I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is:<p><i>Why is this profitable?</i><p>If the land is worth $1.5 billion, it should have cost PE more than $1.5 billion to buy the company. Then there would be no way to make a profit by selling the land, paying yourself, and letting the company go belly-up.<p>Why does PE keep doing this? Presumably because it works? But why does it work? Are the sellers less sophisticated at asset valuation than the buyers, and frequently lowball themselves? Or maybe owners/stockholders are sometimes just tired of holding this asset, want cash to reinvest somewhere else, and are willing to cash out at a discount?
I've seen many people saying, on this site and others, that they "believe in markets", as if it was their profession of faith.<p>When markets are allowed to work "normally", this is what always happens: regulations are lobbied to the ground, resources get depleted, profitable companies get destroyed to make a quick buck and everyone is worse off in the long term.<p>Having a strong economy is sadly harder than letting the markets "work their magic".
To me this is not even slightly surprising. Red Lobster used to be at the top of our list of restaurants. Then in recent years the quality of both the food and service deteriorated. One visit the food was so bad I couldn't even eat it. That was compounded by not having a server to talk to. Took our order and never returned - even had someone else bring out the order.<p>The thing about a restaurant is that you'll always have business if the food and service are good. You can talk about how the market changed or whatever, but no restaurant can survive at that price point while offering so little.<p>We had a chain BBQ restaurant in town that had a booming business for more than a decade. Then the quality of the food went downhill and they shut down, citing lack of a market. They had a market for years but there's no market for crap. Red Lobster's situation is no different.
I think the author has a hard time trying to put a "why should we care?" spin on this at the end: Middle class families need a nice night out, and red lobster is the best way to do that!<p>Totally agree that this is vicious jackal like behavior by the PE funds. But as others have said, this is the lifecycle of a dying company. If red lobster's share prices were high because they were extremely profitable and everyone loved the restaurants:<p>A) it'd be too expensive for PE to buy up a controlling share<p>B) The smart move wouldn't be to strip the company for parts, the smart move would be to keep running the business well and soaking up the cashflows<p>This stuff happens to a limping company and the PEs are the wild dogs picking off the old weak corporations.<p>I think articles like this are pulling a switcheroo where it gets you to engage your moral indignation emotions and aim them in defense of a corporation. Those emotions are appropriate if we're talking about a human being, but aren't when we talking about a company. Imagine a PE fund doing some equivalent to an elderly person, <i>that</i> would actually be outrage worthy! This is just corporate finance, don't let it get to you.
They sold their real estate for 1.5 billion and then red lobster paid 200 million a year in rent.
That’s insane.
In 7.5 years they would pay back the purchase price.<p>That just seems like a massively bad deal for red lobster, I wonder was there another way the private equity firm made out on that deal ?
These private equity deals are the convergence of a couple of phenomena.<p>The most obvious is low interest rates, which is fortunately dying off. The ability to borrow lots of money is something that smaller, well-run companies, are reluctant to do. Why bring in a bunch of cash to expand and take on debt when you are operating at a reasonable profit?<p>The secondary is the undervaluing of customer goodwill -- what PE firms can do is directly monetize that goodwill by squeezing those customers. The income stream from a reliable customer can be translated into present value, and prices and quality can be adjusted to the point where you can drive a customer's goodwill down to zero while extracting something that approximates the present value of the lifetime income stream from that customer.<p>Inflation plays a role -- businesses are reluctant to raise prices because they don't want to sacrifice goodwill, but the supply chain costs keep going up. They have to somehow maintain margins, but they do so by raising prices slowly. PE has no such scruples.
I'm continually amazed by how much outrage normal and perfectly reasonable business strategies generate in the general public.<p>None of this is unusual or in any way wrong. Red lobster (and olive garden) were mismanaged, and the investment funds were right about that.<p>Their attempts at salvaging the situation were perfectly reasonable, even if they were ultimately unsuccessful.<p>You're welcome to be outraged, but that doesn't mean there was anything untoward happening here.
The real estate deal seems rather tame, compared to the "Endless Shrimp" deal perpetrated later by their new owner: <a href="https://www.bloomberg.com/opinion/articles/2024-05-20/the-endless-shrimp-investigation" rel="nofollow">https://www.bloomberg.com/opinion/articles/2024-05-20/the-en...</a>
I need to resurrect my idea of a list of companies (especially ones that manufacture goods) that are owned by Private Equity so people can avoid them.<p>In most cases, the brand name stays the same but the quality falls off a cliff.
So GG Capital paid $2.1B for Red Lobster, and sold the land for $1.5B. They still owe $600M on their purchase! Did they sell the remnants to Thai Union for > $600M? Only then this whole thing makes sense.
Even without private equity's meddling, Red Lobster would have been in a rough spot. Family dining as a segment (lower end restaurants, but with table service) is being squeezed aggressively. Compared to Gen X and before, Millennials on average are valuing food quality over service experience, ballooning the fast casual (order at the counter, but nicer than fast food) segment. This is squeezing family dining from below, meanwhile their branding as ubiquitous and affordable prevents them from raising prices too much without bumping up against the fine dining segment (and who wants to bring a date to Olive Garden?).
<a href="https://prospect.org/health/2023-05-23-quackonomics-medical-properties-trust/" rel="nofollow">https://prospect.org/health/2023-05-23-quackonomics-medical-...</a><p>Interesting story of how some private equity guys would<p>- buy hospitals<p>- sell the real estate for more than they paid for the hospital, signing a long-term lease at a high rent<p>- pay themselves an immediate huge profit. the higher the rent the hospital promised, the bigger the sale/leaseback deal, so the bigger the profit.<p>- default, hospital goes bankrupt, the community and the dumb patsy who bought the hospital gets left holding the bag.<p>classic bustout from Goodfellas or The Sopranos, but mobsters get investigated, PE guys don't.
Looks like a prime market opportunity for a competing chain with competent management. The PE firm's loss can now be someone else's long-term gain.
Can someone help explain restaurant industry economics?<p>when the business starts out, it's high risk and low margin. Tons of capital investment. Labor intensive and hard to staff. If you are lucky you are pulling 15% margins<p>Besides some exceptions, if you are lucky you may get some growth for 5-10 years. Then your brand falls out of favor (trends) and you spiral into bankruptcy.<p>Who invests in this stuff?
I look at private equity as sort of like a bacterial infection. The infection may be the thing that kills its host by sucking of all of its energy, but the reason the host was infected in the first place was because of some other problem that led to a weakened immune system.<p>Private equity firms prey on companies that are already struggling. Yes, they take a struggling company and hasten its demise. But healthy companies don't end up getting bought by private equity in the first place.<p>In this case, I think dining culture has just changed in a way that's incompatible with Red Lobster's brand. It used to be considered higher-class fare, but drifted down market like almost every large restaurant chain does (see also: Friday's, Applebee's, etc.). For a while, it survived on the unusual combination of being a nice-seeming sit-down seafood restaurant, but not actually that expensive or close to the sea.<p>But, of course, the way they were able to do that was by cutting every possible corner (for example, calling langostino "lobster"). Diners today care more about their health and where their food is coming from. The post-WWII culture of "we can trust big companies because they're successful business" has been replaced by "we can't trust big companies because they must have grown by doing shady shit".<p>Frankly, a cheap restaurant in the midwest that lets you eat unlimited lobster no longer seems a delightful treat and a hell of a lot more like a suspicious food poisoning trap.
>> To raise enough cash to make the deal happen, Golden Gate sold off Red Lobster's real estate to another entity — in this case, a company called American Realty Capital Properties<p>I wonder if the Golden Gate investors also own American Realty, or are good friends of theirs. Sure GG made their money, but owning the real estate seems like a second good investment so long as the chain doesn't go under and the lease terms are favorable.
Private equity firm wants to buy Red Lobster, but they don't have enough money. So to afford the sale, they make a deal to sell the land every Red Lobster sits on to a firm that will charge Red Lobster above-market rate rent to stay in business.<p>This doesn't seem like it should be legal.
Private equity is also getting into professional American football.<p><a href="https://bleacherreport.com/articles/10122183-report-nfl-owners-establish-framework-to-allow-private-equity-investment-in-teams" rel="nofollow">https://bleacherreport.com/articles/10122183-report-nfl-owne...</a>
Unfortunately in the late Capitalism that reads more like Feudal than Capitalism, there is not much we can do, and so be it.<p>There is a time that all shall burn and rot and a new world may come forth.
One can blame the private equity investors buying it, but every sale requires not just a buyer, but also a seller. The owner of RL sold it to this private equity firm for an amount they felt was proper. The PE firm got more money out than they put in, so they increased the value of the assets. If this meant (in effect) shutting down RL in slow motion, then so be it. Sometimes it's best to just put a pillow over a company's face and say that's it.
PE is currently in the process of destroying my employer, a nearly 100-year-old engineering firm. Two PE firms teamed up to do some kind of financial voodoo debt transfer reverse mortgage buyout takeover and are slowing inserting their claws inch-by-inch into the management structure of the company.<p>We've been profitable every single quarter of every single year for almost a century. We're a money-printing machine that nobody has heard of unless you build nuclear reactors and satellites and need something only we make.<p>But we are not profitable enough. We are relatively vertically integrated in our niche field and are very, very, slightly less profitable than our competimates, within 1% of places like Northorp and Boeing (uhh.. when they, you know, make money) who outsource practically everything.<p>So fat needs to be trimmed to get that 1%.<p>I am moving on, going 1099 as a consultant, after 17 years at the same desk in the same office in the same building, as is practically everyone else and we're spending precisely 0% of our remaining time passing on our institutional knowledge.
"The thing that private equity does is just unload assets and monetize assets. And so they effectively paid for the purchase of Red Lobster by selling the real estate,"<p>They did the same thing with Sears and many others.They short sell the company, buy it, sell anything valuable and destroy it.
Watching private equity take over and subsequently destroy businesses is so frustrating! This is a story that comes up again and again and there isn’t yet the overwhelming backlash that’s necessary to stop it. I highly recommend the book “Plunder: private equity’s plan to pillage America” for an extremely cogent overview of the entire situation. <a href="https://www.goodreads.com/book/show/62874267" rel="nofollow">https://www.goodreads.com/book/show/62874267</a>
Company Man on YouTube did a great job breaking this down about a week ago: <a href="https://www.youtube.com/watch?v=I17aERAQPfc&pp=ygUXY29tcGFueSBtYW4gcmVkIGxvYnN0ZXI%3D" rel="nofollow">https://www.youtube.com/watch?v=I17aERAQPfc&pp=ygUXY29tcGFue...</a>
Red Lobster did not go bankrupt because of Endless Shrimp. On the revenue side, customers generally have been turning away in favor of competing dining options. On the expenses side, the company has to deal with high labor costs, expensive restaurant leases - and meddlesome PE investors that have led to high leadership turnover.<p>Going into bankruptcy might actually allow them to address their debt and operational losses
Red Lobster has cheapened out its products all over the place. Pennywise, dollar stupid.
- Got rid of Thousand Islands and Raspberry vinaigrette dressing
- Got rid of the lobster and the fake lobster from the "lobster" bisque
- You only get 1 bread per person now
- Sweet chilli shrimp that used to be battered and fried at the restaurant replaced with some no name brand microwavable chilli scrimp
- To save money, they purchase the runt of the crab and lobster, the ones that barely make legal length, that no one wants to buy
- Mushroom caps mushrooms are now bottom of the barrel white mushrooms<p>This "restaurant" is now pure garbage.. used to go all the time, but quit going about a year ago. I'm not interested in spending 100$ per person for fast food
Tiffany Cianci is at the dead center of a battle with private equity trying to monopolize young child development centers. Her horrific personal story will open your eyes as to just how depraved and soulless private equity can really be in their attempt to take over the world. (TL;DR: they literally forced her give a deposition <i>while she was having a miscarriage</i>.) The government should be writing laws to curtail these kinds of bloodsucking parasites.<p><a href="https://www.tiktok.com/@tiffanycianci" rel="nofollow">https://www.tiktok.com/@tiffanycianci</a>
I can’t wait until private equity companies are exposed as the exploitive side of our current system that needs to be corrected. At the heart of so many good companies are bad decisions driven by PE structures and personalities, most of whom seem very toxic and short sighted. Surely there is a better model of capitalism — I am not so vapid as to turn against the obvious advantages of the system. But I am also not willing to endorse the current approach as anything but exploitation with extra steps.
I haven’t been to Red Lobster since 2019, and even during that trip the quality of the food was severely degraded from what I remembered it to be. Their garlicky biscuits were quite nice, though. What baffles me about this story is the fact that they’re continuing to sell the endless shrimp, despite the fact that it lost them 11 million dollars. Old habits die hard, I guess.
Not sure about the expensive lease angle. The red lobster in my home town has had the same physical location longer than I’ve been alive. I assume many other red lobster locations are in the same situation.
I went to red lobster in Toronto yesterday as a "lets save red lobster Canada" idea I had in my head, they came to Canada the year I was born and my dad was obsessed so I have a lot of nostalgia.<p>Came out thinking: let em burn.<p>Worse than mediocre rubber for $200 after tip and tax.
I'd like to see business schools codify "brand value extraction" or "enshittification" as explicitly unethical. Any activity that degrades a brand for short-term cashflow--and is reasonably know to decrease future business--is necessarily fraudulent.<p>If that is codified and taught, then journalists can point to that in all cases (of which we are overrun). It's pathetic.
tl;dr summary in 3 points:
1) Heavy debt from private equity deals and increased lease costs made Red Lobster financially vulnerable. 2) Customers drifted away to other dining options, and frequent leadership changes hindered a stable turnaround plan. 3) The Endless Shrimp promotion, while a poor decision, underscored the company's larger management issues.
Shrimp - the cockroaches of the ocean.<p>I never eat the stuff including lobster (non allergic) but one time I was relocated to Germany to help ship a new software release (English technical documentation) and was invited to a meal with my colleagues and his family.<p>Out comes a big bowl of shrimp for everybody with the skins and feet and antlers on - think we had a language misunderstanding.<p>Not wanting to offend and send it back - did not even know how to disassemble it - ate a few and back at the hotel you know what happened :).