If you think a poorly planned and kind-of-idiotic all-you-can-eat shrimp promotion is what caused the Red Lobster restaurant chain to file for bankruptcy, you need to do a deeper dive into the stormy seas the company’s one-time owners put it in.
T’wasn’t shrimp that sunk Red Lobster: it was private equity once more harpooning a company for their own benefit.
Don’t think management – managements, actually – didn’t do all they could to make Red Lobster a shipwreck. There were lots of bad decisions besides the stuff-your-face promos including using one of its owners as its prime source for much of its food needs, apparently to the benefit of this owner and removing competition from the ordering process.
But it was a one-time private equity owner, Golden Gate Capital, that may have done the most damage. Golden Gate bought Red Lobster in 2014 for $2.1 billion with big plans to make the chain more profitable by cutting costs and efficient. So one of the first things it does is sell off most of its entire real estate portfolio – that’s the restaurant locations themselves – to a third party for $1.5 billion. Do the math and you’ll see Golden Gate got most of its initial investment back right there…and they still owned the company itself.
They call this gimmick a “sale leaseback” and it is more common than it has any right to be in the world of private equity ownership. It’s what these guys do to get their money back quickly. What it essentially does is make the company itself a renter of its own restaurants, paying monthly for the privilege. We’ve seen lots of real estate-intensive companies – particularly in the retail space – get sucked into this death spiral and in fact it’s what is being speculated is the business strategy of the outside investors trying to buy Macy’s.
There doesn’t seem to be any examples of this strategy working and more often than not it puts the company straight on the same path Red Lobster found itself in…into bankruptcy. Golden Gate ended up selling the company to that seafood supplier but it seemed like it got its money out of the deal and follows at least one other similar stunt it pulled. It once owned Payless, the shoe retailer. According to a The American Prospect website story, “Over the first two years of Golden Gate’s reign at Payless, the retailer generated $322 million in operating profits and paid $352 million in one-time dividends to shareholders, the largest being Golden Gate, along with $83 million in interest payments on the debt it had been saddled with from the purchase. That left it with virtually no resources to adapt to the e-commerce era as its sales cratered.”
It’s what private equity firms do. Eddie Lampert, who destroyed Sears ad Kmart, was a master at it.
So don’t blame people eating too much shrimp for Red Lobster’s bankruptcy. (The American Prospect wrote that legal bills so far from the chapter 11 filing almost equal what the company said it lost on this promotion.)
There may be a few cases where private equity investors made a company better and everyone won. But in the case of Red Lobster, everyone seems to have lost. Including people who like to eat a lot of shrimp.
WarrensReport 