Private equity’s involvement played a significant part in the struggles faced by Red Lobster, a well-loved seafood restaurant chain. Here’s a rough overview of what happened:
In 2014, Darden Restaurants, Red Lobster’s then-parent company, sold the chain to Golden Gate Capital, a private equity firm, for $2.1 billion. The decision wasn’t received well by investors who felt the chain was undervalued. Indeed, Starboard Value, an activist investor, had urged Darden to explore real estate sales rather than a full-on sell-off.
However, Golden Gate Capital had its plans. Its strategy relied on optimizing operations, cutting costs, and franchising restaurants. Unfortunately, some critics argue these moves often overlook the quality of customer experience in favor of short-term financial gains. The menu underwent changes that included cheaper, non-seafood items to attract a broader audience, but this confused customers and diluted the brand’s identity.
More worryingly, the firm reportedly decided to sell the real estate assets to help return cash quickly. They set up a sale-leaseback agreement with American Realty Capital Properties in which Golden Gate sold Red Lobster’s property and then leased it back. This move gave them a quick return on investment but burdened Red Lobster with long-term lease obligations.
The real problem arose when seafood costs, particularly for lobsters, began to rise. With burdensome lease obligations and declining customer numbers, Red Lobster struggled to cope.
