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Greed killed Red Lobster

Summary:
I seldom eat at chain restaurants, and I’ve never set foot in a Red Lobster. So the latest bankruptcy of Red Lobster doesn’t affect me personally, but it does serve as yet another illustration of pernicious consequences of vulture capitalism.When the private equity firm Golden Gate Capital bought Red Lobster, the chain was already beaten down by the COVID pandemic and rising operating costs. “Typically, when a private-equity firm takes over a company, it finances the acquisition by loading the company down with debt, which makes the deal cheaper for the PE firm but also makes it harder for the company to thrive. In Red Lobster’s case, though, the problems went beyond that. While Golden Gate Capital did add debt to Red Lobster’s balance sheet, it also

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I seldom eat at chain restaurants, and I’ve never set foot in a Red Lobster. So the latest bankruptcy of Red Lobster doesn’t affect me personally, but it does serve as yet another illustration of pernicious consequences of vulture capitalism.

When the private equity firm Golden Gate Capital bought Red Lobster, the chain was already beaten down by the COVID pandemic and rising operating costs.

“Typically, when a private-equity firm takes over a company, it finances the acquisition by loading the company down with debt, which makes the deal cheaper for the PE firm but also makes it harder for the company to thrive. In Red Lobster’s case, though, the problems went beyond that. While Golden Gate Capital did add debt to Red Lobster’s balance sheet, it also made another move, selling off Red Lobster’s real-estate assets for $1.5 billion, forcing Red Lobster to lease those locations back. . . . And the leases were what are called “triple-net” leases, which meant that Red Lobster was responsible for all the operating expenses, property taxes, and insurance at the locations. As Restaurant Finance Monitor wrote at the time, the deal gave Red Lobster “little room for error” at a moment when it was struggling with falling sales and a weak brand.
“The rents on many of these properties are also, according to the bankruptcy filing, priced above market rates. The result is that last year, the company spent almost $200 million leasing locations, a full third of which it spent on locations for what it calls underperforming stores.”

As if that weren’t bad enough, the Thai Union seafood company acquired majority control of Red Lobster in 2020 and started dumping shrimp. This turned out to be a bad move, and Thai Union has already written down $535 million of its investment.

It’s easy for me to shrug off the problems with Red Lobster, since I never patronized the chain. But this sort of vulture capitalism isn’t peculiar to the restaurant market. Private equity firms are buying up and mismanaging hospital chains and are distorting the residential property market in some cities by holding housing off the market to jack up prices. One doesn’t have to be a Marxist to see that this is bad for capitalism.
private equity kills Red Lobster

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