The Fall of Red Lobster: A Victim of Private Equity Play?
When we think about classic, cost-effective, and comfortable seafood dining, Red Lobster comes to mind for many. But in recent years, a significant number of these well-loved eateries started shutting their doors permanently. The question is, was this natural restaurant lifecycle or the endgame of a private equity chess match?
A Promising Purchase Turns Sour
In 2014, Golden Gate Capital, a Private Equity (PE) firm, purchased Red Lobster for $2.1 billion. The backdrop was a challenging one, with Red Lobster grappling with sinking sales and footfalls. But PEs are known to swoop in like white knights to rescue a struggling business and restore it to its glory. So, the acquisition seemed like a promising lifeline.
Golden Gate Capital secured its purchase mostly with debt, a favorite PE tactic. The company then sold and leased back its property, gaining a quick $1.5 billion but saddling Red Lobster with serious lease obligations it previously didn’t carry.
A Sinking Ship Rather Than a Turnaround?
The hope was that Golden Gate Capital would turn things around, ensuring that your favorite shrimp scampi or lobster entrée remained on the menu. But in the years following the acquisition, Red Lobster seemed more like a sinking ship than a rescued damsel.
By 2020, Red Lobster’s revenue fell to roughly $2.2 billion, a sharp decline from around $2.6 billion in 2015. More concerning, perhaps, was the evident footprint shrinking, with a net closure of 150 outlets in five years, from 705 in 2015 to 555 in 2020.
Did Financial Engineering Sink Red Lobster?
Scapegoats have ranged from changing consumer preferences to the rise of delivery services. But let’s turn the gaze where it truly deserves: financial engineering by private equity owners.
PEs like Golden Gate Capital are known for their pattern of extracting value. The sale-leaseback move, a clear example of financial engineering, gave the PE firm a huge payout while Red Lobster was left carrying the can. With its newly acquired lease burdens, the restaurant’s existing problems were exacerbated.
A Warning for the Age of Private Equity
The Red Lobster case study prompts a consideration, particularly for business owners considering private equity deals. Yes, PEs can offer short-term delivery on the balance sheet, making the books look pretty promising. A big payday for Golden Gate Capital and other similar examples of short-termism may make the idea attractive.
However, the long-term repercussion may be a different story. The ‘take the cash and move onto the next’ mindset may leave companies like Red Lobster struggling for survival. It’s a cycle repeated across industries, from retail to healthcare: robust sales, big dividends, then closures.
Private Equity and its players shouldn’t be viewed as villains. However, in a landscape where profit often takes center stage, the welfare of businesses, workers, and even consumers can easily become an afterthought.
With each shuttered Red Lobster, we get a reminder that every business decision has consequences that might echo long after the checks are cleared.