The downfall of Red Lobster can be traced back to a sale/leaseback deal in July 2014 involving the premium real estate underneath 500 of its stores, which generated $1.5 billion. This money was not reinvested in Red Lobster but was used by private equity firm Golden Gate Capital to finance its purchase of the chain for $2.1 billion. The sale of the real estate, coupled with rent payments on stores previously owned by Red Lobster, increased the chain’s costs substantially. By 2023, the annual rent payments totaled $200 million, or around 10% of its revenues, leading to financial strain on the company.
The sale of the Red Lobster stores not only deprived the chain of any potential benefits from an increase in commercial real estate values but also resulted in higher-than-market rent rates for the premises. Golden Gate’s acquisition of Red Lobster increased the chain’s debt significantly, which, along with higher interest costs, further strained its financial situation. Moody’s Ratings downgraded Red Lobster to a negative outlook in 2017 due to its high leverage, indicating the detrimental impact of private equity buyouts on businesses like Red Lobster.
In 2020, Golden Gate Capital sold Red Lobster to Thai Union Group and an investor group, with terms of the transaction undisclosed. The bankruptcy filing by Red Lobster resulted in concerns about the impact on its employees, supplier relationships, and local communities. Former employees like Austin Hurst, a grill master at a Red Lobster location, found themselves facing layoffs and uncertain job prospects. Senator Edward Markey has proposed legislation to increase transparency in private equity-owned businesses, including measures to disclose sale/leaseback arrangements and fees collected by private equity firms.
Former Labor Secretary Robert Reich highlighted the broader economic repercussions of bankruptcies like Red Lobster, emphasizing the negative impact on suppliers, small businesses, and workers in affected communities. Private equity firms engaging in financial maneuvers that benefit the wealthy at the expense of working and middle-class Americans contribute to a sense of insecurity in the economy. The impact of private equity in sectors like health care is particularly concerning, with Markey pointing to the need for increased oversight to prevent negative consequences on community access to essential services.
The sale/leaseback deal that ultimately led to Red Lobster’s bankruptcy highlighted the detrimental effects of private equity transactions on businesses, employees, and communities. The financial practices employed by firms like Golden Gate Capital, such as high leverage and real estate transactions, can result in long-term harm to companies like Red Lobster. Markey’s proposed legislation seeks to address these issues and increase transparency in private equity ownership, particularly in areas like health care where the consequences can be severe. The case of Red Lobster serves as a cautionary tale about the potential pitfalls of private equity involvement in businesses and the need for stronger oversight to protect workers and communities.
