All You Can Eat - Red Lobster, Live Nation, Fintech, and Inflation
Note: Earlier this week, I was invited to guest write the excellent Numlock News. Hello to any new readers who’ve dropped by as a result!
Also: Last week’s newsletter was formatted strangely in Gmail, and while the folks at Buttondown believe they have fixed the problem, if it happens in the future you can click on the header/title of the newsletter and view it on the web with no formatting issues. Sorry!
Red Lobster
Red Lobster’s bankruptcy is the latest chapter in the story of beloved brands falling on hard times. Toys R Us, Sears, Payless Shoes, and others were snapped up by private equity firms and bled dry in recent memory. This tale does feature one element the others did not, though - shrimp.
The history of the casual seafood chain is downright heartwarming given its roots in America’s culinary past:
“Our motto was informal and family prices,” [founder Charley] Woodsby later said. They saw an opportunity to bring seafood to landlocked people at more affordable prices than fine-dining restaurants.
“In most of middle America, you couldn’t get decent seafood. Red Lobster brought it to the masses,” said Jonathan Maze, the editor in chief at Restaurant Business Magazine, a trade publication. “Red Lobster was part of this casual dining revolution.”
Then, in an unexpected twist, General Mills bought Red Lobster from its founders and grew the chain for almost thirty years, before spinning it off with Olive Garden into Darden Restaurants group. Did you know a cereal company also kicked off the entire concept of casual dining in America? I didn’t!
By 2013, though, Darden was under pressure from investors to sell Red Lobster due to its underperformance compared to the company’s other flagship brands. Enter Golden Gate Capital.
The PE firm paid $2.1 billion for the chain, but, most importantly, funded almost all of it with a sale-leaseback deal worth $1.5 billion, meaning it sold all the underlying real estate assets Red Lobster had accumulated to a company plagued with lawsuits and fraud claims, and created a heavy debt load for the company, which was now paying rent on its locations.
By the time Red Lobster’s leases started adding to the financial strain of an underperforming chain, Golden Gate had skipped town, selling its stake to Thai Union, a seafood company.
A parallel story to Red Lobster’s is that of the US fishing industry, which began to consolidate around 2013 as global fish prices rose and foreign competitors sought to saturate the market with lower-quality imports:
To compete, U.S. fisheries started to race for market share, buying up catch shares and forcing fishers into contractual arrangements where they could only sell to one of the large processors. In the Alaska area, four companies control the share rights to over 77 percent of catches for specific crab species. Along the Pacific Northwest coast, one company—Pacific Seafood—effectively controls the local market fishers sell into for a wide range of catches, from salmon to shrimp.
We’ve talked before about private equity buying up all the fish processing capacity in the Northeast, but it’s been happening everywhere.
At the time, Golden Gate told Darden it could turn the struggling chain around, despite rising costs and declining revenues. What it did instead was cut costs and slash staff, while paying dividends and performance bonuses to itself.
Three years later, Thai Union, a major seafood supplier, bought some and later all of Golden Gate’s stake in the company, a highly unusual arrangement between supplier and customer.
Thai Union’s stewardship was, somehow, even worse:
“It was miserable working there for the last year and a half I was there,” he said. “It was just a matter of (Thai Union) cutting costs everywhere they could.”
Thai Union cut out longtime Red Lobster suppliers to distribute more seafood to restaurants itself, said a former Red Lobster executive who spoke to CNN under the condition of anonymity because of an NDA. Thai Union changed the menu based on cost-cutting decisions and executives’ tastes.
Its final death rattle was the endless shrimp offer in 2023. The chain had offered it as a limited promotion over the years, but executives (appointed by shrimp company Thai Union) decided it should become permanent. The relatively modest $11 million dollars the company says it lost was a drop in the bucket compared to the billions in debt and lease obligations it had racked up thanks to Golden Gate.
Now the company is under new management to navigate a bankruptcy, with creditors accusing Thai Union of extracting more money from the chain by shoveling shrimp at guests. Matt Levine has a theory that Thai Union looked at what it knew was a collapsing business and figured, hey, what if we could sell $11 million worth of shrimp? While that is grimly amusing, it doesn’t change the fact a bunch of vulture capitalists cynically butchered another well-known brand, leaving thousands of employees in the lurch and robbing landlocked Americans of their lobster and cheddar biscuits.
Live Nation
One of America’s least beloved brands is also under fire, with the DoJ and thirty states filing an antitrust lawsuit against Live Nation. This has been a long time coming, and while the company disputes the charges, it is pretty hard to argue that it doesn’t have a monopoly on the concert and event business:
Live Nation controls more than 80 percent of major concert venues’ primary ticketing for concerts and an increasing share of ticket resales in the secondary market. The company has exclusive arrangements with 265 concert venues, including deals with more than 60 of the top 100 amphitheaters in the United States. It also has a controlling interest in 338 venues worldwide. Over 400 big-name artists are locked into Live Nation’s management services. No other competitor comes close to having that scale across any of these market segments.
If Live Nation and Ticketmaster had stuck to ticketing, it might have a case that it had competition in the market, but by buying venues, signing artists, managing tours, and preventing competing venues from booking its acts, Live Nation smothered competition in pursuit of overwhelming market share.
And, despite the company’s arguments, no one who’s paid 40% ‘convenience’ and ‘service’ fees on a single ticket believes Live Nation’s consolidation decreases costs for consumers.
Nor does the story end there - after the merger, Live Nation’s former CEO (known as the ‘Poison Dwarf’) was so committed to industry collusion he formed a new company called Oak View, and used his influence within Live Nation to secure lucrative deals for sponsorships, parking, and concessions:
The symbiosis between Oak View and Live Nation worked in part because each chose to focus on its own cash cow: Live Nation on the lucrative ticketing business, Oak View on sponsorships, parking, and, increasingly, concessions. (Oak View’s head count ballooned to 60,000 as it has amassed concessions contracts since it acquired a hospitality unit owned by Comcast Spectacor in 2021.)
Oak View also acts as Live Nation’s third-party enforcer, buying up holdout venues so it can flip them to Ticketmaster:
Oak View now owns or controls 200 venues in North America, almost as many as the 265 owned or controlled by Live Nation, enabling Ticketmaster’s sphere of domination to nearly double in the shadows.
The people in charge and formerly in charge of Live Nation are evil caricatures of the music and events business, and despite decades of evidence and piles of incriminating documents, the company’s combative attitude and disregard for authority will undoubtedly turn this into a long, ugly battle, while the rest of us continue to pay huge markups at the box office.
Fintech
The idea of ‘fintech’ - financial technology - is loosely to use Tech Mindset to disrupt boring traditional financial institutions like banks. The most recognizable example would be PayPal, a platform where you could send money without pesky banks sitting in the middle.
PayPal and the early money transfer apps were big names in a relatively immature space, but these days anything money-adjacent is branded fintech, to make it easier to raise capital from VCs and other folks who wouldn’t be caught dead investing something as stale as a bank.
The problem with running unregulated financial institutions, as the crypto industry continues to discover on a near-daily basis, is that when they fail, customers are not provided the level of support they’d receive if their local credit union was forced to shut the doors.
It is why when you read an article that says:
A dispute between a fintech startup and its banking partners has ensnared potentially millions of Americans, leaving them without access to their money for nearly two weeks, according to recent court documents.
You might scratch your head and think ‘why is there a company sitting between a finance app and the banks?’ and the answer is always ‘so investors can make money.’
Synapse is a VC-backed fintech that connects banks with other fintechs, and it got into a dispute with some of its partners, and some of those partners left, which meant that customers couldn’t access their funds:
One customer, a Maryland teacher named Chris Buckler, said in a May 21 filing that his funds at crypto app Juno were locked because of the Synapse bankruptcy.
“I am increasingly desperate and don’t know where to turn,” Buckler wrote. “I have nearly $38,000 tied up as a result of the halting of transaction processing. This money took years to save up.”
Alright, first, Chris, buddy, you should probably not be saving up your teaching money to invest in crypto! But, you should not lose access to said savings because a middleman turned off an API.
It’s not just crypto - Synapse clients offered more mundane services like checking accounts and debit cards. An estimated ten million people used a service that was impacted in some way by the Synapse outage.
Also, no one seems to know why Synapse turned itself off in the first place?
It is unclear why Synapse switched the system off, and an explanation could not be found in filings.
The bankruptcy judge has replaced the company’s management and tried to get the Feds involved, but admitted there is no timeline on when services will be turned back on and people can get access to their money.
Elsewhere, a fintech-ish lender is on the ropes, which may endanger more than a hundred of its clothing and home furnishings clients:
The lender, Ampla, spent years courting small direct-to-consumer brands with low rates and a pitch that it understood their needs. In recent weeks, its top executives have been searching for a buyer, two people familiar with the firm’s finances said.
[…]
Ampla has also tightened or frozen clients’ lines of credit and told many customers to find other lenders, leaving them in the lurch, according to half a dozen former and current clients.
Not great! Direct-to-consumer retail is a difficult business, with thin margins and unique financing needs. Which is what Ampla was supposed to be providing until, you know, it ran out of money:
The troubles began after Ampla unsuccessfully tried to raise more capital late last year and this year, the two people said. The company needed the money to stay in compliance with conditions imposed by its lenders, such as having a certain amount of cash on hand, as well as to fund its business, the people said.
It is not great when you are a lender who tries to raise more money to lend and can’t, which triggers an audit from your lenders, who find out you don’t have enough money to honor your agreements. Yikes.
Again, if Ampla were a bank, there would be processes in place to ensure its clients didn’t simply have their credit lines frozen. There are processes in place for this sort of thing. For banks. Not fintechs.
Inflation
Around these parts, we often use the word inflation with giant air quotes, because what we’re talking about is price gouging. Despite protests from the meatpackers, retailers of the world, consumer prices going up has been suspiciously good for their profit margins.
What does it look like when consumer backlash finally makes an impact and the suits in charge of quarterly earnings calls get nervous?
Last week saw an onslaught of retailers offering discounts on essential items: Target made a similar promise as Amazon’s, saying it would cut the prices of 5,000 items including diapers and pet food. The retailer rolled out its “dealworthy” discount brand in February, introducing 400 household and essential products mostly under $10. Walmart also said it would lower costs of 7,000 items, a 45% increase in price rollbacks. Aldi and Kroger both made moves to lower grocery prices as well.
[...]
This trend has continued in fast food, with McDonald’s, Wendy’s, and Burger King all announcing meal deals following earnings reports that suggest customers are losing their taste for high-priced fast food, including $18 Big Mac meals and threats of surge pricing.
It didn’t even need a big backlash - Target’s sales were down a modest 3% and Walmart hadn’t even reported a dip in retail, but the big brands sense a sea change.
Also, to be clear, some of the reason fast food costs more is that workers are being paid more which is unequivocally good, but fast food chains raising prices to grab easy profits is not!
Maybe some companies are worried the FTC might decide to look harder at their books after it issued a report this spring about grocery greedflation, who knows.
We can hope that the days of companies using inflation as an excuse to raise prices are behind us, but I wouldn’t hold my breath.
Short Cons
Michigan Public - “Globally, about 75% of patients hospitalized with COVID were given antibiotics, despite only 8% having a bacterial coinfection where antibiotics would be medically useful.”
WSJ - “Milton is also in a spat with his neighbors and his local government over his use of a helicopter to fly to one of his mansions. Lawyers and representatives for Milton didn’t respond to several requests for comment.”
WaPo - “Across much of the northern United States, where many schools were built without air conditioning, districts are now forced to confront the academic and health risks posed by poorly cooled schools.”
NYT - “For the past decade, thousands of wealthy Americans have been flocking to Puerto Rico to take advantage of a tax break that can cut their tax bills to zero. For nearly as long, there have been allegations that the benefit enables multimillionaires to avoid paying what they owe when they reap big investment profits.”
WaPo - ““One thing I do is, any student that protests, I throw them out of the country. You know, there are a lot of foreign students. As soon as they hear that, they’re going to behave,” Trump said on May 14, according to donors at the event.”
Reuters - “Neuralink's disclosure last week that tiny wires inside the brain of its first patient had pulled out of position is an issue the Elon Musk company has known about for years, according to five people familiar with the matter.”
404 Media - “A man who sued more than two dozen women for calling him “clingy” and “psycho” was just sentenced to a year in federal prison for tax fraud and generating mob-connected earnings from gambling machines.”
Know someone thinking of investing all their savings via a fintech app? Send them HERE!