Red Lobster, the seafood chain that has been a staple in American dining for more than 50 years, has been struggling in recent years, and it wasn’t due to their endless shrimp. Reports point at several reasons behind why but one main contributing factor was the private equity ownership.
In 2014, Darden Restaurants, the parent company of Red Lobster, sold it to Golden Gate Capital, a private equity firm, for $2.1 billion in order to focus on its more profitable businesses. This decision was criticized by investors and has frequently been referred to as one of the worst restaurant transactions in history.
While private equity firms often swoop into struggling businesses with promises of turning things around with major restructuring, the reality can be quite different. The trick lies in these private equity firms’ business model. They are not necessarily in it for the long haul. Often, their strategy is to slash costs, rake in profits, and then sell off the business within a few years.
In the case of Red Lobster, Golden Gate Capital acquired a company with declining sales and profitability. To turn things around, the firm attempted to upscale the chain, redesigning the restaurants and introducing higher-price items like lobster and crab legs to the menu. But these changes alienated many of Red Lobster’s core customers, who had been drawn to the chain for its affordable seafood.
Another trouble spot was the firm’s huge amount of debt. Debt taken on during buyouts can put a lot of pressure on
