How private equity rolled Red Lobster
Did Private Equity Sink Red Lobster?
Red Lobster, once America's largest casual dining chain, filed for bankruptcy on May 19 and closed nearly 100 locations, affecting its 36,000 employees. Analysts point to private equity's role, particularly the asset-stripping and sale/leaseback practices, as major factors in its financial struggles. In 2014, Golden Gate Capital bought Red Lobster and sold its real estate, leading to increased rental costs and financial instability for the chain. This type of financial maneuvering is common in private equity buyouts and has been linked to higher bankruptcy rates among acquired companies.
What was the experience of Red Lobster employees following the bankruptcy and store closures, as illustrated by the example of former grill master Austin Hurst?
Following the bankruptcy and store closures of Red Lobster, employees like Austin Hurst faced significant disruptions and uncertainties. Hurst, a former grill master at a Red Lobster in Arizona, discovered through a friend that his store had closed, highlighting a lack of direct communication from the company's management about the closure. Despite previous assurances from a district manager that his store was performing well and would remain open, the sudden closure contradicted these earlier statements. Hurst was subsequently offered a position at another Red Lobster location, but this new job required a longer commute and offered lower pay—$17 per hour compared to the $19 he previously earned. This situation reflects the broader impact on employees who were left to deal with job displacement, reduced wages, and the logistical challenges of longer commutes, underscoring the personal and financial strain faced by workers as a result of the company's financial troubles and restructuring efforts15.
What were the consequences of Red Lobster's increased operational costs due to the sale/leaseback deal?
The sale/leaseback deal significantly increased Red Lobster's operational costs, leading to several consequences that ultimately contributed to the company's financial struggles and bankruptcy filing.
Firstly, after the sale of premium real estate underneath 500 of its stores, Red Lobster had to pay rent on the properties it had previously owned. This added a significant financial burden to the company, with rents totaling $200 million a year or approximately 10% of its revenues by 2023.
Secondly, the company lost the potential benefits from any upside in the commercial real estate market, as it no longer owned the properties. Additionally, the new owner of the real estate did not give Red Lobster favorable deals on rents, with the CEO noting in a bankruptcy court filing that "a material portion of the Company’s leases are priced above market rates."
Lastly, the sale/leaseback deal was part of a larger pattern of private equity buyouts that left Red Lobster saddled with high levels of debt and interest costs, making it difficult for the company to invest in improvements or adapt to changing market conditions.