The reason why the major seafood restaurant chain Red Lobster went bankrupt was because the company it acquired sold its real estate and it was obligated to pay rent.
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Red Lobster , a major American seafood restaurant, filed for Chapter 11 bankruptcy protection on May 19, 2024 (local time). NBC News, an overseas media outlet, reported that the reason for this was that 'the private equity firm that acquired Red Lobster in 2014 sold the real estate owned by Red Lobster, which resulted in an obligation to pay rent.'
How private equity rolled red lobster
https://www.nbcnews.com/business/consumer/private-equity-rolled-red-lobster-rcna153397
Red Lobster, which operated about 600 restaurants in 44 states and Canada, filed for Chapter 11 bankruptcy protection on May 19, 2024, and filed for bankruptcy. As a result, Red Lobster announced that it would close about 100 restaurants nationwide and lay off about 36,000 employees.
Red Lobster cited 'a decrease in customers due to the spread of COVID-19, increased labor costs due to inflation, and increasing losses due to changing the all-you-can-eat shrimp menu to a permanent menu item in 2023'
On the other hand, some analysts point out that the reason Red Lobster was forced into bankruptcy was not because it made its all-you-can-eat shrimp menu a permanent fixture. NBC News says that the reason was the financing method used by the private equity firm that acquired Red Lobster.
Some private equity firms use a technique called 'asset stripping,' where they sell some of the assets of the companies they acquire to help fund another acquisition. If the acquired company is successful in growing under the private equity firm, the private equity firm then sells it to another private equity firm.
However, it has been
Golden Gate Capital , a private equity firm that acquired Red Lobster in May 2014, sold Red Lobster's $1.5 billion real estate holdings in July 2014. It has been reported that the funds generated by the sale did not return to Red Lobster, but instead went into Golden Gate Capital's pockets.
With the sale of the real estate by Golden Gate Capital, Red Lobster was obligated to pay rent for its stores. Red Lobster reports that by 2023, rent for Red Lobster stores will reach $200 million (about 31 billion yen) per year, accounting for about 10% of annual revenue, putting a strain on its financial situation.
According to American Realty Capital Partners, which purchased the properties owned by Red Lobster, the properties sold were in such good locations that rents were expected to increase by 2% per year. Red Lobster, on the other hand, did not benefit from the increase in the value of these properties, and Golden Gate Capital added high interest to Red Lobster to cover the debt.
'Private equity firms put the companies they buy in a position where they have to take on a lot of debt and put them at a disadvantage,' said Andrew Park, a senior policy analyst at the nonprofit
Golden Gate Capital then sold Red Lobster to Thai Union Group in 2020. In January 2024, Thai Union Group sold all of its 49% stake in Red Lobster.
A Thai Union Group spokesman said: 'Thai Union Group has been a supplier to Red Lobster for over 30 years and intends to continue this relationship. We hope that, under court supervision, Red Lobster will be able to restructure its financial obligations and realize its long-term potential in a more favorable business environment.'
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