Upset that your favorite Red Lobster has closed? The Wizard of Wall Street had a lot to do with it.
Red Lobster is America’s largest casual dining operation, serving 64 million customers annually at nearly 600 locations in 44 states and Canada. Its May 19 bankruptcy filing and closing of nearly 100 locations across the country have devastated its legion of fans and 36,000 workers. The chain is so iconic that it features in a Beyonce song.
Assigning blame for company failures is tricky. But some analysts say the cause of Red Lobster’s woes isn’t the endless shrimp ads some have blamed. Yes, the company lost $11 million in shrimp escapes, its bankruptcy filings, and suffered from inflation and high labor costs. But a big culprit in the company’s problems is a financing technique favored by a powerful force in finance called private equity.
The technique, colloquially known as asset-stripping, has been part of the failures of retail chains such as Sears, Mervyn’s and Shopco, as well as bankruptcies involving hospital and nursing home operations such as Stewart Healthcare and Manor Care. All are privately owned.
Divestment occurs when an owner or investor in a company sells some of its assets and takes the profits for himself, winding up the company. This practice is favored among some private-equity firms, which buy companies, take out debt to finance the purchase, and hope to sell them to someone else at a profit in a few years. A common form of asset disposal is called a sale/leaseback and involves selling a company’s real estate; This type of transaction affected Red Lobster.
In recent years, private-equity firms have invested heavily in all areas of the industry, including retailers, restaurants, media and health care. About 12 million workers are employed by private equity-backed firms, or 7% of the workforce. Companies bought by private equity and in debt are 10 times more likely to go bankrupt than companies not bought by these companies, academic research shows. shows. A Report This month, Moody’s Ratings said a series of buyouts by private-equity firms are increasing corporate defaults and reducing investor bailouts as companies restructure.
The sale/leaseback that helped sink Red Lobster included the July 2014 sale of premium real estate under its 500 stores, which generated $1.5 billion. But that money never returned to Red Lobster; It went to a private-equity firm to finance its purchase of the chain. Red Lobster’s press release said. That firm is San Francisco-based Golden Gate Capital, which has $10 billion in assets.
Golden Gate paid $2.1 billion to buy Red Lobster in May 2014, so the real estate sale is key to the company’s financing. “Red Lobster is an exceptionally strong brand that has an unparalleled market position in seafood casual dining,” Josh Olshansky, Golden Cat’s managing director, said in a press release announcing the deal at the time. shows.
$1.5 billion in sales crippled Red Lobster. After the real estate was sold, Red Lobster had to pay rent on the stores it previously owned, increasing its expenses significantly. According to the bankruptcy filing, its rent will be $200 million a year in 2023, or roughly 10% of its revenue.
Asked about the negative impact the sale/leaseback had on Red Lobster, a Golden Gate spokeswoman declined to comment.
According to a press release announcing the sale/leaseback, American Realty Capital Partners, which purchased the property, received a good deal. It characterized the Red Lobster stores it bought as “untenable locations” and “premium real estate located at key intersections in strong markets,” but the properties were sold at “below replacement cost.” Under the terms of the sale, Red Lobster will also see regular rent increases of 2% per year, the release noted.
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 affected the company in several ways. First, the chain will not benefit from any intervention in the commercial real estate market. In addition, the new owner of the real estate did not offer Red Lobster good rental offers. As Red Lobster’s CEO noted in a bankruptcy court filing, “a portion of the company’s leases are priced above market rates.”
As is typical in private-equity buyouts, Golden Gate’s purchase of Red Lobster significantly increased the chain’s debt, adding high interest costs to its burden. In 2017, Moody’s Ratings, an independent rating agency, downgraded Red Lobster from stable to negative outlook. Moody’s cited the chain’s “persistently high leverage” or debt.
“Carrying a lot of debt and not owning your real estate puts companies at a disadvantage,” said senior policy analyst Andrew Park. Americans for Financial Reform, a non-profit and non-partisan organization that advocates for a sustainable and ethical financial system. “Red Lobster is another example of a private-equity playbook that will harm restaurants and retailers in the long run.”
In 2020, Golden Gate exited its Red Lobster investment and sold it to Thai Union Group, a Bangkok-based company and investor group. Thai Union calls itself “the world’s seafood leader” and its brands include Chicken of the Sea tuna products and King Oscar sardines. Terms of the transaction were not disclosed.
Regarding the bankruptcy, a company spokesperson issued a statement saying, “Thai Union has been a supplier to Red Lobster for over 30 years. We believe the court-supervised process will allow Red 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 ripple effect on the overall economy and cause unrest among consumers and workers, Robert said. ReichFormer Secretary of Labor under President Bill Clinton.
“One of the reasons people feel so insecure is because you have a lot of these financial games going on in the background, behind the scenes, that ultimately make the rich richer and hurt the working and middle class of America,” Reich said. Interview. “All the people who supply Red Lobster, all the people who provide services to Red Lobster, the small businesses in the communities affected by the mass layoffs, they’re next in line, they’re experiencing the ripple effect.”
Red Lobster’s employees are bearing the brunt of the collapse. Austin Hurst is the former grill master at Red Lobster in Arizona. In an interview, he said he learned from a friend who closed his shop and never heard from his manager or higher-ups in the company. He said that till about 3 months ago his shop was profitable.
“A month before closing, the district manager came in and said, ‘Yeah, this Red Lobster is really bright. You’re definitely going to be open,'” Hurst recalled.
Hurst said he was offered a job at another Red Lobster location, but it required a long commute and paid $17 an hour, down from the $19 he previously earned.
Sen. A Democrat from Massachusetts, whose eight hospitals are operated by bankrupt Stewart Health Care. Edward Markey recently conducted investigations into private equity and health care. He also proposed legislation that would require more transparency from private-equity-owned health-care companies, including sale/leaseback arrangements and fees collected by the private-equity company and dividends paid by the health-care company. Private equity funds.
“My law is very simple,” Margie 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 decide whether or not to sell the land under these hospitals and then re-lease the land. The hospitals do not have a negative impact on the delivery of health care in that community. .
Markey added that private equity is emerging in all areas of our economy, but its most profound impact is in health care. “More and more private equity is entering the hospital business,” he said, “and this is a foreshadowing of the atrocities that will plague our health care system.”
