Official: Red Lobster files Chapter 11

[ClownLoach]

Good article here explains how private equity destroyed the company while reaping huge profits from sale-leaseback deals.

https://www.cnbc.com/2024/05/20/red-lob ... uptcy.html

[storewanderer]

Perhaps some opportunities for independent restaurants to back fill these spaces. But I am thinking at this point a lot of these spaces may not be in the best locations or be the best condition based on the age of many of the units.

[ClownLoach]

Perhaps some opportunities for independent restaurants to back fill these spaces. But I am thinking at this point a lot of these spaces may not be in the best locations or be the best condition based on the age of many of the units.

Independents would want a restaurant that is mostly ready for business and easily refurbished. Because the auctions were done to completely clear the interiors leaving nothing behind this could be a more difficult project for an independent to handle. And these days it seems that the chain restaurants who are growing do not want a facility as large as a older Red Lobster. Nor do they want to remodel or convert the space. Growing chains like Texas Roadhouse would want to demolish all the way to the dirt and build to their prototype. I expect almost all of these will go back to their landlords as lease cancelations. News on TV said they filed to reject over 100 leases on first day in BK, so I assume that means they already tried to sell the unwanted site leases and didn't have any buyers. It was also mentioned that one of the auctions sold the entire interior for only $1600. That sounds like nothing for all that kitchen equipment and such but I would imagine that it would take an army to empty the facility "immediately" as required, similar to buying storage units at auction where the buyer has to deliver it empty to the landlord within 24 hours or sometimes even less. I think the landlords will wind up knocking them down and putting up small food oriented strips with three or four small fast casual places.

In SoCal I expect that Pacific Catch and King's Fish House will go after some of these better sites if they can work out deals directly with the landlords. Both are more contemporary and successful operators who understand the market. Pacific Catch has been expanding into SoCal and is now in OC and SD.

Bonefish Grill tried unsuccessfully to crack the California market and failed in a brand new, smaller format location in Tustin. It was always busy so I assume they pulled out because they couldn't make the economics of the smaller facilities work and they also probably couldn't find acceptable sites to expand further. Since they're owned by the parent of Outback who has been closing dozens of restaurants I doubt they'll pursue expanding into any of these closed Red Lobster locations.

The fact is that the locations that closed were probably all bottom performing stores and there are likely strong reasons for such failures: declining shopping centers, problematic locations with parking or facilities issues, areas with competitors that were too strong, etc.

[veteran+]

I am not surprised about Outback-Carrabba's closing locations.

My son worked for both as a Chef. Total nightmare!

[wnetmacman]

Red Lobster's days became numbered when Darden spun them off. They were already dwindling, and quality has gone downhill. Last time I was in one was a couple of years ago in Baton Rouge, which somehow stayed open through this. On a Saturday night in one of the busiest areas of the state, the entire restaurant was empty. Mind you, I wouldn't normally go to a chain seafood place in Baton Rouge, and that's part of the issue there. But it's a telling tale about the fast casual industry.

Too often, these restaurants make life foolproof for the BOH staff, including pre-portioning and ready-made items, which drop quality, and eventually taste. The original RL customer was enfatuated with the way you could get seafood in a decent setting for a decent price - it was a really nice place to take the family. As the fast casual industry expanded, speed became the buzzword, and RL was a victim of that trend.

What we're seeing is the American trend also of venture capital buying distressed businesses and profiting off their failure.

[ClownLoach]

Red Lobster's days became numbered when Darden spun them off. They were already dwindling, and quality has gone downhill. Last time I was in one was a couple of years ago in Baton Rouge, which somehow stayed open through this. On a Saturday night in one of the busiest areas of the state, the entire restaurant was empty. Mind you, I wouldn't normally go to a chain seafood place in Baton Rouge, and that's part of the issue there. But it's a telling tale about the fast casual industry.

Too often, these restaurants make life foolproof for the BOH staff, including pre-portioning and ready-made items, which drop quality, and eventually taste. The original RL customer was enfatuated with the way you could get seafood in a decent setting for a decent price - it was a really nice place to take the family. As the fast casual industry expanded, speed became the buzzword, and RL was a victim of that trend.

What we're seeing is the American trend also of venture capital buying distressed businesses and profiting off their failure.

You've got it right there. The private equity or venture capital people destroy everything they touch. There are two fold issues there. First, they tend to beef up any part of the corporate office structure that could engineer or support cost cutting initiatives. So basically if your job was in quality control before, you'd better figure out how to pivot to cost cutting and being able to justify your own paycheck by being able to explain how many millions of dollars you're going to save the company. So the corporate offices cost structures shift in a way that people make short term decisions that at the least retain their services and at the most beef up their checks even if the company can't afford it. The smart ones get promoted and signed to bankruptcy-proof "front of the line" Golden Parachute deals so in the unlikely event something goes wrong they will walk away from the wreckage as millionaires. All these decisions erode the experience for the customer who is the one paying the bills. Now the fresh fish dish they used to purchase that was prepared and cooked by a professional chef has been replaced with a frozen item processed at a plant somewhere and delivered to be reheated by a untrained cook. And for the same or even higher price to offset the shipping expense while the professionally trained chef has been let go to reduce payroll cost.

Then the private equity or venture capital people effectively get themselves refunds for the purchase price through manipulation of debt or asset sales. These financial changes are always structured in such a way that they erode the stability of the acquired firm. For example if the PE firm pays $5B to buy a company that was booking earnings of $500M a year, they'll take out a loan against the acquired company's books to refund themselves nearly all of the $5B purchase price. That loan winds up requiring $450M a year or so in payments so now 90% of the subsidiary profits are gone and if they encounter any bump in the road they will not have the cash on hand or the availability of credit to overcome it. Now reinvestment into the business like remodels, promotions, new locations etc. become difficult or impossible to execute. Worse, the PE or VC firm will likely expect a cut of those dwindling earnings or profits so now the firm that used to clear half a billion a year might now only make $25M once all the parasites corporate sponsors are paid too. Obviously the only way now to reinvest in the business, handle expenses, etc. Is for those corporate folks I mentioned above to make those "value engineering" decisions to switch to preprocessing, frozen, artificial flavors, and whatever else until there are no more "easy" reductions to be made.

I've worked in one of these private owned firms and the balance sheet was literally insolvent at all times. Liabilities far exceeded assets. Eventually the subsidiary winds up having to make terrible decisions or go bankrupt. Can't cut any more maintenance, payroll or product costs. The PE buyer has already made up all of their purchase price and then some. So you see bad decisions like closing stores and fire sales that effectively burn off assets and sell them for a fraction of what they're worth, or mass layoffs to stem the burning of cash. The business will naturally react in a negative manner as the customers recognize the lack of investment, deteriorating experience, lower quality and lesser service.

The final insult is the inevitable liquidation. The bankruptcy court directs the wind down. Shareholders are wiped out. So if the intentional death process is timed correctly, then at the time of failure the PE or VC firm will be acquiring other new companies and immediately extracting all the value from leverage to reimburse the purchase price, or deals like the sale-leasebacks that Red Lobster couldn't afford. The failed subsidiary is now written off as a huge loss, therefore enabling them to offset paying taxes on the huge profits from the newest acquisition. The PE and VC firms credit ratings and lines are insulated from their subsidiaries planned and unplanned failures, thereby enabling them to continue to destroy companies and the lives of the people who work there. And we as taxpayers subsidize it since they get to write off their fake paper losses.

[SamSpade]

I felt it was worth adding the business column piece from the Los Angeles Times that is well researched and explains how this happened alongside some of the negative of P.E. ownership - they truly do try to counter-act the "it was the $20 shrimp" argument.
https://www.latimes.com/business/story/ ... bankruptcy

[storewanderer]

It has nothing to do with the shrimp. Ridiculous media interpretation trying to distract from the real issue the private equity rape of the chain. Must have assigned the politics reporters to this story.

[ClownLoach]

I'm glad to see that the media is stepping up and doing a better job of exposing the actions of these private equity firms, and the preposterous rhetorical argument that endless shrimp doomed the company served as an excellent foil to the truth. Usually the media doesn't really give more than a few sentences to explanations of private equity. Both the LA Times and CNBC were very thorough. But I'm still finding people who think the bankruptcy is the butt of a endless shrimp joke thanks to soundbite TV news.

[pseudo3d]

It has nothing to do with the shrimp. Ridiculous media interpretation trying to distract from the real issue the private equity rape of the chain. Must have assigned the politics reporters to this story.

Tying up contracts has a lot to do with these things, in this case, Red Lobster's majority owner, Thai Shrimp.