The fishy death of Red Lobster
businessinsider.com
businessinsider.com
Why is this profitable?
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.
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?
Most deals are successful under their management, and this is why banks usually lend 70-90% of the purchase funds.
They specifically target companies that are undervalued, in distress, and can be turned around or liquidated for more than the cost.
PE isn't an exotic business philosophy. It is literally just a private buyer.
With a complex tax-favorable structure, https://www.ropesgray.com/en/insights/alerts/2019/02/tax-iss...
Although often to the detriment of customers as I have seen with several vets and my former dentist. Prices suddenly doubled and tripled or even more.
https://open.substack.com/pub/adaml/p/a-conversation-with-br...
Some mortgages and credit cards end in bankruptcy too. They set their interest rate according and it is a cost of doing business.
PE here acts like a fungus unlocking the energy stored in dead trees that have fallen to the forest floor. :P If this is good nor not depend on if you're one of the creatures that has made their home in the log, if you're the fungus, or if you're the newly growing shoots that appreciate clearing out the obstructions.
PE "vulture capitalism" is profitable because it takes advantage of vulnerable people who want to see their dream continue. and yes, the execs at $1.5bn companies can still be vulnerable people who want to accomplish something in the world.
the argument that PE firms are skilled managers only holds water if they actually turn the companies around and make them succeed. but more often than not they don't, they're burning things down to milk as much profit as they can before the end.
Most people don't have experience on how to squeeze the last drop of value from a struggling company. And many don't know how to quantify the value either. So if the average corporate executive tried doing this, they might not recoup the full value than if they just sold to the "experts".
In this case, it's more like private equity wasn't as smart as Red Lobster's owners, so now Red Lobster's owners have extra capital to allocate in the economy. Which is also arguably good.
If you liked the restaurant, of course, none of this is much comfort. But if nobody with a ton of money thinks Red Lobster is a good use of capital, from either a financial or sentimental perspective, it may go the way of the dodo.
1. buy asset-heavy companies with good cashflow and add to you portfolio. 2. aggressively cut costs on long-term investments like R&D, major capital projects, and squeeze OPEX 3. at the same time focus solely on S&M. If possible get everyone on multi-year contracts that last until year 6 (often with heavy discounting on the back end) 4. shed impressive dividends over the term 5. years 3-4 make signalling investments that hint towards hockey-stick growth: (real life) examples: 1. replatform your database from on-prem to AWS, 2. move OFF aws to fixed-provisioned (I'm not making this up) 6. shop for a new PE fund to sell. Look for a 3x or higher multiplier on initial investment 7. sell, repeat, parchute in your bench of executives.
Eventually you've got a bunch of companies that look like subprime-backed CDOs
sometimes the company is worth more dead than alive, the parts are worth more the whole, especially when you can leave someone holding the bag, and the PE company gets paid to make them dead.
in any event the company is worth more to an extremely unscrupulous buyer than as a going concern in public markets.
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.
Having a strong economy is sadly harder than letting the markets "work their magic".
Strong companies usually aren't killed in this way. They are making everyone money and their share price is too high to allow activists to get a controlling interest.
"Regulations are lobbied to the ground" is not what is described in the article. The regulation was to conserve fish, and it was so onerous to comply with that only large companies could do it efficiently. Assuming this description is accurate, regulation (i.e. non-free markets) is causing this side-effect of consolidation.
Now, is the regulation worth the side effect? If the consequence is overfishing, yeah, I'll take a little hit to market efficiency to avoid tragedy of the commons. Avoiding tragedy of the commons is a great thing for the government to regulate. The flip side is that the government should have enforced anti-trust better to prevent the consolidation.
It will never happen, of course. The purpose of capitalism is not to serve customers by fostering competition, the purpose of capitalism is to give rich people an excuse to pay themselves for being rich. To establish, reinforce, and perpetuate a class hierarchy where the people on the bottom must constantly pay to exist while the people on top get paid to exist through their stocks, bonds, and real estate holdings. From this cynical perspective monopolies are a feature, not a bug. But if they were a bug, progressive taxation is how you would fix it.
I think the parent post is a fundamental misunderstanding of what markets are intended to do. If you want a static world that doesn't and can't change, then of course something like a command economy is preferable
It seems to me that some people simply don't like change for sentimental reasons. There is no shortage of restaurants, and most frankly seem better.
You also might be shocked to find that Native Americans also had a market economy.
And what do you mean about Native Americans having a market economy? Are you honestly comparing their economic system with ours? Or are you making a bad faith argument in favor of laissez-faire capitalism?
Yes, there was a time during industrial revolution when laissez faire was experimented with in a region of England. It ended up in a total hellhole apparently. Also it looks like it was tried in Norway to a lesser degree and it ended up in another hell:
https://www.quora.com/What-would-happen-if-the-Nordic-countr...
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.
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.
"Red Lobster failed because of X corporate restructuring," "Red Lobster succeeded due to Y ad campaign." People go to restaurants for reasons completely unrelated to things like that. Those things are important, but just constitute the small slice of reality that can easily be measured.
I saw a Twitter thread arguing how the video game Stardew Valley succeeded due to the way it was marketed. Marketing is important, but maybe the game succeeded because it was cute and had a soul and is fun to play. You can't measure that.
A developer who genuinely cares about the quality of the game, interacts positively with the community around it, and makes decisions that demonstrate his caring for the game and the community. Specifically, decisions that often leave revenue on the table, particularly in the short term but arguably in the long term as well.
That sort of caring is largely impossible for private equity, and it's really hard to successfully fake.
Is it the financialization of everything? Is that we reached peak growth and profit increases are only possibly through extreme optimization? Is it financial inequality?
But what ends up often happening is data-driven myopia. You see some statistic that doesn't seem optimal and you end up optimizing for that instead of figuring out how it fits into the big picture.
Restaurants, at the end of the day boil down to food. You serve food. People either like the food or they don't. How many customers you get is a function of how much people like the food, how competitive the pricing on the food is, and the market you're in.
Red lobster at the end of the day suffered from people not wanting to pay what they were charging for low quality, uninspiring seafood dishes.
People nowadays are struggling more (spare me the CPI data, hedonics and other basket adjustments mean the situation for most people is quite a bit worse than it was a few years ago) and there needs to be a value prop for dining out.
I'm a full on stardew addict. I was waiting for a game to rekindle the feeling I had playing the original harvest moon on snes. natsume just made a ton of crap sequals focused on making it all 3d.
concernedape, distilled the snes version down to what made it fun and built it up fron there. it scratched the itch better than any of natsume's sequals ever could.
Thought leaders seem to know everything except when to keep their mouth shut for once. But I digress...
If firms are being punished for poor quality, then the system is working, even with enshittification becoming more commonplace. All of the Very Important Business People can sit around and scratch their heads about why the market seems to change on them when they screw up their offering, and they can consult overpriced business fortune tellers to reassure them that it was that pesky market's fault, but that doesn't change the outcome.
I'll miss Red Lobster's cheesy biscuits, but if they've dropped the ball on quality they had this coming to them.
If the olives in the salad don't taste as good or there are fewer breadsticks or the lighting makes it feel more relaxed or the greeters have more time or the menu gets shorter or the desserts arrive quicker or the pasta is less salty, that's because someone involved in that decision decided it was worth paying more for or not worth paying what they were currently paying, taking into account what factors will make people change their mind about eating there. There isn't just a random dude who sits in a room somewhere and says "let's make the food worse" based on his own whim.
If the food gets worse and it just doesn't have that same vibe anymore and you don't want to go there next time, it's because an expert in marketing or restaurant management or food design made an error in their judgement about what they could cut, what they should improve, and what they needed to keep the same. That, or the change which turned you off attracted more customers or more desirable customers who have different preferences to you.
Your restaurant changed because its corporate policy changed. But the capital structure is totally relevant in understanding why that changed.
I too have a few local places that despite being busy and great food for ages, suddenly couldn't keep good people working there. They were doing great then just fell on their face.
I suspect that they just couldn't adapt to it being more difficult to retain / keep good people and everything else suffered.
Dominoes Pizza (US national pizza chain), seems to be the alternate story, long time bargain pizza chain with poor quality.... got better quality pizza and reportedly took off again.
Lately for pizza I've only been ordering from Dominoes, mostly because it's sort of cheap but also consistent.
Not fantastic, not bad, but always pretty good.
I hope they keep up with it, whenever I go in they always appear fully staffed and in good spirits.
I'm not so sure that Red Lobster would have survived if instead of lowering the quality of the product they'd have just raised the prices by say 80% overnight. I mention 80% because that's how much many hospitality businesses have raised prices in my area in London since the pandemic.
I've seen businesses go bust here that have tried both things:
- lowering quality and raising the prices by less than the average
- maintaining roughly the same quality and service but raising prices drastically
Plenty of examples in my area of businesses just collapsing with either strategy. People simply would not accept the new prices in many cases.
A business that is sort-of a luxury business like those specialised in oysters, shellfish in general, high-end cuisine etc only a very select few have survived. Those that are large chains have suffered the most, because they are not seen as so much of a special expenditure and people would just stop going.
Red Lobster perhaps would have fared better by not reacting and simply raising prices. Who knows, it's easy to make the counterfactual scenario in the abstract.
This is just demonstrably false. Good food and service is no guarantee of product-market fit.
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:
A) it'd be too expensive for PE to buy up a controlling share
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
This stuff happens to a limping company and the PEs are the wild dogs picking off the old weak corporations.
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, that would actually be outrage worthy! This is just corporate finance, don't let it get to you.
Do they want Red Lobster to be socialized and run by the government for the public good? Should it be deemed a historic or essential business, with laws to ensure it lasts until the end of time? Do they really think owners shouldn't be able to sell companies they own, or "bust them out" (aka, simply selling off assets for profit).
If a company makes $X in reveune and has $X - Y (Y<X) in costs that doesn't seem to me like a dieing company. Of course if you use PE to purchase that company and add in $2X in costs then it sounds like a dieing company. However, it was perfectly fine until you came along and strangled it.
The price of RL share prices is pretty irrelevant to whether PE can kill it or not. Honestly the higher the price the better it is. If you can spend $100M to buy a company and gut it for $300M that sounds a lot more attractive then buying 100 $1M companies to gut for $3M a peice.
>Honestly the higher the price the better it is.
IF you have to buy at $300M, and can only sell for $100, then higher prices are not better.
As an absurdism, if Walmart only made $1 a year in profit we would probably wonder why the hell it takes them millions or billions in inventory and real estate to produce less profit than a child’s lemonade stand.
Red Lobster is like that. It’s not that they’re unprofitable, it’s that their profits don’t justify occupying that much real estate.
A clear cut example would be if locations were making less in profit than other companies were willing to pay in rent. Ie RL would make more money by not being RL anymore.
> The price of RL share prices is pretty irrelevant to whether PE can kill it or not.
The share price isn’t directly relevant, it’s the share price relative to assets. Companies with expensive stocks are usually worth several to many times more than the assets they hold, so buying them out to sell the physical assets is just lighting money on fire.
PE looks for companies where the market either disbelieves in the company so much their stock is worth less than their assets, or companies where the market has undervalued those assets.
The system is full of perverse incentives.
PE are like autotrophs, or literal vultures if you prefer. They recycle poorly allocated resources and return them to the market so that someone else with a better use (read: more profit) can buy them. It’s a niche in the market, like autotrophs.
This probably is the better move for long term profit. Not for the PE company specifically, but for the market as a whole. All those newly freed assets can now be consumed by new companies making more profit.
In theory, this is supposed to benefit everyone (though it doesn’t, for structural reasons). A new company with more profits means more taxes for governments, more profits that can be paid out as wages to workers, and the profits indicate consumers want whatever the new company makes more than RL’s food.
It’s also worth noting that PE is a reflection of market opinion. Companies that the market believes in are worth several to many times the value of their assets. There’s no way to acquire them, gut them for assets and make a profit.
IF there are no options that generate better value, the company wont be liquidated.
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 ?
I guess the reason that isn’t true is differing time horizons. If the consequences of the deal only become apparent years later, then the PE firm can sell the business before the chickens come home to roost.
But how do they sell Red Lobster without the buyer realizing what is going to happen? Who would be dumb enough to buy from a company that has a history of crippling companies it owns then selling them to suckers?
>> PE firm can sell the business before the chickens come home to roost.
It's really no different from pump and dump. Founders love it because it unlocks a huge pay-out without the hassle, costs and reporting obligations from going public, but if you've worked at a company before and then after a major PE investment it's universally worse IME.
Was it… themselves, in some roundabout way?
Holding a ton of a cash locked up in assets is highly inefficient.
Google did this - sell a building they own and lease it back. Do something else with the money.
The nice thing about the lease is that it’s a tax deductible expense for the business, and if you no longer need it, just don’t renew the lease.
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?
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.
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.
Take a small restaurant. Grandad bought the building 50 years ago. That's long since paid off.
The restaurant makes say 10k a month. Good honest business. But the building/land is worth say a million.
The owners don't care, it's paid off. The business makes a good living.
So I come along and offer 500k for the business. That's basically 4 years profit up front. They want to retire soon, so that's good deal. But I turn around and sell the land for a mil. I've made a big profit, and since rent is now 10k, in only a few months the restaurant goes under.
The root problem is that the business is delivering a really poor return on asset value. Which opens the door to someone buying the assets, not the business.
It's pretty much a license to print money as long as the restaurant can maintain competitiveness in quality and cost. All of the restaurants in the strip mall that holds my nearest Red Lobster have been around for over a decade and half of them for over twenty years. The turnover is really low because everyone rakes it in as long as they don't mess it up. Looks like Red Lobster messed it up.
You can get away with cutting quality for a little while, but eventually customers are going to lose trust and you're not going to get it back.
Optimistically, you could see this as a way of freeing operating assets from underperforming businesses and putting them back into circulation, clearing the way for superior competition. But that only works if there is superior competition to fill the gap, and the whole economy isn't saddled with dysfuction, perverse incentives, and bad leadership. Unfortunately, it seems like we're getting closer and closer to that latter situation every day.
https://www.nytimes.com/2023/04/28/opinion/private-equity.ht...
A good portion of this is cartels that could be squashed. Notably, real estate (commercial and otherwise, driving up the single biggest cost of business/living). But, then, you'd have to deal with the people who rely on cartel-ized pricing power for their income, investment collateral, etc. (But someone is going to get thrown under the bus, so might as well be them.)
People will say it's all about greed, or whatever. But it's not 'the rich' buying these PE investments. It's public pension funds (i.e., government workers, teachers, mailmen). It also has nothing to do with the interest rate (although that certainly enables it, it doesn't explain the demand for the investment vehicle itself or the source of funds).
According to a study from UNC Chapel Hill [1], public pensions comprise 31% of investors at PE funds and 67% of capital.
That means that, while it's true that perhaps the other 69% of investors are the supposedly greedy rich, if it were just them investing, PE would be 3x smaller than it is today.
We have to face the truth which is that these sorts of deleterious economic effects that occur as a result of PE takeovers are due to unfunded public pension liablities.
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4283853
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.
Their attempts at salvaging the situation were perfectly reasonable, even if they were ultimately unsuccessful.
You're welcome to be outraged, but that doesn't mean there was anything untoward happening here.
They wanted Darden to liquidate all of Olive Garden's real-estate holdings and declare a one-off dividend that would net investors a billion dollars, while literally yanking the floor out from beneath Olive Garden, converting it from owner to tenant, subject to rent-shocks and other nasty surprises.
They wanted to asset-strip the company, in other words ("asset strip" is what they call it in hedge-fund land; the mafia calls it a "bust-out," famous to anyone who watched the twenty-third episode of The Sopranos)
The giant slide-deck making fun of Olive Garden's food was just a PR campaign to help it sell the bust-out by creating a narrative that they were being activists* to save this badly managed disaster of a restaurant chain
Sale-leasebacks are common and perfectly reasonable business strategies.
Generally speaking lease liabilities have a lower cost of capital than other types of debt, so making such a deal can help the company.
None of the decisions described in the post are either unusual or unreasonable from a management team trying to save a troubled company. They were just unsuccessful.
My take is that they were not there to save the company, but to extract all its assets and let it go.
They would be right!
This is the same story that explains why health care is ridiculously expensive in the US, why we’re unable to supply our military at prices comparable to other nations, why we’ve seen so many price increases across the economy in recent years, etc. Consolidation and unchecked market power abuses. It probably ends with a new Depression that triggers reform, if we’re extremely lucky.
Let's use a metaphor HN might understand: sale-leasebacks are a bit like migrating to the public cloud from an on-prem setting, and in some cases the government pays you for migrating to the cloud. It helps you balance capital expenditure among other things.
The general public doesn't give a rat's ass about business strategies and nor should they.
If you really enjoyed patronizing a particular business and then they go out of business or change in such a way as to remove what you enjoyed, you're going to be a bit upset about that regardless of how sound the business decision was.
You're completely correct. Everything described in the article was completely legal.
The things that are illegal, like overfishing protected waters, the company doesn't do. Instead, they lobby to make it legal, then do it.
See, all above board. It's all legal. Why would anyone get upset about a company that isn't breaking the law? If it were wrong it would be illegal, right?
* astroturf campaign against the company
* fake boost in profits from massive asset liquidation
Once the stock is run up, equity cashed out leaving morons who only had access to financials and not “the plan” holding the bag. It smells like a combination of fraud and insider trading, but perhaps the SEC can name it something more appropriate.
They can name it "what half of our employees did before working here".
All of that is (barely, probably) not illegal, and because it is not illegal, it therefore is normal, perfectly reasonable, and not in any way wrong. The law wasn't broken, therefore nothing untoward happened.
If they managed to touch their toe over the line of illegal, then it was fraud and bad and they're criminals who should be prosecuted. But since what they did might be barely not quite fraud, it's perfectly normal and acceptable, right?
/s
While I can’t vouch for the accuracy of the strategy, the comparison with there health industry jives with my own experiences. Insurance companies buying up hospital chains to compete against pharma and gutting them in the process. When it’s hospitals shutting down instead of Red Lobster maybe people will understand.
In most cases, the brand name stays the same but the quality falls off a cliff.
On one side this is a study in destroying a chain restaurant, but what'll be taught in business school will be the other side: was this transaction profitable for one party and if so how do we repeat it? It won't be taught as a cautionary tale unless the hedge fund lost out.
Red Lobster well... I've only been twice. Two different locations. The first time service was really, really slow. The second time it was non-existent. After about 15 mins of waiting, we grabbed another waitress who dismissively told us that our waitress just quit and hurried off like it was our problem to figure out. I don't remember the food at all, but even if it was stellar I'd not go back.
I don't understand why these huge restaurant companies have such a hard time with the "make good food" part of their business model. It clearly can't be that hard if so many small businesses are able to do do it better.
The big chains also tend to aim for excessive variety on their menus, which again leads to food needing to be designed to be less perishable.
And then there's the chunk of profits that are going to run the national presence, ad spend, and line the pockets of shareholders.
I think many millennials would be fine with Red Lobster quality food, if it were quick enough for lunch. But the format is slow, sit-down service. And the atmosphere in these restaurants is not what millennials are looking for to relax or entertain.
Individual preferences vary obviously but I'll basically never eat at McDonalds but some of the burger places like Shake Shack and In-and-Out hit the spot now and then.
I think the rise of fast casual is coincident with the rise in people visiting a restaurant when it isn't a treat. When someone is looking to just grab a quick bowl, they don't care as much about atmosphere or service, their priority is something quick, easy, and good value.
But then when these same people go out to dinner when it is a special occasion, they're looking for something measurably better quality and better experience than the fast casual they had three times for lunch that week.
It's the mediocre sit-down places that are caught in the middle. In the 90s these types of places were good enough to be considered a friday night treat. Because people weren't eating out during the middle of the week as much.
But, that's assuming that the more well-off generations aren't going. I dunno if that's the case; things other than revenue can be squeezing RL.
Interesting story of how some private equity guys would
- buy hospitals
- sell the real estate for more than they paid for the hospital, signing a long-term lease at a high rent
- pay themselves an immediate huge profit. the higher the rent the hospital promised, the bigger the sale/leaseback deal, so the bigger the profit.
- default, hospital goes bankrupt, the community and the dumb patsy who bought the hospital gets left holding the bag.
classic bustout from Goodfellas or The Sopranos, but mobsters get investigated, PE guys don't.
The current owner (for the last 8 years) is the multinational seafood company Thai Union. They conducted a 150million stock buyback the same quarter they declared bankruptcy for Red Lobster, and are doing fine.
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
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.
Who invests in this stuff?
Option b, you grow super fast, you have a lot locations, each one barely profitable, but you make it up on scale. You scale quickly enough that you make a lot of money before trends change. They key is that you accept that you're chasing a trend and move as quickly as possible to extract as much as you can.
Option c, you come up with the core concept, and you create a franchise program. You make your money off franchise fees & shadier stuff like making the franchisers use suppliers that you own. The franchises die when trends change but some made a profit, and your capital outlays were never very high, so you make a lot of profit.
$CAVA, $WING, $SG, $SHAK, $TXRH... lots of names that will either be the next $CMG or crash back to earth when the next trendy restaurant catches the attention of social media.
I think a lot of young people are abandoning older brands like McDonalds in favor of these trendier options, so there's a lot of business there if a new brand can capture it. But like you say, nothing lasts long in that industry.
Obviously a handfull of stocks have spiked with speculation. but every town has hundreds to thousands of restaurants. And regions have dozens of growth chains all receiving investment.
I get why mom & pop's invest, even if it's high risk low reward. But everything in the middle that takes on millions in capital makes no sense
Bill Ackman (founder of Pershing Square Capital Management), for one: https://lexfridman.com/bill-ackman-transcript#chapter4_inves...
Margins are good. Spoilage is a non-issue.
Orders are pickup or delivery.
I can bring 10 pizzas to every party.
this would include coffee shops and other relatively low cost establishments
> Tons of capital investment
I mean it's not that much capital, compared to most businesses. You need way more money to start a software shop than a restaurant.
Jokes aside, I get mom & pops. But I'm dubious on the "growth" chains like a Shake Shack or Chick Fil A.
My current theory is that they are effectively MLMs with different structures: private equity MLM, owner-operator (franchisee) MLM.
See Subway for the end result
I don't know why you'd be skeptical, franchising has been very successful for the last century (McDonalds, 7-Eleven, Ace Hardware, etc) and gives steady returns to investors. And the reason why the food business always has opportunity is because people always need to eat, and are willing to spend disposable income on food. When consumer spending goes up so does the restaurant biz, and that's not going to change. And franchises are just one efficient way to create an international restaurant business. It was actually pretty surprising when Starbucks came along and didn't franchise.
But just because the model is efficient doesn't mean you can't screw it up, like Quiznos. That's just short term thinking run amok.
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.
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.
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".
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.
This is honestly fair given bacteria’s ecological role as digesters/recyclers. There are probably better things to do with Red Lobster’s locations and people than serving terrible seafood.
People thinking that Red Lobster is a good place to eat is a valuable asset, which can be traded for short-term profits until they catch onto what's actually going on.
One way to look at private equity is that they are playing an arbitrage game between the perceived value of a brand and the actual worth of the products the brand produces.
In a world where people had better access to true, recent information, perceived brand value wouldn't lag actual product value as much and there would be less opportunity to exploit the arbitrage.
From the finance/economics perspective, what should be the ideal replacement for Private Equity?
At least for me they seem like a part of the ecosystem responsible for extending the lifespan of some companies and eventually maximizing revenue in those that has success, and this premium is used to cover the losses in other bets.
The vampire capitalists did the standard playbook:
leveraged buyout.
transfer debt to the once healthy company.
extract yearly management fees.
fire and/or encourage many employees to leave.
shift maintenance to low cost foreign outsourcing company.
skimp on R&D and customer support.
Not only was this company once healthy, it had astonishing employee retention. We are talking many programmers and support people with 20+ years of specialized knowledge. People seem to forget how much productivity is lost with high turnover.
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.
In fact you could argue that Red Lobster has suffered from a long term decline due to poor positioning in the marketplace, and the PE shops are accelerating what was likely to happen anyway.
This doesn't seem like it should be legal.
When the PE firm took over red lobster, it wasn't a thriving business. They made a gamble: if we sell the land, we can pay down the debt to reduce interest payments and restructure it into a profitable business.
It was always a risky proposition, but the alternative was probably slow decline. The PE firm lost their gamble and they suffered the losses for it.
If the PE firm sold the land to a landlord they owned at discount prices, then yea, that would be a conflict of interest but that isn't what happened.
Isn't this what Gordon Gecko did in the movie Wall Street? Look for asset-rich companies, buy a controlling interest of the stock (the equivalent of the PE leveraged buyout) then strip them for parts? Also, wasn't that a cautionary tale of the worst of the 80's vs. a "how to" manual?
https://bleacherreport.com/articles/10122183-report-nfl-owne...
It's been a grand mess from day 1. All of PE's common failings are on display for the 100s of millions of premier league viewers.
* Arrogantly uprooting working structures because PE knows better
* Lack of domain knowledge means over reliance on flimsy statistics
* a general sense of discomfort for every working member of the club
* Optimisticly dumping money to exploit so called loopholes that somehow every other team had missed (they hadn't, the loopholes were double edged swords)
* Destruction of legacy, eliminating the emotional aspect that keeps someone supporting a team.
* Haphazard changes with large impact that get touted as reform, but come across as cluelessness.
And this a *good* PE firm who is pouring money into an asset that is likely grow as the market grows. So not exactly a pclueless best.
_____
I've supported Chelsea for 20 years now, and 2022-24 was the only time my love for it has diminished.
There is a time that all shall burn and rot and a new world may come forth.
What if VC and shareholders are just fulfilling their purpose in the capitalist circle of life? We can think of them as jackals, buzzards and bacteria combined into a superform. They cull herds, piece off the carrion and decompose what's left.
They are bringers and eaters of death, working as one.
They've managed to con a huge number of people into agreeing that they should have unchecked power and that government (that thing 'we the people' have direct influence on) is the real problem. It's shocking to me how many people fell for it and would rather be ruled over by corporations than government even through they don't get any kind of vote for who their corporate masters are, while we can (ostensibly) vote for our government officials and vote them out if they displease us, replacing them with someone more aligned with our interest.
Increasingly government is either bribed into letting corporations do whatever they want, sabotaged by regulatory capture, or stripped of their power by the people who have either been suckered into voting against their own interests or who fantasize about one day being able to carve out their own fiefdoms full of peasants they can chain and exploit
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.
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.
So fat needs to be trimmed to get that 1%.
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.
They did the same thing with Sears and many others.They short sell the company, buy it, sell anything valuable and destroy it.
https://www.theatlantic.com/ideas/archive/2024/04/vet-privat...
There must be some barrier to entry in the market that prevents that, and that's what I would target. Because the PE firm isn't the root cause. After all, if you can't just enter a market and charge whatever you want as a standalone vet, what makes a PE firm different?
It doesn't make any sense - they paid billions for Red Lobster, they made some money, they could make even more by having a viable business.
If this were a publicly owned company I could understand outrage, but it's privately owned, the owner presumably isn't interested in losing money. What's his motivation for taking these steps that are "obviously" bad?
---
After the real estate move, Golden Gate sold 25% of the company in 2016 to Thai Union, a Thailand seafood company, for $575 million and unloaded the rest of the company to an investor group called the Seafood Alliance, of which Thai Union was a part, in 2020. Golden Gate likely came out ahead, but the same can't be said for Thai Union, which also controls the Chicken of the Sea brand. It is now looking to get out of its stake in Red Lobster...
---
The bigger question to me is why there are so many entities interested in buying up businesses from private equity, when this exact pattern has been repeated about a million times. I suppose in this game nobody ever thinks they're the sucker. After all if you can casually toss around billions of dollars, you must clearly have had plenty of financial success at some point, and it most certainly was due exclusively to your exceptional financial genius.
It reminds one of NFTs in a way. Spending hundreds of thousands of dollars on a poorly drawn picture of a cartoon ape is either moronic or brilliant dependent exclusively on whether you're the one left holding the cartoon.
It's not obviously bad from a finance point, it's just significantly shorter term thinking than the original owner.
(What %age of eastern european enterprises got long term investment in the 1990s?)
Short term gains over a long, steady market is the current driving mentality of Western capital.
Which seems crazy, since the costs of inputs are so low at most restaurants. They pay workers embarrassingly little money, and the ingredients have massive externalities. (Those "endless shrimp" are possible because of literal slave labor and environmental destruction in southeast Asia.)
And yet restaurants bleed money. There are so many invisible costs -- replacing bent silverware, repairing the walk-in fridge, shady suppliers whose produce you have to toss, etc etc etc etc. It's just a crappy business.
A private equity firm may not know how to turn a profit. Or they could run it with a tiny profit that just isn't worth their time and effort, and it's easier to just shutter it. It's a much bigger hardship to the employees than it is to them -- even the potential gains are too small.
Also they often engineer things so the money the fund put into the deal comes back very fast. In this case they sold the companies real estate which got a big chunk of their initial investment back ASAP.
the simplified view - red lobster they bought it for $2.1b - they sold off the real estate for $1.5b and 25% of the equity for $575m - so the PE fund has $25m of their original investment in the deal. They borrowed a bunch of money and then paid out dividends on that $25m that were multiples times that amount.
Until Americans take on a mindset of longterm/family (as I've seen many Chinese families express), they'll be doomed to make short term decisions. Right now very few Americans are able to accept an optimization that looks like "I invest today, and my grandkids will get the returns". So America is stuck in that local maxima of invest for next few quarters. The obvious tradeoff being the risks/ability to predict the future.
All reward, no risk.
They then gutted everything - all technology teams stripped back to nothing, or a single junior to KTLO as best as possible, all management fired, although of course kept all of sales and marketing. They handle amazingly sensitive data for manufacturers across numerous sectors, including the likes of Apple and BAE, and no longer have any infosec functions.
So in the case of the client, they didn’t sell to PE, and it’s a time bomb I’m quite looking forward to seeing go bang.
In another case, years ago, it was just a straight up hostile takeover initiated by a disgruntled investor who wanted out, and an asset strip followed by administration - we, their main technology partner, got screwed to north of £100k. One of the events that lead to me deciding to quit my previous business, as I couldn’t put down the murderous rage it incited in me. The money was almost immaterial, it was the fact that these fuckers essentially burgled a perfectly good and profitable business and then robbed their entire supply chain, from services to product, and cost several hundred people their livelihoods. Fire and ice in lucifer’s mouth for all eternity for these bastards.
Yeah, a decade on, still haven’t quite put that down - but again, not initiated by anyone who actually had anything to do with the business - I felt terribly sorry for all of them.
There is a finite amount of capital in the world (with a little more printed each year of course). But they're not printing 20% more every year, so companies can't keep expecting to grow by 20% every year forever. It's just not possible and once a company reaches certain thresholds, we need regulations that prevent them from destroying the good parts of capitalism for simply more money than they had last year.
They usually involve PE taking over firms that were already in financial trouble, which is what made them attractively priced to PE in the first place. The PE firm would also prefer to have a nice profitable business, but if they can't turn it around, they have options like asset stripping or selling the name to a different company.
Here TFA mentions "flagging sales" already in 2014.
The most likely alternative to PE "killing" Red Lobster or Sears or Toys R Us wasn't that the businesses restructured with the same management and business model but 25% fewer stores. It was that they went out of business altogether.
I'm worried by PE buying up successful natural mom-and-pop businesses like dentists and vets and worsening the consumer experience at those. Not so worried about them managing the decline of massive national brands slightly more aggressively than another billionaire owner might.
> 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 — and then immediately leased the restaurants back.
So private equity didn't try to make Red Lobster profitable before stripping it of its assets. That was literally their first move.
What are some well known examples of "private equity turned troubled brand into wild success" where products become better than ever and consumers couldn't be happier? It seems like all I ever hear are stories where a brand is "rescued" only for it to be butchered for parts in a couple years time.
I'm curious if anyone who has a negative reaction to this article has actually been to a Red Lobster in the last 10 years. They serve poor quality food for similar prices as other sit-down restaurants. You're as likely to get poor service as you are anywhere else (maybe more so), but you'll still have to tip the same amount and spend the same amount of time there. There is no value proposition and certainly no cause for mourning or hagiographies.
Quotation needed. Usually they put no or little effort in this. They want to get their profit by destroying the business, either by breaking it down and selling the parts or by turning it into a shitty consumer-hostile money-grabbing version of its former self
I agree. I uh, hope they don't do the same thing to Olive Garden, or Applebee's. That would be tragic..
Perhaps because the latter are associated with aspirational working class, which is to be mocked.
The upper middle class and higher going to coffee shops and restaurants targeting them and dialing the pretentiousness and crap fusion food and such to 11 is OK though, that's in high taste. And McDonalds is acceptable too, since it's seen as neutral.
https://www.theguardian.com/business/2023/jul/10/as-thames-w...
If you have a company that's been slowly failing for a while, PE is here to help you out.
They will pay you money today and take over the company and in 3-5 years it will go out of business in a convincing way. And PE will take the heat.
Like sharks in the sea or wolves in the wilderness, they identify and remove sick and ailing businesses. Additionally they offer a convenient exit to tired owners and investors, thus incentivizing further business creation. Finally, they identify and exploit regulation-created monopolies, enabling the government to re-allow competition through deregulation - something more and more important in today's populist and regulation-happy climate.
Going into bankruptcy might actually allow them to address their debt and operational losses
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
I’ve been through a few depositions and anyone can leave for medical reasons. It’s not like there are bailiffs there forcing you to attend. Even with the most basic of cases, I can just walk out and tell my attorney to reschedule. I may have to pay other counsel’s fees, but I expect with the reason “I’m having a miscarriage” no judge is going to uphold their claim.
https://www.washingtonian.com/2023/07/24/how-a-battle-over-a...
Came out thinking: let em burn.
Worse than mediocre rubber for $200 after tip and tax.
My homeless ex wanted RL for her bday last year. All of us and the families took her there for dinner. For me it was comparable to Walmart canned and frozen. She was happy enough with it but then she fixates on things.
I came in to the restaurant and there was no one at the front desk, but the place seemed to be operating normally so I just went on to seat at the nearest table I found. Waiters just started ignoring me; at some point I realized this was on purpose. Wtf.
Anyway, after like 20 mins. I stand up and ask one of the guys "what's going on?". He tells me that they knew I was there (!) but decided to ignore me because no one "seated me at that place". I tell him, well, do that now ... the guy just tells me they don't want to do that anymore because I should've done it when I entered the restaurant, then just like that asks me to leave the place (wtf x2).
I tell him that's ridiculous and he just says "I'm calling security" and walks away. After a few minutes, two huge guys come to my table and ask me what the problem is (they were actually quite polite). I tell them, I just walked into the restaurant, sat here, and just want to order something. They look at each other a bit confused (who knows what the waiter told them), ask me if that's it, "yes", ..., "ok, wait here a bit". After another like 10 mins., a different waiter comes up and starts catering to me.
Everything was normal afterwards, but that was super weird. Imagine getting beat up for walking into a restaurant and wanting to get some food.
Needless to say I never came back as the food turned out to be quite average, definitely not worth fighting for it, lol.
It sounds like you seated yourself at a section that wasn't open. "Sections" are often not obvious to customer, but they're really important to the wait staff. You don't grab tables outside your section; it can be seen as attempting to grab more tips. (A Red Lobster probably has tip pooling, but still, working outside your section is a no-no.) Eventually they got somebody to open your section.
Threatening to call security is also a no-no. He should have called the manager over. But if the host desk was unoccupied for more than a couple of minutes, it sounds like the manager was off fighting some kind of fire.
With the host desk unoccupied, the restaurant would prefer that you ask a passing waiter to find the host.
So I'm not surprised that wait staff were ignoring you. A better waiter would have figured out what was going on and signaled the host to come talk to you, and move you into an open section. But if you're waiting tables at Red Lobster, you're not being hired for your initiative.
Anyway... I hope that helps explain what happened. The upshot: don't seat yourself, but it sounds like they were being mismanaged anyway.
It seems like once the bouncer types got involved they thought the reason you were ignoring their system might be because you were crazy or high and they might have to kick you out. Once they determined you weren’t either of those they accommodated you.
Chain restaurants especially seem to be very process oriented and the staff would not be as good at improvising as those at a local place.
I'm from the US, but on the Canadian border, and Timmy's was the dominant coffee shop growing up. Even if you didn't drink coffee, that was the hang out.
We had a Dunkin that was probably less than 100 meters away from it that had a fire and never reopened. I definitely think it was a ploy for insurance money because they never had _any_ business. Tim Horton's dominated.
Then something happened around 2017 and their coffee became awful (it was never incredible, but it got much worse). Then their prices began to rise significantly. Whenever I go home, I get a cup of Timmy's coffee, but it's never good.
Turns out having nostalgia for a large food company doesn't play well in the long run. I'm sure the same applies to Red Lobster, but those kinds of places become part of your memories growing up and you want them to do well, maybe as a way of preserving those memories. Probably half of my friends and I had their first dates at Tim Horton's growing up. As much as I wish I didn't feel the need to drink their swill a few times a year, there's something that still draws me.
But, it's like the 'default' addiction for Canadians and crappy coffee (especially after they switched their coffee supplier to a much worse grade).
Before that, it was removing their in-house bakeries and supplying flash-frozen donut offerings. (And then after shifting the "overton window" for a couple years - reducing sizes, but keeping prices the same - they sold that as "healthier")
They moved their yearly promotional contest to an "app-only" mechanism - and have had major errors in notifying winners for 2-years in a row. (This year, my wife was notified that she won a $70,000+ boat+trailer... well, apparently so did a quarter-million other Canadians...)
And then there is the ever shifting introduction of nightmare food offerings - they keep shuffling the chairs around like something is going to be a big "hit".
The latest is crappy "cardboard flatbread pizza" - and they seemed to have removed the simple "grilled cheese" to accommodate that.
Their franchise owners blatantly abused the TFW program for obtaining minimum wage workers - and now they are abusing the student visa changes, because the TFW program was tightened.
They need to go. (The conglomerate who owns them, not the franchises - or workers)
(It's not anyone you saw at the restaurant...)
So let em burn!
Also: 9th up from the bottom: https://news.ycombinator.com/newsguidelines.html
When I started making my own money, it was one of my regular indulgences.
As an adult, I rarely ever see them anymore. And when I do go (it's been years), I'm always left feeling sick to my stomach, and yet still hungry. The portions sizes have shrunk considerably, even more shrinkflation. The greasiness, while expected with that kind of food, it so much worse. The fries are soggy, and you hardly ever get any crunchies anymore!
I missed the late 90's LJS something terrible. :)
My kids love crap food, and I sometimes have to sigh and go to places I'd rather not go because my kids think it's the best thing since sliced bread.
Granted, my only experience with LJS are stories from https://en.wikipedia.org/wiki/Wayne_Coyne (2nd paragraph, "Early Life" section.)
If that is codified and taught, then journalists can point to that in all cases (of which we are overrun). It's pathetic.
In this context (the idea of making this unethical), a brand is built on investor money (not profits) and then later profits are achieved by cashing out the brand value.
But I'm guessing you knew that and disagree. Care to be more forthright?
ownersip here should wake up before it worsens further
How many private equity acquisitions are like this but circumstances are less obvious and the measurers to rescue need to be more involved than just waiting for a pandemic to end? I genuinely don't know. But I suspect that it's very easy, looking in from the outside as a customer, to come to the conclusion that the business went bad when private equity came in when the business was already struggling but prior leadership was avoiding dramatic changes.
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.
Out comes a big bowl of shrimp for everybody with the skins and feet and antlers on - think we had a language misunderstanding.
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 :).
Ah, culinary wisdom based on internet memes and bro quotes: the cockroach of the mind!
>ate a few and back at the hotel you know what happened :)
Reverted to the fast-food baseline?
I'll also mention that folks allergic to shellfish also have to be careful with crickets and other land insects. They have their similarities.
Can't really say that I am.