Private equity’s impact on Red Lobster is a tale of financial engineering rather than a simple case of an all-you-can-eat shrimp promotion gone awry.
Red Lobster was acquired by Golden Gate Capital, a private equity firm, in 2014 from Darden Restaurants for $2.1 billion. The acquisition came at a time when Red Lobster was struggling with declining sales and profits, and Darden believed that selling the chain to a private equity firm could help fix it.
However, Golden Gate Capital’s strategy for turning around Red Lobster relied heavily on financial engineering rather than restaurant operations. Firstly, they put up the company’s real estate holdings for sale-leaseback transactions, which released valuable capital but also significantly increased the company’s fixed costs due to lease obligations.
This strategy left Red Lobster cash-rich but with higher debt, as the proceeds from the sale-leaseback operations were used to pay a $600 million dividends to Golden Gate Capital. Additionally, the company used borrowed money to fund renovations at many of its locations in an attempt to refresh the aging chain’s image.
As a result, Red Lobster was left saddled with high debt and large fixed costs. When the chain’s revenues didn’t increase as expected, the profits couldn’t cover the increased costs and debt obligations and the company came close to bankruptcy.
It’s important to note that while the strategy of private equity ownership didn’t work out for Red Lobster, other factors also contributed to the company’s struggles
