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May 26, 2024

It wasn’t the endless shrimp that doomed Red Lobster. How private equity pinched the seafood chain.

The story of Red Lobster's near-demise largely revolves around financial strategies utilized by private equity firms, rather than an issue with its signature "endless shrimp" promotion. Owned by Darden Restaurants, Red Lobster was sold to Golden Gate Capital, a private equity firm, for $2.1 billion in 2014. Private equity firms often use an investment strategy where they acquire businesses, restructure management and operations to boost efficiency or reduce costs, and then sell the companies for profit. However, this strategy doesn't always work, and can sometimes lead to ruin for the companies involved, as they are often laden with debt due to the leveraged buyout strategy. Such might be the case with Red Lobster. One of the main problems was that the cash to service its debt — a whopping $2.6 billion in total obligations in 2017 — was being siphoned off, primarily to Golden Gate Capital, its private equity owner. It has allowed the firm to recoup its original investment while leaving Red Lobster in a precarious financial position. Moreover, a rush to capitalize on a seemingly infinite demand for high-end seafood dishes led the company to double down on expensive, high-margin items, effectively alienating its lower- and middle-income consumer base who could no longer afford its offerings. This, coupled with a decline in casual dining trends as more consumers gravitate towards fast-casual or even fine-dining options, adversely affected Red Lobster's profitability. Golden Gate