There isn’t a magic pill that make restaurants profitable or successful; it’s a lot of hard work, trying and tinkering. Now if you wanted to know the secret to bankrupting restaurants, have the restaurant you work for or visit as a customer owned by a private equity firm. Their niche isn’t running a restaurant unless you mean running them into the ground with egregious decisions based on greed and profit. Private equity firms are all about profit, but how can there be any profit if they continue bankrupting restaurants they acquire?
What is a Private Equity Firm?
A private equity firm is an investment company that invests in other companies that are not publicly traded. Private equity firms use their own funds, borrowed money, and capital from investors to help companies grow and increase their value. The firms then buy the companies and overhaul them to make a profit when they sell them again.
Let’s be clear, a private equity firm isn’t in the restaurant business for the long haul. They are there to cut corners to grow profits and then when they have enough profit, which they never do because there is no such thing as enough profit for them, they’ll sell the restaurant to another firm who will stripped it down even further.
These private equity firms often have more success bankrupting restaurants than successfully running them for a profit. Their lack of knowledge in the restaurant and hospitality industry is the biggest factor in them failing to understand how things are run and thus the inevitable bankruptcy.
Companies bought out and indebted by private equity go bankrupt 10 times more often than companies not purchased by these firms, academic research shows.
Why Invest in Restaurants?
According to Axios, 2024 will be the U.S. restaurant industry’s biggest year ever in sales — $1.1 trillion by the end of December, per National Restaurant Association estimates. Private equity firms love big numbers and when sales are projected to be in the trillions, well now you know why these firms want a piece of the pie. The biggest piece of course.
Another sexy piece of investing in a restaurant chain is that these private equity firms can now double dip and have the restaurants use supplies and products from other companies they have in their portfolio of assets. The more money for them the better.
Ways to Bankrupt a Restaurant
No one goes into opening a restaurant with the intention of bankrupting it. Now if you’re a private equity firm you’re not opening a restaurant. You’re looking for the one that has the potential to make you a lot of money profit wise and you go out and acquire it. Bankrupting restaurants is no big deal to them. They can just cut their losses and write off the rest for taxes.
Here are some examples of ways that these private equity firms have found to bankrupt a restaurant chain.
Subway
The sandwich chain is owned by the Roark Capital Group. They also own the Cheesecake Factory, Sonic, Jamba Juice and other restaurants.
What was Subway famous for? The used to offer $5 subs. A sub for $5 is a great deal any time of day. When the Roark Capital Group bought them, the ingredients weren’t as fresh and now the price went from $5 to $14.
What consumer is going to pay nearly triple for a poorly constructed and tasting sub?
Corners were cut, spending was slashed and prices increased to raise profits and to make the chain look more successful than it is.
Red Lobster
The one restaurant chain bankruptcy that shows how ignorant and greedy these private equity firms are when it comes to owning restaurant chains is Red Lobster. Red Lobster which was owned by Golden Gate Capital based out of San Francisco. Now people think it was the endless shrimp sale that bankrupted Red Lobster not the endless greed shown by the Golden Gate Capital group and the subsequent group that bought them, Thai Union Group.
When Golden Gate Capital bought the chain they sold the land that the restaurants owned to American Realty Capital Partners. So now instead of owning the land the restaurants sit on they now have to pay rent to American Reality Capital Partners. And do you really think that American Realty Capital Partners would give a fair and reasonable rate for rent? Of course not. It’s all about greed and profit. That monthly expense was one way Red Lobster found it’s way to bankruptcy.
In 2020 Golden Gate Capital sold Red Lobster to the Thai Union Group who proclaimed themselves the “world’s seafood leader.” They also own the Chicken of the Sea brand and Genova brand of premium tuna.
While the endless shrimp was a successful promotion the problem laid with the poor decision making from the heads of the Thai Union Group. They cut out the suppliers of shrimp from their competitors and had Red Lobster buy directly from one of their brands they own. And guess what they did? The raised the prices of the shrimp for more profit for their other company.
These abhorrent and unnecessary spending increases are what led Red Lobster to file for bankruptcy.
Who Suffers the Most from Private Equity Firms?
While most everyone feels like effects from private equity firms and their love of asset stripping and poor business decisions, but the restaurant employees feel it the most. The ones who day in and day out, cook the food, serve the food and interact with the paying patrons. They’re out of a job and finding work in the restaurant industry has become increasingly volatile with all the bankruptcies and store closings. Competition for these minimum wage paying jobs is nearly at an all time high.
The consumers suffer as well. Their are less options to choose from dining wise and with all the cut corners and asset stripping for profit, the food and the quality of the experience goes down. And in the restaurant and hospitality industry, if the consumers are not satisfied with the quality of the food or service you just lost business.
Private equity firms use restaurants like a giant ponzi scheme just moving money around. These firms rather be Gordon Gecko with their greed is good mantra instead of building up failing restaurants like Jon Taffer from Bar Rescue.
Anytime Wall Street or a private equity firms buys something, know it’s not to be successful, but to be profitable. They’re going to strip all the assets of the restaurant and sell them off. They’re going to cut down on spending and they will inevitably run the restaurant into the ground and when that happens they’ll just look for their next victim for the bankruptcy roll call.
If a private equity firm buys a restaurant you work at or go to, just know it’s just a matter of time before you walk to the door and see a closed sign on it.
