64 million patrons annually at about 600 sites in 44 states and Canada. Its 36,000 employees and ardent fan base have been crushed by the company’s May 19 bankruptcy filing and the shutting of over 100 outlets nationwide. Beyoncé used the chain in one of her songs since it is so famous.
It’s difficult to place responsibility for business failures. However, other observers dispute the notion that Red Lobster’s problems stemmed from its incessant shrimp promotions. Indeed, the company’s bankruptcy declaration reveals that it lost $11 million due to the shrimp scandal in addition to suffering from inflation and increased labor expenses. However, a more significant source of the company’s issues is a funding method that is supported by private equity, a significant player in the financial sector.
The practice, also referred to as “asset-stripping,” has been implicated in bankruptcies involving hospital and nursing facility operations, including Steward Healthcare and Manor Care, as well as retail chain failures like Sears, Mervyn’s, and ShopKo.
All had been under private equity ownership.When a business’s owner or investor sells off a portion of its assets, crippling the business and keeping the profits for themselves, this is known as asset-stripping. Some private equity firms that acquire businesses, inflate their debt to fund the acquisitions, and then aim to sell them to another party for a profit in a few years are partial to this strategy.
A sale/leaseback, which entails selling a company’s real estate, is a frequent kind of asset-stripping that hurt Red Lobster.
Private equity companies have made significant investments in every sector of the economy in recent years, including restaurants, retail, media, and healthcare. Private equity-backed companies employ around 12 million people, or 7% of the labor force. Based on academic studies, businesses that are taken out and indebted by private equity firms have a ten-fold higher bankruptcy rate than enterprises that are not owned by these corporations.
Leveraged buyouts, such as those many private equity firms seek, increase company default rates and decrease investor recovery after restructured corporations, according to a research released by Moody’s Ratings this month.
The $1.5 billion sale of prime real estate underneath 500 of Red Lobster’s locations in July 2014 was part of the sale/leaseback that contributed to the company’s demise. However, according to Red Lobster’s news statement, the money didn’t stay in the company; rather, it was used by the private equity group to fund its acquisition of the business.
That company was Golden Gate Capital, headquartered in San Francisco and with $10 billion in assets.The real estate deal was essential to Golden Gate’s funding since the company had spent $2.1 billion to acquire Red Lobster in May 2014. As shown by a news statement announcing the transaction at the time, Josh Olshansky, managing director at Golden Gate, said that Red Lobster “is an exceptionally strong brand with an unparalleled market position in seafood casual dining.”
The sale for $1.5 billion brokered Red Lobster. Red Lobster’s expenses increased dramatically when it had to pay rent on outlets it had previously owned after the real estate was sold. The bankruptcy petition states that by 2023, its annual rent payments would have reached $200 million, or almost 10% of its entire income.
When asked whether the sale and leaseback had a detrimental effect on Red Lobster, a Golden Gate representative remained silent.
According to the news announcement announcing the sale/leaseback, American Realty Capital Partners, the business that purchased the buildings, received an excellent bargain. The Red Lobster outlets it had acquired were described as “high-quality real estate located at main intersections in strong markets” and “irreplaceable locations,” but it also pointed out that the properties were sold “at below replacement cost.” According to the statement, Red Lobster will also see 2% annual rent hikes as part of the conditions of the transaction.
Realty Income purchased American Realty Capital Partners in 2021. A request for information on the sale/leaseback was not answered by Realty Income.
The corporation suffered in a number of ways from the sale of the Red Lobster shops. Initially, it meant that any positive developments in the commercial real estate sector would not help the business. Furthermore, it didn’t seem like Red Lobster was getting decent rent offers from the new real estate owner. In a bankruptcy court filing, Red Lobster’s CEO said, “A material portion of the Company’s leases are priced above market rates.”
Golden Gate’s acquisition of Red Lobster greatly raised the chain’s debt and boosted interest payments, as is common in private-equity buyouts. The independent ratings company Moody’s lowered Red Lobster from stable to negative outlook in 2017. The chain’s “persistently high leverage,” or debt, was mentioned by Moody’s.
According to Andrew Park, senior policy analyst at Americans for Financial Reform, a nonprofit group that is nonpartisan and advocates for a sound financial system, “carrying a lot of debt and not owning your real estate puts companies at a disadvantage.” “Red Lobster is just another illustration of how private equity plays a long-term negative game that hurts restaurants and retailers.”
Golden Gate sold its Red Lobster stake to an investor group and the Bangkok-based Thai Union Group in 2020, capping its involvement in the brand. Thai Union bills itself as the “world’s seafood leader,” and two of its brands are King Oscar sardines and Chicken of the Sea tuna products. The transaction’s terms were kept a secret.
“Thai Union has been a supplier to Red Lobster for more than 30 years, and we intend for that relationship to continue,” a business representative said in a statement about the bankruptcy. We have faith that Red Lobster will be able to reorganize its debt and reach its full potential in a more advantageous working environment via a procedure overseen by the courts.
Red Lobster’s bankruptcy has a cascading impact on the economy and increases consumer and employee anxiety, according to Robert Reich, the former labor secretary under President Bill Clinton.In an interview, Reich said, “One of the reasons people feel so insecure is you’ve got a lot of these financial games going on behind the scenes that ultimately are hurting America’s working and middle class and making the very rich richer.” “
The small companies in the towns hit by mass layoffs, as well as everyone who supplied Red Lobster and effectively provided services to the company, are next in line and are feeling the ripple effect.
The majority of the collapse is being felt by Red Lobster workers. One such person is Austin Hurst, a former grill master at an Arizona Red Lobster. He added in an interview that he hasn’t heard from his boss or any other corporate executives, and that he found out about the closure of his shop from a friend. He stated he was informed up until around three months ago that his shop had been successful.
The district manager said, “Yeah, this Red Lobster is looking really bright,” about a month before the closure. Hurst recollected, “And you guys are going to stay open for sure.”
Hurst said he received an offer to work at a different Red Lobster, but the position would need a longer commute and pay $17 per hour instead of the $19 he was previously earning.
Sen. Edward Markey, a Democrat from Massachusetts, recently convened hearings on private equity and health care. Massachusetts is home to eight hospitals run by the insolvent Steward Health Care. Additionally, he has put forth legislation that would mandate increased disclosure from health care organizations owned by private equity firms. This would include information about any sale or leaseback agreements, fees that the private equity firm collects, and dividends that the health care organization pays to the private equity fund.Markey said in an interview that “my legislation is quite simple.” “
The Department of Health and Human Services must ascertain whether or not the sale of the land beneath these hospitals and the subsequent rental back to the hospitals isn’t having a detrimental effect on the delivery of healthcare in that community in order to ensure that these financial shenanigans don’t have a significant impact upon communities across our nation.
All sectors of our economy are seeing a rise in private equity, but Markey said that the health care sector is seeing the biggest effects. He said, “This is just a preview of coming atrocities affecting our health care system.” This sentiment increased as more private equity entered the hospital industry.
NEWS COLLECTED: NBC NEWS
