“I had a guy come in with his family. It was a family of five. And he did 16 rounds of shrimp scampi,” said former Red Lobster employee James Berke. “He was there for over two hours on a busy Friday night.” (Credit: Slate’s Luke Winkie)

They (Private Equity) swoop in, slash expenses (especially employee headcount), and squeeze every penny out of a company in the name of short-term profits. The Red Lobster bankruptcy, which closed locations around the country and laid off 36,000 workers is a prime case study of this cost-cutting work. A private equity company firm named Golden Gate Capital financed a takeover by selling the real estate under 500 of Red Lobster’s restaurants for $1.5 billion, and the purchasing company then charged premium lease prices from the restaurants. By 2023, the rents totaled $200 million a year—amounting to 10% of total revenues.

You may have read that the ‘endless shrimp’ promotion was the cause of the bankruptcy, and it didn’t help. But a closer look shows that this was only a small part ($11M) of the looting. Seafood Distribution Company, Thai Union Group, bought the largest share stake in Red Lobster and then persuaded the PE-installed CEO to make the endless shrimp a permanent menu item. This allowed Thai Union to dump its excess shrimp on the food chain, investing in the company to create a market for its excess inventory.

Examples like this are not uncommon. An academic report has looked into companies bought out and indebted by private equity, and found that they go bankrupt 10 times more often than companies not purchased by these firms. And it wouldn’t be a bad assumption that each of those bankruptcies enriched the ‘investing’ PE firms. In addition, this one cost America Endless Shrimp once per year…

*Check out Sam G. Huszczo, CFA, CFP’s comments in this recent CNBC Article in the top link below: