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The fishy death of Red Lobster

businessinsider.com

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Re: The fishy death of Red Lobster

#471

Post by everforward »

lesuorac wrote: post #432
habitue wrote: post #430

I think the author has a hard time trying to put a "why should we care?" spin on this at the end: Middle class families need a nice night out, and red lobster is the best way to do that! Totally agree that this is vicious jackal like behavior by the PE funds. But as others have said, this is the lifecycle of a dying company. If red lobster's share prices were high because they were extremely profitable and everyone l…

You have a wonky definition of a dieing company. If a company makes $X in reveune and has $X - Y (Y The price of RL share prices is pretty irrelevant to whether PE can kill it or not. Honestly the higher the price the better it is. If you can spend $100M to buy a company and gut it for $300M that sounds a lot more attractive then buying 100 $1M companies to gut for $3M a peice.

A dying company is one that fails to produce enough earnings to justify the assets it consumes or holds.

As an absurdism, if Walmart only made $1 a year in profit we would probably wonder why the hell it takes them millions or billions in inventory and real estate to produce less profit than a child’s lemonade stand.

Red Lobster is like that. It’s not that they’re unprofitable, it’s that their profits don’t justify occupying that much real estate.

A clear cut example would be if locations were making less in profit than other companies were willing to pay in rent. Ie RL would make more money by not being RL anymore.

> The price of RL share prices is pretty irrelevant to whether PE can kill it or not.

The share price isn’t directly relevant, it’s the share price relative to assets. Companies with expensive stocks are usually worth several to many times more than the assets they hold, so buying them out to sell the physical assets is just lighting money on fire.

PE looks for companies where the market either disbelieves in the company so much their stock is worth less than their assets, or companies where the market has undervalued those assets.

Re: The fishy death of Red Lobster

#472

Post by thrance »

s1artibartfast wrote: post #467
thrance wrote: post #464

Earlier quoted context omitted.

If a company provides some utility while still making a profit, wouldn't it be morally better to let it be? Killing the company immediately hurts its employees, its customers and reduces the income available to the collectivity through taxation. It even also hurts its stakeholders in the long term, who could have earned a steady dividend for many years to come. I don't care much about Red Lobster and other chain rest…

When a company is liquidated, its value and assets go elsewhere and are put to more productive use. This value difference is how liquidation is profitable. This means more taxes for the government. Owners get paid out when PE buys a company, usually with a premium so they are happy. PE liquidation IS utility optimization. The only way it makes profit is if the money made is invested into something with higher returns…

Oh OK, I think I understand where you come from now.

I see what you mean, but it is not what I have observed, at least in my country. There has been a steady transfer of wealth upward over the last decades. Unemployment has gone up and wages have stagnated.

When a company is liquidated, I doubt enough of its assets are reinvested to make of the event an overall positive for the economy.

Re: The fishy death of Red Lobster

#473

Post by everforward »

kalleboo wrote: post #444
habitue wrote: post #430

I think the author has a hard time trying to put a "why should we care?" spin on this at the end: Middle class families need a nice night out, and red lobster is the best way to do that! Totally agree that this is vicious jackal like behavior by the PE funds. But as others have said, this is the lifecycle of a dying company. If red lobster's share prices were high because they were extremely profitable and everyone l…

B is not true. It's more profitable to extract lots of value in the short term and kill the company and then move on to the next victim, continually showing great profit spikes and cashing out yourself, than to slowly extract value over the years. The system is full of perverse incentives.

You’re forgetting that we operate in a world of limited resources, and the opportunity cost of poorly allocating those limited resources.

PE are like autotrophs, or literal vultures if you prefer. They recycle poorly allocated resources and return them to the market so that someone else with a better use (read: more profit) can buy them. It’s a niche in the market, like autotrophs.

This probably is the better move for long term profit. Not for the PE company specifically, but for the market as a whole. All those newly freed assets can now be consumed by new companies making more profit.

In theory, this is supposed to benefit everyone (though it doesn’t, for structural reasons). A new company with more profits means more taxes for governments, more profits that can be paid out as wages to workers, and the profits indicate consumers want whatever the new company makes more than RL’s food.

It’s also worth noting that PE is a reflection of market opinion. Companies that the market believes in are worth several to many times the value of their assets. There’s no way to acquire them, gut them for assets and make a profit.

Re: The fishy death of Red Lobster

#474

Post by everforward »

jfengel wrote: post #434
moralestapia wrote: post #408

Earlier quoted context omitted.

I had a really bad dining experience the one single time I went to Red Lobster; happened at the same place probably (Toronto, the one in Bay Street?) hence why I want to share. I came in to the restaurant and there was no one at the front desk, but the place seemed to be operating normally so I just went on to seat at the nearest table I found. Waiters just started ignoring me; at some point I realized this was on pu…

Just to explain a bit of restaurant procedure: It sounds like you seated yourself at a section that wasn't open. "Sections" are often not obvious to customer, but they're really important to the wait staff. You don't grab tables outside your section; it can be seen as attempting to grab more tips. (A Red Lobster probably has tip pooling, but still, working outside your section is a no-no.) Eventually they got somebod…

The wait staff may not have even realized they were waiting for service. I’ve used booths in an empty section not expecting or wanting service.

Eg I’ve borrowed an empty booth for 5 or 10 minutes in an empty section when I got paged while out to dinner. I didn’t expect any service.

I’ve also done it when I was out to eat and got bad news. I needed a minute alone, and outside the restaurant is usually very much not “alone”.

Re: The fishy death of Red Lobster

#475

Post by matthewdgreen »

s1artibartfast wrote: post #448
matthewdgreen wrote: post #422

Earlier quoted context omitted.

The article tells a fairly clear story of business consolidation and monopoly. The chains had buying power, so suppliers consolidated and removed that power. Then the suppliers became so strong (with the help of PE) that they bought and looted the remaining value from the chain. Ultimately the loser at the end of this story will be the consumer, who has no market power, and any new small restaurants that develop to r…

I dont think it is as one dimensional as that. You are also watching the breakup of a vertically integrated megacorp that owned many restaurants, and underlying real-estate.

It doesn't have to be one-dimensional, but some dimensions should concern us more than others. Businesses fail all the time for loads of reasons and we shouldn't necessarily try to prevent that. But the structural reasons behind this one are driven by market power and consolidation, and the result of the takeover will be an increase in those measures: these are the effects that generalize beyond "Red Lobster is a complex one-off."

Re: The fishy death of Red Lobster

#476

Post by s1artibartfast »

thrance wrote: post #472
s1artibartfast wrote: post #467

Earlier quoted context omitted.

When a company is liquidated, its value and assets go elsewhere and are put to more productive use. This value difference is how liquidation is profitable. This means more taxes for the government. Owners get paid out when PE buys a company, usually with a premium so they are happy. PE liquidation IS utility optimization. The only way it makes profit is if the money made is invested into something with higher returns…

Oh OK, I think I understand where you come from now. I see what you mean, but it is not what I have observed, at least in my country. There has been a steady transfer of wealth upward over the last decades. Unemployment has gone up and wages have stagnated. When a company is liquidated, I doubt enough of its assets are reinvested to make of the event an overall positive for the economy.

>When a company is liquidated, I doubt enough of its assets are reinvested to make of the event an overall positive for the economy.

Where do you think they money goes? it is almost always reinvested. If it wasnt reinvested but spent, it wealth couldnt transfer upward.

The rich would lose 5% of of their value of any cash assets to inflation every year. Instead, the money has to be invested in something.

Re: The fishy death of Red Lobster

#477

Post by rondini »

johngladtj wrote: post #470
fasteo wrote: post #469

Earlier quoted context omitted.

>>> from a management team trying to save a troubled company. They were just unsuccessful. My take is that they were not there to save the company, but to extract all its assets and let it go.

Sometimes that's the best option.

For who? Was that the best option for the employees who relied on the income? Or the customers who enjoyed the food? There are plenty of actions that are rational from an economics standpoint as long as you don't care about any of the externalities such as human dignity.

Re: The fishy death of Red Lobster

#479

Post by romafirst3 »

They sold their real estate for 1.5 billion and then red lobster paid 200 million a year in rent. That’s insane. In 7.5 years they would pay back the purchase price.

That just seems like a massively bad deal for red lobster, I wonder was there another way the private equity firm made out on that deal ?

Re: The fishy death of Red Lobster

#480

Post by Cheer2171 »

Private equity firm wants to buy Red Lobster, but they don't have enough money. So to afford the sale, they make a deal to sell the land every Red Lobster sits on to a firm that will charge Red Lobster above-market rate rent to stay in business.

This doesn't seem like it should be legal.

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