People love to hate private-equity groups these days. Post anything to social media about the investment firms buying anything and eventually people will chide the firms for destroying whatever company is acquired. Even if the private-equity firm hasn’t actually destroyed it yet.
Private-equity firms give haters plenty of ammunition. The latest round comes courtesy of Hooters, the pioneering breastaurant chain that filed for bankruptcy earlier this month.
My colleague Joe Guszkowski wrote an excellent profile of the company, which you should definitely read.
As Guszkowski notes, Nord Bay Capital (a family office) and the private-equity firm TriArtisan Capital Advisors bought Hooters of America using a lot of debt, thanks to a 2021 whole business securitization. Hooters when it filed for bankruptcy had $376 million in secured debt.
Unsurprisingly, this led to some moves insiders considered problematic. We point out this passage from Guszkowski’s story:
To keep up, HOA began to change how it operated its restaurants. It cut costs and put off needed repairs and maintenance. It also raised prices to a degree that alarmed some within the company.
“You used to be able to count on wings being about a buck a wing,” said one former executive who asked to remain anonymous. “Today, they're at like a $17.99 price point for 10 wings. The internal narrative was, ‘This is too much, too fast.’”
So, if we have this straight, Hooters’ owners loaded the brand with debt and then put off needed repairs and maintenance and raised prices so aggressively that it “alarmed” insiders.
To put that into perspective, that was roughly the same reaction that Red Lobster insiders had when the CEO of that chain decided to price an all-you-can-eat shrimp deal at $20 back in 2023.
Delaying maintenance absolutely is a reduction in quality. Full-service dining is all about experience. If you’re going to one of those restaurants, you sure don’t want to see ripped booths or leaky ceilings or wobbly tables. And you certainly do not want to pay more for the right to eat in that environment. That’s just an ugly combination.
Any strategy that reduces quality and raises prices at the same time is particularly boneheaded in an era in which consumers are cutting back on the type of service a company provides. Fewer people are dining at full-service chains. They certainly don’t want to dine there when the food is more expensive and the atmosphere has taken a hit from too many years of underfunded capex.
Private-equity-owned companies often make such boneheaded moves because the firms load those companies with debt, which puts pressure on executives to fund their debt service. The same holds true for the massive sale-leasebacks some firms do after buying restaurant companies, which is what got Red Lobster into trouble.
The restaurant business is too competitive. Consumers notice when brands cut quality, even if it takes a while for them to do so. They notice higher prices. And they’re going to notice them when done at the same time.
If you’re going to buy a full-service chain restaurant, maybe give yourself a bit more leeway than that.