I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is:
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?
I thought the PE model was to buy one of these companies, leverage them with many multiples of debt while paying themselves out massive fees and bonuses, then letting the huge interest and debt load take its toll on the husk of the company.
It often is, but this isn't some kind of free money tree that only rich people can access. Loading up a company with debt requires a creditor. Selling underlying assets requires a buyer. If these counterparties don't offer enough money to offset what PE spent to buy the company, PE loses. And this often happens, including, apparently, in this case!
So the sucker here is the bank? Can't say that I care that much about that. It's just business and the banks apparently suck at it. They can foreclose on the business and sell it off to someone who relaunches it.
But why would anyone lend to a company which has been bought out by a PE firm then? Wouldn't banks turn around and say "hold on, I know this old trick, you're going to take loads of my money and then give it to yourself and default, and I get nothing"?
Because the asset is worth the net present value of its future cashflows. Unless you take over the the thing and liquidate it, the value of the property is far in the future... so arguably the takeover and liquidation increases its value.
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.
I debate if PE unlocks or unsustainably accelerates. I think it comes down to should a small minority get very rich quickly, or should a going concern support a much broader ecosystem. I have seen PE "wreck" a few companies first-hand, so my selfish preference is the former.
because the people who have spend years of their life trying to build something, whether that's a brand, an experience, a product, whatever, have an emotional attachment to it and don't want to see it destroyed. so when they're struggling, the look for a lifeline. PE provides that lifeline as a cash infusion in exchange for ownership.
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.
This may be true but it doesn't have to be so cynical.
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".
No, this isn't true. First they no longer own it; we don't know what the sale terms were. Second (and more importantly) PE is a term-based play; if you do it right you get both the returns over the life of your fund by directing more revneues to payouts, aggresively cutting costs and eroding long-term investment (like commercial real estate) AND you sell at the right time to generate a multiple return (before all those unfavourable leases start to impact financials). Red Lobster 18-24 months ago could have sold at a premium to the $2.1B purchase price.
Good point. I think this changes the story a bit. It's not exactly that PE is predatory. If PE were unlocking the value of assets held by an underperforming company, the transaction could be explained as the creative destruction of capitalism making room for something better to hold those assets.
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.
it's a bust-out, you identify a patsy and you stick it to them.
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.
I've seen many people saying, on this site and others, that they "believe in markets", as if it was their profession of faith.
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.
There should be a law that allows companies to self split once they become monopolies. As in a person can collect evidence of a monopolie and then can walk out of the busters office with the standalone part of the company thats the monopoly as a compamy of its own. Make those that conspire and lobby for the r monopolies those who would profit the most on busting.
I'm absolutely okay with the market destroying companies. It's literally one of the points of having a market to begin with. That sometimes also includes profitable companies.
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
I have no problem with unprofitable, severly mismanaged companies going out of business. I do have a problem when a company is liquidated to give an exit to shareholders when it is still profitable, as described in the article.
> 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.
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:
To me this is not even slightly surprising. Red Lobster used to be at the top of our list of restaurants. Then in recent years the quality of both the food and service deteriorated. One visit the food was so bad I couldn't even eat it. That was compounded by not having a server to talk to. Took our order and never returned - even had someone else bring out the order.
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.
Increasingly I think the financialization of everything makes us less capable of understanding the world.
"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.
The problem is that executives will ask "what makes Stardew Valley successful?" and never make it to this answer:
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.
We live in a time where almost everything is getting worse. Products are getting smaller, service is getting worse, businesses are closing, quality is going down. I don't think I've ever experienced such an obvious decline in commercial society in my entire life.
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?
This is the reason I've always been a detractor of purely relying on "data driven decision making". Being data driven is great... if paired with intuition and common sense.
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.
> because it was cute and had a soul and is fun to play.
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.
This is what people mean when they use the term soulless capitalism. The increasing financialization of everyone leads us to optimize for the things we can measure assuming those are the things that matter, and in the end the optimizations erase everything good.
> 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.
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.
I think this is naive. When (for example) a private equity fund buys a casual dining chain, they will go through how the business is run in painstaking detail and try to understand exactly what makes the experience 'work' and what changes are possible or advisable.
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.
Quality control and management ... seem to be the secret sauce to restaurants and are amusingly unrelated to the actual food / recipes and etc.
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.
For my poor friends the whole 'emergency pizza' thing was amazing marketing. Every other company is actively screwing them, increasing rates to unaffordable, shrinking sizes. Domino's not only stayed affordable, but said, hey, times are though, if you get in a crunch, here's an emergency pizza to fill the gap. Friggen' overdraft protection on food for their kids. The amount of good will that corporate marketing campaign brought in that group I can't even tell you. I'm talking about the single dad's working two jobs, moved back home with their parents segment. They now feel like Dominoes is the only company that hasn't f'd them. They actively talk about Dominoes randomly (we guys don't have much to talk about but still it doesn't normally fall to discount pizza discussion).
This happened to a local sports-bar chain around us. It was always decent and our first choice for family nights out, but after Covid it went downhill, locations closed, and the last location close by just started falling flat... empty even at busy periods, no wait staff, declining quality, etc. It just up and closed shortly after.
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 used to really like Red Lobster, for the money they were quite good. Their cheese rolls are still great. That being said, I haven't been in years. Just the other day I went to a Chili's, I remember going to Chili's all the time in high school and college. Hadn't been in a while. The food quality was just so off from what it used to be. I was really disappointed. I honestly am not sure what these restaurants are thinking. Menu restructuring to cut back portions and also quality control is a significant problem. The only "fast casual" restaurant I can think of at the moment that has maintained its relative quality is Outback.
I stopped going after a waitress mentioned my mozzarella sticks were still in the microwave. As I sat there, thinking about the Sam’s Club cardboard box they might have come from, I realized that many restaurants probably do the same. However, I had hoped Red Lobster would at least use an oven.
I assume Red Lobster preemptively lowered the food grade and the service labour costs to avoid raising the prices in their menu drastically. We've had a wave of very strong inflation pretty much worldwide - or at least wherever there have been covid lock-downs and huge government payment schemes - and for many businesses, especially those that already operated at the margin of profitability, this has been their death knell.
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.
Yep, it's the food. There are many famous 'food destinations' around the world. Usually the line goes around the block. You always have to wait, either in line, for a reservation, etc. People wait because it's worth it. The food is good.
Well, it's could also have become a meme or whatever the right term is. There's a lobster roll place in a Maine coastal town that always has lines around the block with maybe hour waits. There's a place right across the street that IMO is just as good--as are a bunch of other Maine coastal places you've never heard of.
I think the author has a hard time trying to put a "why should we care?" spin on this at the end: Middle class families need a nice night out, and red lobster is the best way to do that!
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.
I wish authors like this would explore the alternative they want.
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.
The company wasn't dying, but it was undervalued on the market. It also sounds like the component parts of the company were more valuable separate than together.
>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.
A dying company is one that fails to produce enough earnings to justify the assets it consumes or holds.
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.
B is not true. It's more profitable to extract lots of value in the short term and kill the company and then move on to the next victim, continually showing great profit spikes and cashing out yourself, than to slowly extract value over the years.
You’re forgetting that we operate in a world of limited resources, and the opportunity cost of poorly allocating those limited resources.
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.
Why is this perverse? It seems desirable. IF there are other opportunities that generate more value, you would want to cash out of the lower ones and invest in the better ones.
IF there are no options that generate better value, the company wont be liquidated.
They sold their real estate for 1.5 billion and then red lobster paid 200 million a year in rent.
That’s insane.
In 7.5 years they would pay back the purchase price.
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 ?
What’s most weird to me is that the PE firm owns Red Lobster. So if a deal is bad for Red Lobster, the deal is also bad for the PE firm.
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?
The hit from above-market leases vs. owning the land might be clearly visible in hindsight, but that's not necessarily true looking into the future. A buyer could have focused on the economies of scale from being in the seafood business and actually thought "we're not a real estate companye, and rentals are preferable in this inflated market". The got all that current debt off the books in exchange for future liabilities; that could also have looked good.
>> 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.
These private equity deals are the convergence of a couple of phenomena.
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.
I'd add that it's also a function of revaluing the assets, and then determining if the return on asset value is appropriate.
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.
That's what it looks like to me too. All of the Red Lobsters I know of in California are in some very high volume locations, often in large multi-block shopping malls where everyone in a several mile radius goes to shop. They did a good job front running the state's population growth and locking in some great locations before they became really expensive.
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.
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.)
Private equity is mostly driven by state pension funds that are basically unfunded entitlements. They have to pay out more now as the boomers retire, but they have no money so seek ever-increasing rates of return, even above market rate. They can't find anything on the 'public' market, so they turn to these alternatives. Meanwhile, those on the supply side see that there is money that needs to be invested in these sorts of vehicles to have any shot of paying out, and they oblige.
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.
Have you actually read the article ? It tells a different story:
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.
I think that is the point. That is considered mismanagement. If I'm using a gold as the foundation of a hotdog stand, someone will come along and say that the gold is mismanaged, and worth more as jewelry.
The article tells a fairly clear story of business consolidation and monopoly. The chains had buying power, so suppliers consolidated and removed that power. Then the suppliers became so strong (with the help of PE) that they bought and looted the remaining value from the chain. Ultimately the loser at the end of this story will be the consumer, who has no market power, and any new small restaurants that develop to replace RL.
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.
I dont think it is as one dimensional as that. You are also watching the breakup of a vertically integrated megacorp that owned many restaurants, and underlying real-estate.
It's funny because I just got out of a professional training session where the instructor told us sale-leaseback agreements are a common business practice and helped a few companies he worked for secure long term growth.
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.
> I'm continually amazed by how much outrage normal and perfectly reasonable business strategies generate in the general public.
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?
While maybe not illegal (yet), there is a lot of deception of retail investors throughout the process:
* 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.
Did you read the article? The mismanagement was the supplier buying the purchaser with the most negotiating power and bankrupt them (by extracting as much equity as possible). This leaves purchasers with less negotiating power and the ability to raise prices. It was intentional.
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.
No, I think Doctorow is explicitly arguing the opposite? He is saying that it wasn't Thai Union that killed the chain, but the previous (PE) owners. Even the title says that.
When I jokingly talk about MBA Disease being the same as Dutch Elm Disease, this is what I mean: parasitic behavior that kills the host.
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.
I had the dubious luck to work for a company that got acquired by private equity. The company was resold for double the price it was valued when the private equity injected capital after 3 years. But during those 3 years, they lowered the quality, increased the quantity of product sold and now, no customers are excited by their product anymore.
CA was where innovation went to die far before Broadcom. It's main business process was buying popular products, "enterprising" but mostly selling them, and then selling them off as they went out of fashion.
So GG Capital paid $2.1B for Red Lobster, and sold the land for $1.5B. They still owe $600M on their purchase! Did they sell the remnants to Thai Union for > $600M? Only then this whole thing makes sense.
Yes. Thai union bought a 25% partial stake from GG capital in 2016 for 575 million. Thai union must have been happy, because they bought 24% more to become the primary owner in 2020 for an undisclosed amount.
Even without private equity's meddling, Red Lobster would have been in a rough spot. Family dining as a segment (lower end restaurants, but with table service) is being squeezed aggressively. Compared to Gen X and before, Millennials on average are valuing food quality over service experience, ballooning the fast casual (order at the counter, but nicer than fast food) segment. This is squeezing family dining from below, meanwhile their branding as ubiquitous and affordable prevents them from raising prices too much without bumping up against the fine dining segment (and who wants to bring a date to Olive Garden?).
And speaking of food quality, restaurants like Olive Garden and Red Lobster are just terrible. I'd rather get a fast-food fish sandwich, or fish and chips at the local brewpub, than eat anything at Red Lobster.
And it's not a secret. Fettucine Alfredo? They open the plastic packet from Sysco, microwave for the appropriate amount of time, same with the sauce, put it on a plate... $18.
The one thing Olive Garden has that Red Lobster lacks IMO is great service. Maybe I'm lucky, but I've never once had anything less than awesome service there. I don't go often, and yes it's not fine dining but it's a place to go to enjoy mediocre to good tasting food and be frustration free. I'll take that every single time over a place with better food but unreliable or frustrating service.
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.
There's a local italian restaurant that I frequent which is 30% cheaper than Olive Garden and way, way tastier. There are dozens of other local restaurants that are also cheaper, and tastier, than Olive Garden.
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.
I don't even really think it's food quality alone that is the issue. It's the total package doesn't match preferences.
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.
That's actually sort of been a sort of a revolution with things like fast casual burgers and a lot of food in airports (at least those that serve upscale cities). A lot of people don't really want at least somewhat extended sitdown. They want fairly decent food that's served quickly.
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.
It's not even about quality. Honestly, much of it is just that megachains aren't cool. I'm not above eating at Red Lobster but if I have to pick where I'm going to spend my money it's hardly going to be the first choice.
Millennials don't have families and can barely afford the transportation to get to these places, let alone the cost of a decent meal there. The ones that can aren't satisfied with a cookie-cutter franchise experience.
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.
PE sold red lobster in 2016, so you are 8 years too late.
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.
Can someone help explain restaurant industry economics?
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.
Option a, you stay small, don't chase trends, and you bring in decent profits year after year. Eventually maybe you close but not after paying back the investments plus more.
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.
Speculators hoping to catch the next Chipotle. Tons of activity in this space right now. I got burned trying to short one of them. These are, many times, low-float or institutionally owned and prone to heavy manipulation as well.
$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.
i hear that. but how about the actual economics of the businesses. e.g. return on capital .
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
Maybe not fast food / fast casual, but at least in a trendy area (NYC, SF, LA, etc.) if a restaurant catches on, they're making way more than 15% margins because they can charge whatever they want and people will go because it's cool...
this would include coffee shops and other relatively low cost establishments
More than half close within a year and it's closer to 80% after five years, but the ones that make it past that point are a lot more likely to thrive. Kinda like turtles going out to sea.
> 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.
also, stock prices aren't economics. In aggregate they can be useful indicators, but they are not a measure of a business' results (due to derivative factors)
I look at private equity as sort of like a bacterial infection. The infection may be the thing that kills its host by sucking of all of its energy, but the reason the host was infected in the first place was because of some other problem that led to a weakened immune system.
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.
> look at private equity as sort of like a bacterial infection
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.
And what's more likely, that they do that or that they leave a bunch more dead real estate for at least several years while they hold out for more money?
Seems like they exist to basically sell off a brand.
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.
> 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.
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.
I've been at 2 companies acquired by private equity firms. In one case, the company was totally healthy in the niche market of software for libraries. The company was sold because the owner wanted to retire.
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.
In the short term, profits go up. Long term, the once healthy company slowly dies, as customers get pissed to the point they are willing to incur the cost of transitioning to a new vendor.
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.
>> 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
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.
What a short sighted, money grubbing decision by people that didn't actually care about the wellbeing of the company. Keeping the land the restaurants are on means higher margins of profit long term and the ability to weather problems. Selling it off and then leasing it back does...exactly what happened here.
The people in PE don't concern themselves with the wellbeing of a company in any sort of moral or sentimental sense. The company's future is dependent on what turns the highest profit on their time and investment. Sometimes the most money is made in value extraction and crippling the company long term. They are the vampires and vultures of the economy.
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.
You're responding as if the person you're replying to wasn't asking a question, but stating a fact. Do you know about the details or even a general outline of the considerations that went into this decision?
Private equity firm wants to buy Red Lobster, but they don't have enough money. So to afford the sale, they make a deal to sell the land every Red Lobster sits on to a firm that will charge Red Lobster above-market rate rent to stay in business.
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.
Well, they DID have to scrape together a few % of the purchase price </s>
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?
Chelsea FC the football club, was acquired by a PE firm in 2022.
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.
I think that if ever founding another company, will definitely have corporate bylaws that resist similar strategies, as well as cap executive pay per year to a max multiplier of lowest and average salaries in the company.
> Unfortunately in the late Capitalism...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.
It isn't just late stage capitalism. Robber barons became a glaring issue with capitalism very early on. People eventually realized that it took regulation and government intervention to correct for that, but the wealthy who wanted to keep peasants doing all the work in their fiefdoms have spent a very long time demonizing and weakening the kinds of government interventions that could keep them in check.
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
One can blame the private equity investors buying it, but every sale requires not just a buyer, but also a seller. The owner of RL sold it to this private equity firm for an amount they felt was proper. The PE firm got more money out than they put in, so they increased the value of the assets. If this meant (in effect) shutting down RL in slow motion, then so be it. Sometimes it's best to just put a pillow over a company's face and say that's it.
PE is currently in the process of destroying my employer, a nearly 100-year-old engineering firm. Two PE firms teamed up to do some kind of financial voodoo debt transfer reverse mortgage buyout takeover and are slowing inserting their claws inch-by-inch into the management structure of the company.
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.
"The thing that private equity does is just unload assets and monetize assets. And so they effectively paid for the purchase of Red Lobster by selling the real estate,"
They did the same thing with Sears and many others.They short sell the company, buy it, sell anything valuable and destroy it.
Watching private equity take over and subsequently destroy businesses is so frustrating! This is a story that comes up again and again and there isn’t yet the overwhelming backlash that’s necessary to stop it. I highly recommend the book “Plunder: private equity’s plan to pillage America” for an extremely cogent overview of the entire situation. https://www.goodreads.com/book/show/62874267
They're currently buying up veterinary practices in the UK and turning them into cash cows. This has the effect that pet insurance has gone through the roof, and general vet bills are much higher than they used to be. Pets suffer too if owners can't afford to treat them any longer. (https://www.theguardian.com/business/2024/mar/12/uk-vet-pric...)
I just saw a blurb about something similar in the US! Mars (the candy company) is 'the largest owner of stand-alone veterinary clinics in the United States.' Also: 'JAB Holding Company, the owner of National Veterinary Associates’ 1,000-plus hospitals (not to mention Panera and Espresso House), also holds multiple pet-insurance lines in its portfolio.'
If the PE firm is charging more than a vet operating alone would, then why wouldn't a vet operating alone just undercut the PE firm's veterinary practice?
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?
Optum is doing the same thing here in the US PNW for actual doctors' offices. My SO had a mysterious charge suddenly appear in her account that nobody would explain and then she got fired as a patient and sent to collections by them a few years ago. Now that they're buying all of the clinics she essentially can't get in to any providers because of it.
Something I don't understand is why private equity would destroy a business they themselves own.
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?
IMO the fundamental issue is that the goal of private equity isn't to save the company, but to make as much money as quickly as possible off of it. The article hits on the exact pattern. Equity strips down a business, does whatever they can to juke the numbers with no concern for sustainability. As soon as they can make the numbers look appealing [enough], they sell it to the next sucker, and that person is left holding the bag, while the PE gets out with a tidy profit. From the article:
---
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.
When you value a business, part of it is brand and people's habits. The new owners are betting that they can trade in that value for cash, by selling a crap lesser product under the old name, and that this will return faster than a sustainable business.
It's not obviously bad from a finance point, it's just significantly shorter term thinking than the original owner.
Not certain, but I would guess it is to do with investment horizons and getting a 10x return on the money they put in to return to their fund, rather than 1x revenue per year.
Making money off restaurants is incredibly hard. It's just a lousy business. Even well-run, well-liked, well-attended restaurants are often running on incredibly thin profit margins.
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.
The private equity fund who makes the decisions about what to do is buying the company with other people's money. They get a % of the other peoples money they manage as revenue and slice of the profits on success.
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.
It's rooted in societal culture and what people incentivize (ie assign the highest multiple to).
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.
That's the trick though, they don't own it. They often take a company private and make the company "own itself". Then make it take out exorbitant loans to pay them their consultation fees. Then they fuck around as consulting management as the company struggles to meet even the interest payments on the massive loan taken out in its name.
It's understandable if you are a small business owner and someone makes an offer which means you can retire comfortably. The blame here is not with those owners, but with the private equity companies that exploit customers, and also the regulators that allow this monopolization & destruction of value to happen.
Not necessarily. I’ve seen it happen involuntarily several times - most recently, a client was acquired by another technology company in a mutually beneficial buyout - however, a year later, the buyer found themselves undergoing a hostile takeover by private equity.
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.
Are they entirely to blame? No. Everyone who capitalizes on the deal shares some blame. The consumer and the economy do get hurt. Late stage capitalism is starting to destroy what was good about capitalism and we need regulations to keep things sane.
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.
The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell.
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.
> The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell.
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.
It's especially jarring to see a story like this with Red Lobster as its subject.
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.
>The PE firm would also prefer to have a nice profitable business
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 never understood how PE firms get blamed for rising costs in doctor's offices and vets. If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same? Where is the competition? Why is there a barrier to entry that prevents some new young doctor or vet from coming in and undercutting the PE business?
Ah, American classism, where crap like McDonalds is OK, but pissing on Olive Garden and Applebees is a signal for "I'm not working class, I have taste".
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.
I wouldn't expect anything to change now. This is essentially what we're all doing to Earth: wringing it dry because we know we'll be dead before the oil runs out. People stopped dreaming of something better a long time ago.
That belies that fact that the play is usually to finance a bunch of debt to prop it up, pay themselves PHAT bonuses, and then let it burn to the ground. Honestly, it's gotten way past tiring that the government continues to let this same scenario play out over and over and over again.
I used to feel the same, but eventually I came to understand that they have a tremendously important role in the business ecosystem.
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.
Did he?? He expanded a bullet list of the different owners to fit a 12 minute video, started and ended the video with an ad, literally said he "didn't have too much to say about Golden Gate Capital", and shares the insight that "Red lobster just needs to get to a point financially where they can be themselves..." OK.
Red Lobster did not go bankrupt because of Endless Shrimp. On the revenue side, customers generally have been turning away in favor of competing dining options. On the expenses side, the company has to deal with high labor costs, expensive restaurant leases - and meddlesome PE investors that have led to high leadership turnover.
Going into bankruptcy might actually allow them to address their debt and operational losses
Red Lobster has cheapened out its products all over the place. Pennywise, dollar stupid.
- Got rid of Thousand Islands and Raspberry vinaigrette dressing
- Got rid of the lobster and the fake lobster from the "lobster" bisque
- You only get 1 bread per person now
- Sweet chilli shrimp that used to be battered and fried at the restaurant replaced with some no name brand microwavable chilli scrimp
- To save money, they purchase the runt of the crab and lobster, the ones that barely make legal length, that no one wants to buy
- Mushroom caps mushrooms are now bottom of the barrel white mushrooms
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
Tiffany Cianci is at the dead center of a battle with private equity trying to monopolize young child development centers. Her horrific personal story will open your eyes as to just how depraved and soulless private equity can really be in their attempt to take over the world. (TL;DR: they literally forced her give a deposition while she was having a miscarriage.) The government should be writing laws to curtail these kinds of bloodsucking parasites.
No one can force you to give a deposition during a miscarriage.
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.
I can’t wait until private equity companies are exposed as the exploitive side of our current system that needs to be corrected. At the heart of so many good companies are bad decisions driven by PE structures and personalities, most of whom seem very toxic and short sighted. Surely there is a better model of capitalism — I am not so vapid as to turn against the obvious advantages of the system. But I am also not willing to endorse the current approach as anything but exploitation with extra steps.
I haven’t been to Red Lobster since 2019, and even during that trip the quality of the food was severely degraded from what I remembered it to be. Their garlicky biscuits were quite nice, though. What baffles me about this story is the fact that they’re continuing to sell the endless shrimp, despite the fact that it lost them 11 million dollars. Old habits die hard, I guess.
Not sure about the expensive lease angle. The red lobster in my home town has had the same physical location longer than I’ve been alive. I assume many other red lobster locations are in the same situation.
I went to red lobster in Toronto yesterday as a "lets save red lobster Canada" idea I had in my head, they came to Canada the year I was born and my dad was obsessed so I have a lot of nostalgia.
Came out thinking: let em burn.
Worse than mediocre rubber for $200 after tip and tax.
> I went to red lobster in Toronto yesterday...Worse than mediocre rubber for $200 after tip and tax...Came out thinking: let em burn.
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 had a really bad dining experience the one single time I went to Red Lobster; happened at the same place probably (Toronto, the one in Bay Street?) hence why I want to share.
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.
Same location and I also had an amusing experience, I asked the lady who brought our drinks over if she had any idea if the Canadian locations would be ok, and she said she knew about as much as I do, and then out of nowhere randomly said "you look rich, you should buy us!" - my wife almost spat our her drink laughing at that.
I think depending on staffing levels a restaurant at certain times does not have the capacity to handle all of its tables and so some are considered inactive. If you sit at a table that is not active it would be treated as equivalent to not sitting at a table at all.
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.
Very tangential to the quality of chain restaurants that have decline in quality:
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)
Did you read the article? In there you will find the explanation of why you had a costly low-quality experience. Maybe this will clarify who the "'em" is.
LJS was always an extravagant treat when I was a kid as it was seemingly more expensive than McDonald's or Taco Bell, and further away from where we lived.
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'd like to see business schools codify "brand value extraction" or "enshittification" as explicitly unethical. Any activity that degrades a brand for short-term cashflow--and is reasonably know to decrease future business--is necessarily fraudulent.
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?
tl;dr summary in 3 points:
1) Heavy debt from private equity deals and increased lease costs made Red Lobster financially vulnerable. 2) Customers drifted away to other dining options, and frequent leadership changes hindered a stable turnaround plan. 3) The Endless Shrimp promotion, while a poor decision, underscored the company's larger management issues.
It's unclear to me how much is private equity "ruining" the business and how much is making it visible. Here in Portland a private equity firm bought a bunch of local restaurants and mini chains during the pandemic. Now they struggle paying workers and rent and are closing a lot of these businesses. My suspicion is that they bought these businesses when they were distressed and otherwise wouldn't have survived at all. Now the pandemic recovery here has been famously bad and these businesses aren't recovering. I suspect the play here was to buy for cheap, help them through the pandemic and have a bunch of guys businesses. Honestly everyone would IMO have been a winner. Employees, customers, investors and even the founders who lost their business but at least got done money for it and see it continue. I don't think we can blame this particular private equity firm in this situation. As a customer the transition was not noticeable.
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 :).
Sorry, but no. I've thought that shrimp and lobsters were simply ocean bugs since I was a child in the 80s. It isn't quite accurate in science terms, but still holds out as a thing in my brain. Even if I happen to eat them (Not disgusting, not delicious either)
I'll also mention that folks allergic to shellfish also have to be careful with crickets and other land insects. They have their similarities.
I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is:
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?
Because, contrary to public belief, PE firms are skilled and sophisticated managers.
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.
> 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...
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"Most deals are successful under their management"
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.
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I thought the PE model was to buy one of these companies, leverage them with many multiples of debt while paying themselves out massive fees and bonuses, then letting the huge interest and debt load take its toll on the husk of the company.
It often is, but this isn't some kind of free money tree that only rich people can access. Loading up a company with debt requires a creditor. Selling underlying assets requires a buyer. If these counterparties don't offer enough money to offset what PE spent to buy the company, PE loses. And this often happens, including, apparently, in this case!
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So the sucker here is the bank? Can't say that I care that much about that. It's just business and the banks apparently suck at it. They can foreclose on the business and sell it off to someone who relaunches it.
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The leverage game is much tougher to do now that ZIRP is thankfully over.
But why would anyone lend to a company which has been bought out by a PE firm then? Wouldn't banks turn around and say "hold on, I know this old trick, you're going to take loads of my money and then give it to yourself and default, and I get nothing"?
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Because the asset is worth the net present value of its future cashflows. Unless you take over the the thing and liquidate it, the value of the property is far in the future... so arguably the takeover and liquidation increases its value.
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.
I debate if PE unlocks or unsustainably accelerates. I think it comes down to should a small minority get very rich quickly, or should a going concern support a much broader ecosystem. I have seen PE "wreck" a few companies first-hand, so my selfish preference is the former.
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These articles are not written to inform the reader.
In bankruptcy the term is called “fraudulent transfers.”
because the people who have spend years of their life trying to build something, whether that's a brand, an experience, a product, whatever, have an emotional attachment to it and don't want to see it destroyed. so when they're struggling, the look for a lifeline. PE provides that lifeline as a cash infusion in exchange for ownership.
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.
This may be true but it doesn't have to be so cynical.
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".
It's not. They paid $2.1 billion for Red Lobster and sold the land for $1.5 billion. Now it's bankrupt so they lose $600 million.
No, this isn't true. First they no longer own it; we don't know what the sale terms were. Second (and more importantly) PE is a term-based play; if you do it right you get both the returns over the life of your fund by directing more revneues to payouts, aggresively cutting costs and eroding long-term investment (like commercial real estate) AND you sell at the right time to generate a multiple return (before all those unfavourable leases start to impact financials). Red Lobster 18-24 months ago could have sold at a premium to the $2.1B purchase price.
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Good point. I think this changes the story a bit. It's not exactly that PE is predatory. If PE were unlocking the value of assets held by an underperforming company, the transaction could be explained as the creative destruction of capitalism making room for something better to hold those assets.
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.
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it's a bust-out, you identify a patsy and you stick it to them.
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.
https://www.dailymotion.com/video/x4348lj
I've seen many people saying, on this site and others, that they "believe in markets", as if it was their profession of faith.
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".
Couple points:
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.
There should be a law that allows companies to self split once they become monopolies. As in a person can collect evidence of a monopolie and then can walk out of the busters office with the standalone part of the company thats the monopoly as a compamy of its own. Make those that conspire and lobby for the r monopolies those who would profit the most on busting.
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I'm absolutely okay with the market destroying companies. It's literally one of the points of having a market to begin with. That sometimes also includes profitable companies.
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
I have no problem with unprofitable, severly mismanaged companies going out of business. I do have a problem when a company is liquidated to give an exit to shareholders when it is still profitable, as described in the article.
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Market economies destroyed the wildlife fauna of North America. It's incredible when you see photographs of what used to exist here.
At least north america has some wild places and animals left. In most of europe there is almost nothing left. We destroyed everything.
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Go look at parts of China, Russia, North Korea, and Vietnam and compare.
You also might be shocked to find that Native Americans also had a market economy.
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> 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.
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...
I would love to see an experiment where the only type of regulation allowed was to price unpriced externalities.
To me this is not even slightly surprising. Red Lobster used to be at the top of our list of restaurants. Then in recent years the quality of both the food and service deteriorated. One visit the food was so bad I couldn't even eat it. That was compounded by not having a server to talk to. Took our order and never returned - even had someone else bring out the order.
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.
Increasingly I think the financialization of everything makes us less capable of understanding the world.
"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.
The problem is that executives will ask "what makes Stardew Valley successful?" and never make it to this answer:
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.
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We live in a time where almost everything is getting worse. Products are getting smaller, service is getting worse, businesses are closing, quality is going down. I don't think I've ever experienced such an obvious decline in commercial society in my entire life.
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?
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This is the reason I've always been a detractor of purely relying on "data driven decision making". Being data driven is great... if paired with intuition and common sense.
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.
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> because it was cute and had a soul and is fun to play.
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.
But a lot of games are cute and fun to play that do not succeed
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This is what people mean when they use the term soulless capitalism. The increasing financialization of everyone leads us to optimize for the things we can measure assuming those are the things that matter, and in the end the optimizations erase everything good.
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> 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.
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.
what about all the other cute fun to play soulful games that DONT succeed?
I think this is naive. When (for example) a private equity fund buys a casual dining chain, they will go through how the business is run in painstaking detail and try to understand exactly what makes the experience 'work' and what changes are possible or advisable.
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.
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Quality control and management ... seem to be the secret sauce to restaurants and are amusingly unrelated to the actual food / recipes and etc.
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.
For my poor friends the whole 'emergency pizza' thing was amazing marketing. Every other company is actively screwing them, increasing rates to unaffordable, shrinking sizes. Domino's not only stayed affordable, but said, hey, times are though, if you get in a crunch, here's an emergency pizza to fill the gap. Friggen' overdraft protection on food for their kids. The amount of good will that corporate marketing campaign brought in that group I can't even tell you. I'm talking about the single dad's working two jobs, moved back home with their parents segment. They now feel like Dominoes is the only company that hasn't f'd them. They actively talk about Dominoes randomly (we guys don't have much to talk about but still it doesn't normally fall to discount pizza discussion).
This happened to a local sports-bar chain around us. It was always decent and our first choice for family nights out, but after Covid it went downhill, locations closed, and the last location close by just started falling flat... empty even at busy periods, no wait staff, declining quality, etc. It just up and closed shortly after.
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 used to really like Red Lobster, for the money they were quite good. Their cheese rolls are still great. That being said, I haven't been in years. Just the other day I went to a Chili's, I remember going to Chili's all the time in high school and college. Hadn't been in a while. The food quality was just so off from what it used to be. I was really disappointed. I honestly am not sure what these restaurants are thinking. Menu restructuring to cut back portions and also quality control is a significant problem. The only "fast casual" restaurant I can think of at the moment that has maintained its relative quality is Outback.
I stopped going after a waitress mentioned my mozzarella sticks were still in the microwave. As I sat there, thinking about the Sam’s Club cardboard box they might have come from, I realized that many restaurants probably do the same. However, I had hoped Red Lobster would at least use an oven.
I assume Red Lobster preemptively lowered the food grade and the service labour costs to avoid raising the prices in their menu drastically. We've had a wave of very strong inflation pretty much worldwide - or at least wherever there have been covid lock-downs and huge government payment schemes - and for many businesses, especially those that already operated at the margin of profitability, this has been their death knell.
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.
Yep, it's the food. There are many famous 'food destinations' around the world. Usually the line goes around the block. You always have to wait, either in line, for a reservation, etc. People wait because it's worth it. The food is good.
Well, it's could also have become a meme or whatever the right term is. There's a lobster roll place in a Maine coastal town that always has lines around the block with maybe hour waits. There's a place right across the street that IMO is just as good--as are a bunch of other Maine coastal places you've never heard of.
> The thing about a restaurant is that you'll always have business if the food and service are good.
This is just demonstrably false. Good food and service is no guarantee of product-market fit.
I think the author has a hard time trying to put a "why should we care?" spin on this at the end: Middle class families need a nice night out, and red lobster is the best way to do that!
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.
I wish authors like this would explore the alternative they want.
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).
You have a wonky definition of a dieing company.
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.
The company wasn't dying, but it was undervalued on the market. It also sounds like the component parts of the company were more valuable separate than together.
>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.
A dying company is one that fails to produce enough earnings to justify the assets it consumes or holds.
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.
B is not true. It's more profitable to extract lots of value in the short term and kill the company and then move on to the next victim, continually showing great profit spikes and cashing out yourself, than to slowly extract value over the years.
The system is full of perverse incentives.
You’re forgetting that we operate in a world of limited resources, and the opportunity cost of poorly allocating those limited resources.
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.
Why is this perverse? It seems desirable. IF there are other opportunities that generate more value, you would want to cash out of the lower ones and invest in the better ones.
IF there are no options that generate better value, the company wont be liquidated.
They sold their real estate for 1.5 billion and then red lobster paid 200 million a year in rent. That’s insane. In 7.5 years they would pay back the purchase price.
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 ?
What’s most weird to me is that the PE firm owns Red Lobster. So if a deal is bad for Red Lobster, the deal is also bad for the PE firm.
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?
The hit from above-market leases vs. owning the land might be clearly visible in hindsight, but that's not necessarily true looking into the future. A buyer could have focused on the economies of scale from being in the seafood business and actually thought "we're not a real estate companye, and rentals are preferable in this inflated market". The got all that current debt off the books in exchange for future liabilities; that could also have looked good.
>> 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.
… who’d PE sell the land to?
Was it… themselves, in some roundabout way?
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It’s not insane.
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.
No I don’t mean the strategy, I mean selling the real estate for 7.5 years of rent. Usually the multiple is closer to 20x
You dont understand, the PE firm IS red lobster. The old owners were paid 2.1 billion for the company and retired.
I do understand
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These private equity deals are the convergence of a couple of phenomena.
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.
I'd add that it's also a function of revaluing the assets, and then determining if the return on asset value is appropriate.
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.
That's what it looks like to me too. All of the Red Lobsters I know of in California are in some very high volume locations, often in large multi-block shopping malls where everyone in a several mile radius goes to shop. They did a good job front running the state's population growth and locking in some great locations before they became really expensive.
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.
Private equity takeovers are often just scams to convert customer trust to short-term profits, but labeled as growth.
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.
the whole point is to flip the business in 5ish years.
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But that is the PE playbook. Take businesses and squeeze as many profits out of them before they die.
https://www.nytimes.com/2023/04/28/opinion/private-equity.ht...
PVH is the first time I realized this is what everyone was doing. I have never been able to put it so succinctly though, thank you.
>but the supply chain costs keep going up.
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.)
Private equity is mostly driven by state pension funds that are basically unfunded entitlements. They have to pay out more now as the boomers retire, but they have no money so seek ever-increasing rates of return, even above market rate. They can't find anything on the 'public' market, so they turn to these alternatives. Meanwhile, those on the supply side see that there is money that needs to be invested in these sorts of vehicles to have any shot of paying out, and they oblige.
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
I'm continually amazed by how much outrage normal and perfectly reasonable business strategies generate in the general public.
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.
Have you actually read the article ? It tells a different story:
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
Yes, I did.
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.
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I think that is the point. That is considered mismanagement. If I'm using a gold as the foundation of a hotdog stand, someone will come along and say that the gold is mismanaged, and worth more as jewelry.
They would be right!
The article tells a fairly clear story of business consolidation and monopoly. The chains had buying power, so suppliers consolidated and removed that power. Then the suppliers became so strong (with the help of PE) that they bought and looted the remaining value from the chain. Ultimately the loser at the end of this story will be the consumer, who has no market power, and any new small restaurants that develop to replace RL.
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.
I dont think it is as one dimensional as that. You are also watching the breakup of a vertically integrated megacorp that owned many restaurants, and underlying real-estate.
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It's funny because I just got out of a professional training session where the instructor told us sale-leaseback agreements are a common business practice and helped a few companies he worked for secure long term growth.
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.
> I'm continually amazed by how much outrage normal and perfectly reasonable business strategies generate in the general public.
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.
> None of this is unusual or in any way wrong.
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?
While maybe not illegal (yet), there is a lot of deception of retail investors throughout the process:
* 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.
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Did you read the article? The mismanagement was the supplier buying the purchaser with the most negotiating power and bankrupt them (by extracting as much equity as possible). This leaves purchasers with less negotiating power and the ability to raise prices. It was intentional.
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.
No, I think Doctorow is explicitly arguing the opposite? He is saying that it wasn't Thai Union that killed the chain, but the previous (PE) owners. Even the title says that.
The real estate deal seems rather tame, compared to the "Endless Shrimp" deal perpetrated later by their new owner: https://www.bloomberg.com/opinion/articles/2024-05-20/the-en...
I need to resurrect my idea of a list of companies (especially ones that manufacture goods) that are owned by Private Equity so people can avoid them.
In most cases, the brand name stays the same but the quality falls off a cliff.
When I jokingly talk about MBA Disease being the same as Dutch Elm Disease, this is what I mean: parasitic behavior that kills the host.
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.
Hedge Funds != Private Equity. They are two very different businesses. For starters, hedge funds don't run other companies.
I had the dubious luck to work for a company that got acquired by private equity. The company was resold for double the price it was valued when the private equity injected capital after 3 years. But during those 3 years, they lowered the quality, increased the quantity of product sold and now, no customers are excited by their product anymore.
That's an excellent idea. I posted in the thread another angle I'd love to see get traction:
https://news.ycombinator.com/item?id=40238807
I would like this service but for vet clinics, apartment rental forms, and dentists.
Instant Pot was one ...
For products it would be good to include a date so people can obtain the quality items second-hand.
Tim Hortons
They're on my lifetime ban list after PE ruined their menu.
Tim Hortons is part of $RBI [1] and not private equity.
[1] https://en.wikipedia.org/wiki/Tim_Hortons
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This will work until a PE firm buys you out.
Travis CI
Whataburger :(
Did this happen to Chipotle?
And then it was reversed, purchased back by the founder for less
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VMWARE CA (Computer Associates) CITRIX ...
CA was where innovation went to die far before Broadcom. It's main business process was buying popular products, "enterprising" but mostly selling them, and then selling them off as they went out of fashion.
So GG Capital paid $2.1B for Red Lobster, and sold the land for $1.5B. They still owe $600M on their purchase! Did they sell the remnants to Thai Union for > $600M? Only then this whole thing makes sense.
Yes. Thai union bought a 25% partial stake from GG capital in 2016 for 575 million. Thai union must have been happy, because they bought 24% more to become the primary owner in 2020 for an undisclosed amount.
Even without private equity's meddling, Red Lobster would have been in a rough spot. Family dining as a segment (lower end restaurants, but with table service) is being squeezed aggressively. Compared to Gen X and before, Millennials on average are valuing food quality over service experience, ballooning the fast casual (order at the counter, but nicer than fast food) segment. This is squeezing family dining from below, meanwhile their branding as ubiquitous and affordable prevents them from raising prices too much without bumping up against the fine dining segment (and who wants to bring a date to Olive Garden?).
And speaking of food quality, restaurants like Olive Garden and Red Lobster are just terrible. I'd rather get a fast-food fish sandwich, or fish and chips at the local brewpub, than eat anything at Red Lobster.
And it's not a secret. Fettucine Alfredo? They open the plastic packet from Sysco, microwave for the appropriate amount of time, same with the sauce, put it on a plate... $18.
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The one thing Olive Garden has that Red Lobster lacks IMO is great service. Maybe I'm lucky, but I've never once had anything less than awesome service there. I don't go often, and yes it's not fine dining but it's a place to go to enjoy mediocre to good tasting food and be frustration free. I'll take that every single time over a place with better food but unreliable or frustrating service.
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.
There's a local italian restaurant that I frequent which is 30% cheaper than Olive Garden and way, way tastier. There are dozens of other local restaurants that are also cheaper, and tastier, than Olive Garden.
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.
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I don't even really think it's food quality alone that is the issue. It's the total package doesn't match preferences.
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.
That's actually sort of been a sort of a revolution with things like fast casual burgers and a lot of food in airports (at least those that serve upscale cities). A lot of people don't really want at least somewhat extended sitdown. They want fairly decent food that's served quickly.
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.
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It's not even about quality. Honestly, much of it is just that megachains aren't cool. I'm not above eating at Red Lobster but if I have to pick where I'm going to spend my money it's hardly going to be the first choice.
Millennials don't have families and can barely afford the transportation to get to these places, let alone the cost of a decent meal there. The ones that can aren't satisfied with a cookie-cutter franchise experience.
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.
Damn near everybody who has a family right now is a Millennial. Millennials are 30-45 years old
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https://prospect.org/health/2023-05-23-quackonomics-medical-...
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.
Looks like a prime market opportunity for a competing chain with competent management. The PE firm's loss can now be someone else's long-term gain.
PE sold red lobster in 2016, so you are 8 years too late.
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.
Can someone help explain restaurant industry economics?
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 a, you stay small, don't chase trends, and you bring in decent profits year after year. Eventually maybe you close but not after paying back the investments plus more.
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.
Speculators hoping to catch the next Chipotle. Tons of activity in this space right now. I got burned trying to short one of them. These are, many times, low-float or institutionally owned and prone to heavy manipulation as well.
$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.
i hear that. but how about the actual economics of the businesses. e.g. return on capital .
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
PepsiCo acquired Pizza Hut, Taco Bell, and KFC to increase its soda fountain sales of Pepsi products.
Fundamentally they're a sickness-as-a-service company
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> Who invests in this stuff?
Bill Ackman (founder of Pershing Square Capital Management), for one: https://lexfridman.com/bill-ackman-transcript#chapter4_inves...
If I ever get rich, I would totally open a ghost pizza restaurant.
Margins are good. Spoilage is a non-issue.
Orders are pickup or delivery.
I can bring 10 pizzas to every party.
Maybe not fast food / fast casual, but at least in a trendy area (NYC, SF, LA, etc.) if a restaurant catches on, they're making way more than 15% margins because they can charge whatever they want and people will go because it's cool...
this would include coffee shops and other relatively low cost establishments
More than half close within a year and it's closer to 80% after five years, but the ones that make it past that point are a lot more likely to thrive. Kinda like turtles going out to sea.
> 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.
Well thankfully restaurant & AI startup aren't the only two industries worthy of investing in.
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
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You should look at Chipotle's stock.
also, stock prices aren't economics. In aggregate they can be useful indicators, but they are not a measure of a business' results (due to derivative factors)
an exception that proves the rule
I look at private equity as sort of like a bacterial infection. The infection may be the thing that kills its host by sucking of all of its energy, but the reason the host was infected in the first place was because of some other problem that led to a weakened immune system.
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.
> look at private equity as sort of like a bacterial infection
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.
And what's more likely, that they do that or that they leave a bunch more dead real estate for at least several years while they hold out for more money?
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Seems like they exist to basically sell off a brand.
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.
Yeah, that's a good point.
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.
> 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.
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.
I've been at 2 companies acquired by private equity firms. In one case, the company was totally healthy in the niche market of software for libraries. The company was sold because the owner wanted to retire.
The vampire capitalists did the standard playbook:
In the short term, profits go up. Long term, the once healthy company slowly dies, as customers get pissed to the point they are willing to incur the cost of transitioning to a new vendor.
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.
>> 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
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.
What a short sighted, money grubbing decision by people that didn't actually care about the wellbeing of the company. Keeping the land the restaurants are on means higher margins of profit long term and the ability to weather problems. Selling it off and then leasing it back does...exactly what happened here.
The people in PE don't concern themselves with the wellbeing of a company in any sort of moral or sentimental sense. The company's future is dependent on what turns the highest profit on their time and investment. Sometimes the most money is made in value extraction and crippling the company long term. They are the vampires and vultures of the economy.
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.
You're responding as if the person you're replying to wasn't asking a question, but stating a fact. Do you know about the details or even a general outline of the considerations that went into this decision?
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Why should anyone care about the wellbeing of a company? This sounds like an exercise in anthropomorphism.
Private equity firm wants to buy Red Lobster, but they don't have enough money. So to afford the sale, they make a deal to sell the land every Red Lobster sits on to a firm that will charge Red Lobster above-market rate rent to stay in business.
This doesn't seem like it should be legal.
Why would it be illegal?
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.
Reminds me of payday loan companies, except for billion dollar businesses instead of poor people struggling to pay for groceries.
Well, they DID have to scrape together a few % of the purchase price </s>
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?
Private equity is also getting into professional American football.
https://bleacherreport.com/articles/10122183-report-nfl-owne...
Chelsea FC the football club, was acquired by a PE firm in 2022.
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.
Unfortunately in the late Capitalism that reads more like Feudal than Capitalism, there is not much we can do, and so be it.
There is a time that all shall burn and rot and a new world may come forth.
I think that if ever founding another company, will definitely have corporate bylaws that resist similar strategies, as well as cap executive pay per year to a max multiplier of lowest and average salaries in the company.
> Unfortunately in the late Capitalism...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.
It isn't just late stage capitalism. Robber barons became a glaring issue with capitalism very early on. People eventually realized that it took regulation and government intervention to correct for that, but the wealthy who wanted to keep peasants doing all the work in their fiefdoms have spent a very long time demonizing and weakening the kinds of government interventions that could keep them in check.
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
One can blame the private equity investors buying it, but every sale requires not just a buyer, but also a seller. The owner of RL sold it to this private equity firm for an amount they felt was proper. The PE firm got more money out than they put in, so they increased the value of the assets. If this meant (in effect) shutting down RL in slow motion, then so be it. Sometimes it's best to just put a pillow over a company's face and say that's it.
PE is currently in the process of destroying my employer, a nearly 100-year-old engineering firm. Two PE firms teamed up to do some kind of financial voodoo debt transfer reverse mortgage buyout takeover and are slowing inserting their claws inch-by-inch into the management structure of the company.
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.
"The thing that private equity does is just unload assets and monetize assets. And so they effectively paid for the purchase of Red Lobster by selling the real estate,"
They did the same thing with Sears and many others.They short sell the company, buy it, sell anything valuable and destroy it.
Watching private equity take over and subsequently destroy businesses is so frustrating! This is a story that comes up again and again and there isn’t yet the overwhelming backlash that’s necessary to stop it. I highly recommend the book “Plunder: private equity’s plan to pillage America” for an extremely cogent overview of the entire situation. https://www.goodreads.com/book/show/62874267
They're currently buying up veterinary practices in the UK and turning them into cash cows. This has the effect that pet insurance has gone through the roof, and general vet bills are much higher than they used to be. Pets suffer too if owners can't afford to treat them any longer. (https://www.theguardian.com/business/2024/mar/12/uk-vet-pric...)
M&M Mars here in the US has been buying up the independent veterinary practices and turning them into corporate run businesses.
https://en.wikipedia.org/wiki/Mars_Inc.#Mars_Petcare
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I just saw a blurb about something similar in the US! Mars (the candy company) is 'the largest owner of stand-alone veterinary clinics in the United States.' Also: 'JAB Holding Company, the owner of National Veterinary Associates’ 1,000-plus hospitals (not to mention Panera and Espresso House), also holds multiple pet-insurance lines in its portfolio.'
https://www.theatlantic.com/ideas/archive/2024/04/vet-privat...
A few years ago my cat needed his teeth cleaned my local vet charged me £125. The same vet, now owned by CVS, is now going to charge £250
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If the PE firm is charging more than a vet operating alone would, then why wouldn't a vet operating alone just undercut the PE firm's veterinary practice?
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?
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Optum is doing the same thing here in the US PNW for actual doctors' offices. My SO had a mysterious charge suddenly appear in her account that nobody would explain and then she got fired as a patient and sent to collections by them a few years ago. Now that they're buying all of the clinics she essentially can't get in to any providers because of it.
Dentists too.
Something I don't understand is why private equity would destroy a business they themselves own.
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?
IMO the fundamental issue is that the goal of private equity isn't to save the company, but to make as much money as quickly as possible off of it. The article hits on the exact pattern. Equity strips down a business, does whatever they can to juke the numbers with no concern for sustainability. As soon as they can make the numbers look appealing [enough], they sell it to the next sucker, and that person is left holding the bag, while the PE gets out with a tidy profit. From the article:
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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.
When you value a business, part of it is brand and people's habits. The new owners are betting that they can trade in that value for cash, by selling a crap lesser product under the old name, and that this will return faster than a sustainable business.
It's not obviously bad from a finance point, it's just significantly shorter term thinking than the original owner.
If they can make even more money on a different viable business by vampiring out this one, the NPV calculation says...
(What %age of eastern european enterprises got long term investment in the 1990s?)
Not certain, but I would guess it is to do with investment horizons and getting a 10x return on the money they put in to return to their fund, rather than 1x revenue per year.
Once you realize the destruction of the sunk cost fallacy it's easy to detach from things that would harm you long term.
For the same reason that large tech firms lay off thousands and shutter successful, or yet to be released projects.
Short term gains over a long, steady market is the current driving mentality of Western capital.
Making money off restaurants is incredibly hard. It's just a lousy business. Even well-run, well-liked, well-attended restaurants are often running on incredibly thin profit margins.
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.
The private equity fund who makes the decisions about what to do is buying the company with other people's money. They get a % of the other peoples money they manage as revenue and slice of the profits on success.
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.
It's rooted in societal culture and what people incentivize (ie assign the highest multiple to).
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.
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That's the trick though, they don't own it. They often take a company private and make the company "own itself". Then make it take out exorbitant loans to pay them their consultation fees. Then they fuck around as consulting management as the company struggles to meet even the interest payments on the massive loan taken out in its name.
All reward, no risk.
Can we place blame on the people who sell their firms to private equity firms?
It's understandable if you are a small business owner and someone makes an offer which means you can retire comfortably. The blame here is not with those owners, but with the private equity companies that exploit customers, and also the regulators that allow this monopolization & destruction of value to happen.
Not necessarily. I’ve seen it happen involuntarily several times - most recently, a client was acquired by another technology company in a mutually beneficial buyout - however, a year later, the buyer found themselves undergoing a hostile takeover by private equity.
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.
Are they entirely to blame? No. Everyone who capitalizes on the deal shares some blame. The consumer and the economy do get hurt. Late stage capitalism is starting to destroy what was good about capitalism and we need regulations to keep things sane.
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.
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"look what they (sellers) made them (PE) do!"
Nope.
Yep.
The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell.
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.
From the article:
> 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.
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> The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell.
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.
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It's especially jarring to see a story like this with Red Lobster as its subject.
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.
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>The PE firm would also prefer to have a nice profitable business
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 never understood how PE firms get blamed for rising costs in doctor's offices and vets. If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same? Where is the competition? Why is there a barrier to entry that prevents some new young doctor or vet from coming in and undercutting the PE business?
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>Watching private equity take over and subsequently destroy businesses is so frustrating!
I agree. I uh, hope they don't do the same thing to Olive Garden, or Applebee's. That would be tragic..
The really sad thing is that both of those used to be not so bad. Not good, mind you, but at least palatable. Now they're just nasty.
You keep your hands off Olive Garden.
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Ah, American classism, where crap like McDonalds is OK, but pissing on Olive Garden and Applebees is a signal for "I'm not working class, I have taste".
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.
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Similar story with Sears. Bought by a real estate investor who didn't care about running the stores that much...
Wait until you hear about Thames Water and Maquarrie in the UK.
https://www.theguardian.com/business/2023/jul/10/as-thames-w...
I wouldn't expect anything to change now. This is essentially what we're all doing to Earth: wringing it dry because we know we'll be dead before the oil runs out. People stopped dreaming of something better a long time ago.
We didn't stop dreaming: it's just that we have not yet found non-polluting oil!
Private Equity is a scapegoat business. Like Ticketmaster.
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.
That belies that fact that the play is usually to finance a bunch of debt to prop it up, pay themselves PHAT bonuses, and then let it burn to the ground. Honestly, it's gotten way past tiring that the government continues to let this same scenario play out over and over and over again.
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Eh, PE also takes over businesses where the owners just want to cash out. Plenty of businesses too small to IPO but plenty of revenue to sell to PE.
I used to feel the same, but eventually I came to understand that they have a tremendously important role in the business ecosystem.
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.
Company Man on YouTube did a great job breaking this down about a week ago: https://www.youtube.com/watch?v=I17aERAQPfc&pp=ygUXY29tcGFue...
Did he?? He expanded a bullet list of the different owners to fit a 12 minute video, started and ended the video with an ad, literally said he "didn't have too much to say about Golden Gate Capital", and shares the insight that "Red lobster just needs to get to a point financially where they can be themselves..." OK.
Like Red Lobster, maybe it’s not for everyone, I guess?
GOOD! I celebrate the death of the restaurant chains!
“Yes, the planet got destroyed. But for a beautiful moment in time we created a lot of value for our shareholders.”
Some viewed the Wall Street movie as a tutorial
Red Lobster did not go bankrupt because of Endless Shrimp. On the revenue side, customers generally have been turning away in favor of competing dining options. On the expenses side, the company has to deal with high labor costs, expensive restaurant leases - and meddlesome PE investors that have led to high leadership turnover.
Going into bankruptcy might actually allow them to address their debt and operational losses
Red Lobster has cheapened out its products all over the place. Pennywise, dollar stupid. - Got rid of Thousand Islands and Raspberry vinaigrette dressing - Got rid of the lobster and the fake lobster from the "lobster" bisque - You only get 1 bread per person now - Sweet chilli shrimp that used to be battered and fried at the restaurant replaced with some no name brand microwavable chilli scrimp - To save money, they purchase the runt of the crab and lobster, the ones that barely make legal length, that no one wants to buy - Mushroom caps mushrooms are now bottom of the barrel white mushrooms
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
Tiffany Cianci is at the dead center of a battle with private equity trying to monopolize young child development centers. Her horrific personal story will open your eyes as to just how depraved and soulless private equity can really be in their attempt to take over the world. (TL;DR: they literally forced her give a deposition while she was having a miscarriage.) The government should be writing laws to curtail these kinds of bloodsucking parasites.
https://www.tiktok.com/@tiffanycianci
No one can force you to give a deposition during a miscarriage.
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.
The other alternative was to violate her sacred beliefs. You clearly have no idea how nasty this litigation has been.
https://www.washingtonian.com/2023/07/24/how-a-battle-over-a...
I can’t wait until private equity companies are exposed as the exploitive side of our current system that needs to be corrected. At the heart of so many good companies are bad decisions driven by PE structures and personalities, most of whom seem very toxic and short sighted. Surely there is a better model of capitalism — I am not so vapid as to turn against the obvious advantages of the system. But I am also not willing to endorse the current approach as anything but exploitation with extra steps.
It seems like they keep getting "exposed", yet nothing changes.
There's a solution, I posted it in the thread.
https://news.ycombinator.com/item?id=40238807
I haven’t been to Red Lobster since 2019, and even during that trip the quality of the food was severely degraded from what I remembered it to be. Their garlicky biscuits were quite nice, though. What baffles me about this story is the fact that they’re continuing to sell the endless shrimp, despite the fact that it lost them 11 million dollars. Old habits die hard, I guess.
https://archive.is/qarb5
Not sure about the expensive lease angle. The red lobster in my home town has had the same physical location longer than I’ve been alive. I assume many other red lobster locations are in the same situation.
I went to red lobster in Toronto yesterday as a "lets save red lobster Canada" idea I had in my head, they came to Canada the year I was born and my dad was obsessed so I have a lot of nostalgia.
Came out thinking: let em burn.
Worse than mediocre rubber for $200 after tip and tax.
> I went to red lobster in Toronto yesterday...Worse than mediocre rubber for $200 after tip and tax...Came out thinking: let em burn.
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 had a really bad dining experience the one single time I went to Red Lobster; happened at the same place probably (Toronto, the one in Bay Street?) hence why I want to share.
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.
Just to explain a bit of restaurant procedure:
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.
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Same location and I also had an amusing experience, I asked the lady who brought our drinks over if she had any idea if the Canadian locations would be ok, and she said she knew about as much as I do, and then out of nowhere randomly said "you look rich, you should buy us!" - my wife almost spat our her drink laughing at that.
I think depending on staffing levels a restaurant at certain times does not have the capacity to handle all of its tables and so some are considered inactive. If you sit at a table that is not active it would be treated as equivalent to not sitting at a table at all.
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.
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You shouldn’t just seat yourself at the majority of restaurants, unless you are sitting at the bar area.
Is it the same sh* like Tim Hortons? RIP then...
Very tangential to the quality of chain restaurants that have decline in quality:
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.
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Man, I wish Tim Hortons would die...
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)
Overpriced bad food? Bingo!
Did you read the article? In there you will find the explanation of why you had a costly low-quality experience. Maybe this will clarify who the "'em" is.
(It's not anyone you saw at the restaurant...)
That was exactly the point, I experienced what the article said first hand.
So let em burn!
Also: 9th up from the bottom: https://news.ycombinator.com/newsguidelines.html
Realistically, Red Lobster and most chain restaurants are... just not that good.
They keep saying all-you-can-eat shrimp was a bad idea and I don’t understand how that’s possible.
Just like Toys 'R Us. Same playbook.
We'll always have Long John Silver's. All hail the hush puppy!
LJS was always an extravagant treat when I was a kid as it was seemingly more expensive than McDonald's or Taco Bell, and further away from where we lived.
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. :)
"The food is so bad and the portions are so small!" - Woody Allen
Maybe your standards are refined now that you're older?
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.)
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I'd like to see business schools codify "brand value extraction" or "enshittification" as explicitly unethical. Any activity that degrades a brand for short-term cashflow--and is reasonably know to decrease future business--is necessarily fraudulent.
If that is codified and taught, then journalists can point to that in all cases (of which we are overrun). It's pathetic.
What do you think "enshittification" means, exactly?
https://en.wikipedia.org/wiki/Enshittification
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?
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both Red Lobster and McDonald's are on the front page of Hacker News currently
ownersip here should wake up before it worsens further
tl;dr summary in 3 points: 1) Heavy debt from private equity deals and increased lease costs made Red Lobster financially vulnerable. 2) Customers drifted away to other dining options, and frequent leadership changes hindered a stable turnaround plan. 3) The Endless Shrimp promotion, while a poor decision, underscored the company's larger management issues.
The white-collar version of walking out of a failing company with the chairs and coffee machine. 1000x more damaging, 1000x less punished. Business.
Private equity seems to have a high rate of taking something beloved and successful, and then killing it.
It's unclear to me how much is private equity "ruining" the business and how much is making it visible. Here in Portland a private equity firm bought a bunch of local restaurants and mini chains during the pandemic. Now they struggle paying workers and rent and are closing a lot of these businesses. My suspicion is that they bought these businesses when they were distressed and otherwise wouldn't have survived at all. Now the pandemic recovery here has been famously bad and these businesses aren't recovering. I suspect the play here was to buy for cheap, help them through the pandemic and have a bunch of guys businesses. Honestly everyone would IMO have been a winner. Employees, customers, investors and even the founders who lost their business but at least got done money for it and see it continue. I don't think we can blame this particular private equity firm in this situation. As a customer the transition was not noticeable.
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.
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Shrimp - the cockroaches of the ocean.
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 :).
For future reference, say you are allergic. It's not like they would have asked for a doctor's note. Oh it was in Germany? They probably would...
Now if you'd said there was no Old Bay on the table I'd say you had a serious issue on your hands, but I'm guessing you don't know what that is?
>Shrimp - the cockroaches of the ocean
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?
Sorry, but no. I've thought that shrimp and lobsters were simply ocean bugs since I was a child in the 80s. It isn't quite accurate in science terms, but still holds out as a thing in my brain. Even if I happen to eat them (Not disgusting, not delicious either)
I'll also mention that folks allergic to shellfish also have to be careful with crickets and other land insects. They have their similarities.
you fondly reminisced about a wonderful meal?
„Advanced Conflict Avoidance, Vol.1“
>> Angry that your favorite Red Lobster closed down
Can't really say that I am.