Red Lobster, an American casual dining chain with almost 600 locations, filed for bankruptcy and closed almost 100 locations across the country, causing distress among its fans and employees. While some blamed the company’s financial woes on endless shrimp promotions, experts point to a financing technique known as asset-stripping favored by private equity firms. This technique involves selling off company assets to benefit the owners and investors, ultimately crippling the company. Private equity firms often buy companies, load them with debt, and hope to sell them at a profit, leading to a higher risk of bankruptcy.
In the case of Red Lobster, a sale/leaseback deal involving the sale of premium real estate underneath 500 of its stores generated $1.5 billion that went to the private equity firm, Golden Gate Capital, instead of back into the company. This led to the chain having to pay rent on stores it had previously owned, significantly increasing its costs. The sale of properties also prevented Red Lobster from benefiting from any potential commercial real estate market growth and resulted in higher rent prices, leading to financial struggles for the chain.
Golden Gate’s purchase of Red Lobster increased the company’s debt levels significantly, adding to financial burdens and leading Moody’s Ratings to downgrade the chain’s outlook due to its high leverage. In 2020, Golden Gate exited its investment in Red Lobster, selling to Thai Union Group, a Bangkok-based company, and an investor group. Bankruptcies of companies like Red Lobster have a ripple effect on the economy, affecting consumers, workers, and small businesses. Former employees like Austin Hurst have been left jobless and uncertain about their future.
Sen. Edward Markey has proposed legislation to increase transparency around private equity ownership in industries like healthcare, requiring disclosure of sale/leaseback deals and fees collected by private equity firms. Markey is particularly concerned about private equity’s impact on healthcare, as seen in bankruptcies like Steward Health Care, and the potential negative effects on communities. Private equity’s actions, such as asset-stripping and high debt levels, can harm the working and middle class while enriching the very wealthy, contributing to economic insecurity and job losses.
The story of Red Lobster serves as a cautionary tale about the risks associated with private equity buyouts and asset-stripping practices. The company’s bankruptcy and closure of numerous locations highlight the detrimental impact of these financial maneuvers on employees, consumers, and communities. As private equity continues to play a significant role in various industries, policymakers like Sen. Markey are pushing for greater transparency and oversight to prevent further harm to workers and businesses.
