Comment by dmurray
2 years ago
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.
Because it was a dead man walking by the time PE bought it. The underlying assets were worth more than the sale price so it was never going to make sense to do anything other than what happened.
With that said, the tax code and employee law could be improved so there are stronger guardrails to protect some stakeholders more.
> The underlying assets were worth more than the sale price
That's not so clear to me. The real estate wouldn't have been worth so much without the existing restaurants having to pay rent.
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That's pretty standard, even for well-run chains. Gives the primary business (making food profitably) a huge cash infusion, and removes a distraction.
Obviously deal terms are important, but that action on its own isn't stripping for the sake of stripping.
McDonald's, possibly the most successful chain of them all, doesn't seem to think owning real estate is a distraction.
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How is owning real estate a distraction for a restaurant chain? Presumably their new landlords aren't going to maintain kitchen equipment and other infrastructure that makes up a lot of the maintenance burden. If it's really such a distraction, outsource it—but don't sell the real estate.
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"Gives the primary business (making food profitably) a huge cash infusion, and removes a distraction"
This is so suspiciously MBA-esque: - Owning real estate (and responsibilities associated with it) are not distractions: they are the cost (and responsibilities) associated with running a business. - "a huge cash infusion" followed by [correspondingly] huge rent payments; the business becomes a prisoner.
There certainly are distractions when running a business, but owning the spot of land where it's installed is not one of them.
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> Gives the primary business (making food profitably) a huge cash infusion
What is "stripping for the sake of stripping" of not this?
> 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.
Maybe Dell? Not exactly a consumer darling, but certainly a successful story for a PE LBO.
There was a side plot of "PE partners with charismatic former founder", but the main story was PE cost-cutting, layoffs and loading the company up with debt.
That has more to do with Silverlake capital preferring steady, regular cash flows. They like to buy up and hold and just run things like a normal business, no MBA shenanigans.
Barnes & Noble, maybe?
They were taken private a few years back, and after a long slow period they're expanding again.
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.
> but you'll still have to tip the same amount
Nitpick: You'll have to tip the same amount as another restaurant with bad service. If it's awful enough, that works out to about a 20% discount on the meal.
People who don't know how to tip bad for bad service (most of us!) are why tipping is bad. When you get a bill you should have a discussion about service quality with everyone and then decide what to tip (if you are solo is can be just you but still think). If you don't do that then you failed to use your tipping power.
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> in the last 10 years.
From the article:
> In 2014, amid flagging sales and pressure from investors, Darden sold Red Lobster for $2.1 billion to Golden Gate Capital, a San Francisco private-equity firm.
Yeah looking back I don't know why I qualified it - it was bad before then too.
>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?
It's common for PE to buy many "mom n pop" practices with the goal of reducing competition (eg https://kgnu.org/investigation-finds-that-private-equity-was... )
Reducing the friction of starting new business is good. But I don't think it's sufficient to protect consumers. (If it was sufficient, we wouldn't need antitrust law at all, right?) For example, the rolled-up firms might have economies of scale that allow it to undercut new competitors.
They don't really prevent new competition, rather than target markets that specifically have a larger barrier to entry such that new competition is rare to form.
i.e. these vet clinics - a PE firm can buy up 40 disparate vet clinics in a large city then raise fees and cut staff. You may be lucky if a few new clinics appear over the next couple years once customers are fed up with the increased price and reduced quality.
It's still a win for the PE firm and a loss for most of the consumers.
Presumably because mom n pop businesses are not perfect optimizers and end up charging below the profit-maximizing price
This is exactly it - mom and pop businesses will charge enough for a comfortable lifestyle for themselves, but not really feel pressure to charge above that.
And if you have a vet, say, who is near the end of his career, he's already amortized all the training/educational expenses, and so can run out until retirement at relatively low rates compared to a brand new one.
The companies take advantage of this, but the customers also like it, too, because the offices will be fancy and feel new and they can schedule an appointment online.
Same thing that Great Clips et al did to barber shops.
The two groups have very different goals. One wants sustainable profit running a sustainable business, the other wants short-term profit by any legal means necessary.
> If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same?
Because they have a connection to their community, which means both (1) they're more vulnerable to backlash, and (2) they don't want to, because it would be taking directly from other members of their community.
Mom-and-pop shops tend to price based on what is fair. PE firms tend to price based on what is profit-maximizing.
The mom and pop, if they raise prices too high, punish themselves when they lose business. Perhaps even to the point of insolvency and folding.
If the PE firm raises prices too high, they don't punish themselves at all, because those customers go elsewhere. "Elsewhere" being just another office/practice which they also own. Mom and pop couldn't do that themselves. They didn't have monopoly-like powers to ensure their success.
> Why is there a barrier to entry that prevents some new young doctor or vet
Because the young ones are getting started, and do not have the capital to start a practice (or to buy an existing one). How much does a dental x-ray machine cost? How much do the dental chairs cost? How much does the lawyer that fills out the paperwork to get the permits for that retail space to be a dental office cost, per hour, and how many hours of paperwork?