private equity firms go bankrupt 10 times more often than companies not bought by these firms, according to academic research show. IN report Moody’s Ratings said this month that leveraged buyouts like those carried out by many private equity firms are leading to an increase in corporate defaults and reducing the amount that investors get back when companies restructure.
The sale/leasebacks that helped sink Red Lobster included the July 2014 sale of the luxury real estate beneath its 500 stores, which brought in $1.5 billion. But that money didn’t go back to Red Lobster; instead, he turned to a private equity firm to finance the purchase of the network. Red Lobster’s press release states:. That firm was Golden Gate Capital, headquartered in San Francisco and with assets of $10 billion.
Golden Gate paid $2.1 billion to buy Red Lobster in May 2014, so the real estate sale was critical to financing the firm. “Red Lobster is an exceptionally strong brand with an unparalleled position in the seafood restaurant market,” Josh Olshansky, managing director of Golden Gate, said in a press release announcing the deal at the time. show.
The $1.5 billion sale hurt Red Lobster. After selling the properties, Red Lobster had to pay rent for the stores it previously owned, significantly increasing its costs. Rent will be $200 million a year by 2023, or about 10% of revenue, according to the bankruptcy filing.
When asked about the negative impact of the sale/leaseback on Red Lobster, a Golden Gate spokeswoman declined to comment.
American Realty Capital Partners, the company that bought the property, negotiated a very good deal, according to a press release announcing the sale/leaseback. The company described the Red Lobster stores it acquired as “irreplaceable locations” and “high-quality properties located at major intersections in strong markets,” but noted that the properties were sold “for below replacement cost.” Under the terms of the sale, Red Lobster will also receive regular rent increases of 2% per year, the release said.
American Realty Capital Partners was acquired by Realty Income in 2021. Realty Income did not respond to a request for comment on the sale/leaseback.
The sale of Red Lobster stores caused some damage to the company. First, it meant that the chain would not benefit from the growth of the commercial real estate market. In addition, the new owner of the property does not appear to have offered Red Lobster favorable lease terms. As Red Lobster’s CEO noted in the bankruptcy court filing, “a significant portion of the company’s leases are priced above market rates.”
As is common in private company buyouts, Golden Gate’s purchase of Red Lobster significantly increased the chain’s debt, adding to its burden of higher interest costs. In 2017, independent rating agency Moody’s Ratings downgraded Red Lobster’s outlook from stable to negative. Moody’s cited the chain’s “persistently high levels of debt.”
“Having a lot of debt and not owning real estate puts companies at a disadvantage,” said Andrew Park, senior policy analyst at Americans for Financial Reform, a nonprofit and nonpartisan organization advocating for a stable and ethical financial system. “Red Lobster is another example of how private equity is hurting restaurants and retailers in the long term.”
In 2020, Golden Gate exited its investment in Red Lobster by selling the company to Bangkok-based Thai Union Group and a group of investors. Thai Union calls itself the “global leader in seafood” and its brands include Chicken of the Sea tuna products and King Oscar sardines. Terms of the deal were not disclosed.
Regarding the bankruptcy, a company spokesperson issued a statement saying: “Thai Union has been a Red Lobster supplier for over 30 years and we intend to continue that relationship. We are confident that the court-supervised process will allow Red Lobster Lobster to restructure its financial obligations and realize its long-term potential in a more favorable operating environment.”
Bankruptcies of companies like Red Lobster have a multiplier effect on the broader economy and contribute to anxiety among consumers and workers, Robert said. Reichformer Secretary of Labor under President Bill Clinton.
“One of the reasons people feel so insecure is because in the background, behind the scenes, there are a lot of these financial games that end up making the very rich even richer and hurting working and middle class America.” Reich said in his report. interview. “All the people who supplied Red Lobster, all the people who essentially provide services to Red Lobster, small businesses in communities affected by mass layoffs, they’re next in line, they’re experiencing a ripple effect.”
Red Lobster employees bear the brunt of the collapse. Austin Hurst is one of them, a former grill master at Red Lobster in Arizona. In an interview, he said he learned from a friend that his store was closing and had not heard from his manager or other company executives. He said that about 3 months ago he was told that his store was profitable.
“About a month before closing, the regional manager came in and said, ‘Yeah, that Red Lobster looks really bright. And you guys will probably stay open,” Hirst recalls.
Hurst said he has been offered a job at another Red Lobster restaurant, but it requires longer travel and pays $17 an hour, compared to the $19 he previously earned.
Sen. Edward Markey, a Democrat from Massachusetts, home to eight hospitals run by bankrupt Steward Health Care, recently held a hearing on private equity and health care. He also proposed legislation that would require greater transparency from healthcare organizations owned by private equity firms, including disclosure of sale/leaseback agreements as well as fees charged by the private equity firm and dividends paid by the healthcare organization to the private equity fund.
“My legislation is pretty simple,” Markey said in an interview. “To ensure that these financial scams do not have a profound impact on communities across our country, the Department of Health and Human Services must determine whether it is worth selling the land under these hospitals and then leasing that land back to hospitals without negatively impacting the provision of health care in this community.”
Private capital is emerging in every aspect of our economy, Markey added, but its most profound impact is in health care. “The more private equity gets into the hospital business,” he said, “the more it is just a preview of the atrocities to come that will affect our health care system.”