Who Killed Red Lobster?

The Pitch: Economic Update for May 23rd, 2024

Friends,

Last week, 87 Red Lobster restaurant locations closed around the country as the chain filed for bankruptcy. We had known for some time that the Red Lobster chain was in financial trouble. Last year, nearly every news source in the US blamed those financial problems on a botched shrimp promotion.

“Endless shrimp did not mean endless success for Red Lobster,” wrote Anthony Robledo in USA Today back in November. “The seafood chain’s “Ultimate Endless Shrimp” deal became more popular than expected, inadvertently becoming a key factor in a $11 million loss in the third quarter….Red Lobster’s parent company, Thai Union Group, said earlier this month that the chain was headed toward a $20 million loss for 2023.”

Could it really be true that the high cost of shrimp and a bad bet on Americans’ love of all-you-can-eat deals would sink a restaurant chain that was founded 56 years ago? Of course not — but the humorous detail inspired credulous reports from publications including the New York Times.

It is true that Red Lobster lost money on the all-you-can-eat shrimp deal — and reporter Trung Phan has some more information that suggests Thai Union Group might have been offloading shrimp at inflated prices, creating losses for its subsidiary restaurant chain even as Thai Union itself profited. But shrimp is not the primary factor that toppled the chain into closures and bankruptcy. Neither is the decline in foot traffic to the malls that frequently serve as anchors for Red Lobster stores, or America’s diminishing love of sit-down restaurant chains.

For the truth about Red Lobster’s financial woes, you have to look beyond the shrimp headlines and dig deep into these news stories. Nathaniel Meyersohn of CNN wrote a long overview of the chain’s history that directly identifies the true source of Red Lobster’s downfall. The chain’s explosive growth was overseen by giant food conglomerate General Mills for most of the last half of the 20th century before it was spun off into its own company, Darden Restaurants.

But then, the real culprit appears: In 1996, Meyersohn writes, “Darden sold Red Lobster to Golden Gate Capital, a private equity firm, for $2.1 billion. To help fund the deal, Red Lobster spun off its real estate assets in a transaction known as a sale-leaseback agreement. Red Lobster had long owned its own real estate but would now be paying rent to lease its restaurants.” In fact, reports show that Red Lobster was leasing the land back at “above market rates.”

You’ve heard this story a million times before: A private equity firm snapped up a popular brand that was profitable but on the downward slope of success, much like Toys R Us and Bed, Bath, and Beyond. (Though, to be clear, all three of those examples still enjoyed great popularity with the American public: Red Lobster raked in $2.3 billion in sales in 2021, so it was hardly a ghost town.) Private equity firms then pump the company full of debt to finance the sale and start slowly sucking it dry of any profitability.

In this case, Golden Gate sold the chain’s most valuable assets — its real estate — in order to fund its takeover of the company. And then it spent the next three decades destroying everything that made the restaurants appealing in the first place. As Meyersohn writes, Golden Gate oversaw “years of underinvestment in Red Lobster’s marketing, food quality, service and restaurant upgrades hurt the chain’s ability to add Millennials to its core Baby Boomer customer base.”

Rather than investing Red Lobster’s considerable profits back into the company in the form of menu research and development, advertising, and better wages for workers, Golden Gate allowed the chain to atrophy and die. And now hundreds of workers in dozens of restaurants around the country have lost their jobs while pundits and social media influencers crack bad jokes about all-you-can-eat shrimp meals.

Private equity is now moving into nearly every aspect of American life, from veterinary clinics to elder care facilities, making cuts to quality of service and extracting profits away from communities around America and toward Wall Street. And with private equity firms moving aggressively into real estate this year, we can expect similar pernicious behavior around housing prices soon.

It might not surprise you to know that Senator Elizabeth Warren has a policy solution for this problem. Her Stop Wall Street Looting Act would not allow PE firms to offload their debt into acquisitions — they would be responsible for the debts they take on. It would also force PE firms to prioritize paying workers when they begin bankruptcy filings for zombie firms like Red Lobster, and it would ban firms from offloading profits in the form of dividends to shareholders for two years after an acquisition is finalized.

Trickle-downers might argue that this policy is a regulation that would discourage investment, but it actually just discourages looting. There’s nothing in the bill that would prevent a larger firm from buying a troubled chain, fixing it up with investments in workers and customer experience, and turning a profit. That’s the way businesses should be run — not an extractive practice that enriches a tiny handful of wealthy investors at the expense of thousands of American workers.

The Latest Economic News and Updates

The American Public Is Still Feeling the Pain of Inflation

Jeanna Smialek at the New York Times walks through the complicated takeaways from a 2023 Federal Reserve survey of Americans on household financial matters. First, the good news: “households feel good about their job and wage growth prospects and are saving for retirement, evidence that the benefits of very low unemployment and rapid hiring are tangible,” she writes. “And about 72 percent of adults reported either doing OK or living comfortably financially, in line with 73 percent the year before.”

Then, the bad news: Thanks to persistent price increases due in large part to greedflation, “65 percent of adults said that price changes had made their financial situation worse. People with lower income were much more likely to report that strain: Ninety-six percent of people making less than $25,000 said that their situations had been made worse.”

“Renters also reported increasing challenges in keeping up with their bills,” Smialek writes. “The report showed that 19 percent of renters reported being behind on their rent at some point in the year, up two percentage points from 2022.”

Those pricing pressures are hurting consumer sentiment, which “is at a six-month low, according to a closely watched index by the University of Michigan,” reports the Washington Post’s Abha Bhattarai. “ The measure notched its biggest drop since 2021, reflecting the persistent tug of inflation on household budgets and fueling fears that rising prices, unemployment and interest rates could all worsen in the coming months.”

We do have to note that consumer sentiment is self-reported, and self-reported polling data is often pretty tricky because people are not always the most reliable reporters of their own conditions. For instance, though people are reporting that they’re nervous about spending, the fact is that consumer spending is still running very high, according to Vox’s Nicole Navea: “Their spending helped drive US economic growth in 2023 and remained high in the first months of this year. In March, consumer spending increased by 0.8 percent, exceeding expectations from financial analysts,” she reports.

Still, there are some warning signs: “Retail spending stayed the same in April as compared to the previous month, falling short of analyst projections for growth,” Nevea writes. “However, those numbers don’t capture spending on services — for example, health care, transportation, and insurance — which has increased markedly this year. And both Preston Caldwell, a senior US economist at Morningstar, and Scott Hoyt, a Moody’s Analytics economist, said those numbers could easily bounce back next month, even if they’re expecting spending to cool by the end of the year.”

President Biden is doing everything he can to immediately bring down prices, including lowering air travel fees, reducing drug costs, and releasing one million barrels of gasoline from government reserves, in an effort to keep gas prices down during the heavy summer travel season. And housing prices are finally starting to come down in Florida and Texas, which are two of the fastest-growing states in the union.

Basically, the signals are mixed in such a way that anyone can cherry-pick data to predict any kind of economic outcome that they desire. So I again return to the reliable refrain that guides us in times like these: Anyone who says they can definitively predict what the economy will do next is either lying or a fool.

Trickle-Down Vs. Middle-Out: Which One Is Better for Workers?

I wanted to direct your attention to a post by Lindsay Owens on Otherwords, a publication of the Institute for Policy Studies. In it, she argues that the Trump tax bill of 2017 helped to set the stage for the inflation we’ve seen since the pandemic began.

“In 2017, Republicans slashed the corporate tax rate from 35 percent to 21 percent, giving massive corporations their biggest tax windfall since Ronald Reagan was president,” Owens writes. “A few years later, as Americans emerged from a global pandemic, these same corporations drove up prices for families.” She continues…

…While inflation hamstrung workers and families, it didn’t make a dent in corporate profits. In fact, as many CEOs boasted themselves, it’s been a boon. Companies simply passed rising costs along to consumers — and then some, bringing in record profits as a result.

All told, corporate profit margins skyrocketed to 70 year-highs. And by the end of 2023, when Americans were beyond fed up, after-tax corporate profits hit an all-time record high of $2.8 trillion. My organization, Groundwork Collaborative, recently found that corporate profits drove over 50 percent of inflation in the second and third quarters of last year.

Those trickle-down tax cuts resulted in soaring prices for everyone. And let’s not forget, as this scathing report from the Peterson Institute for International Economics (PDF) shows, the Trump tax cuts were terrible for all but the richest few Americans. The lower your income, the higher burden the Trump economic agenda placed upon you — and that’s without taking those greedflation figures into account.

While there’s still more work to do in order to bring down inflationary prices, the Biden Administration has worked to make sure that Americans have more money to spend by growing their paychecks. As our friends at the Economic Policy Institute show, nominal wage growth — that is, the growth of wages year-over-year, not adjusted for inflation — has now risen above inflation for the last full year.

“This real (or inflation-adjusted) wage growth is a key indicator of how well the average worker’s wage can improve their standard of living. As inflation continues to normalize, I’m optimistic more workers will experience real gains in their purchasing power,” writes Elise Gould at EPI.

That wage growth is largely impacting workers who have not seen many investments during the trickle-down era. We know that workers at the lowest end of the income scale saw the largest pay bumps as pandemic-era lockdowns ended, though those wage increases are slowing down. And now the so-called rust belt in the American Midwest, which has languished as factories closed throughout the trickle-down era, is finally roaring back. At Inside Climate News, Kristoffer Tigue writes that the green-energy investments written into the Inflation Reduction Act are starting to pay off for states that have been left behind.

“Michigan, Indiana and Ohio have received $11.6 billion, $7.8 billion and $7 billion respectively,” Tigue writes, “placing them among the top 10 states nationwide to receive the most private investments for clean energy projects between August 2022 and April of this year.”

Tigue adds, “At least eight of Michigan’s 29 large-scale clean energy projects that have been announced since 2022 are in or near Detroit, including a $35 million electric vehicle battery plant that an Australian company plans to build right in Motor City — nicknamed for its legacy in U.S. auto manufacturing.” This could have something to do with the astonishing fact that Detroit added to its population last year — the first time the city’s population has grown since 1958.

These investments are building new green-energy hubs in parts of the country that politicians have written off for generations, directing private businesses to invest in technology that will help us combat climate change while also paying good wages to American workers who had been written off for generations by neoliberal leaders.

Directly comparing these two strategies — one which hands out tax cuts to corporations while asking nothing in return, and one which directs corporations to invest in technologies and regions that most need investments — reveals the stark contrast between the trickle-down understanding of growth and the middle-out understanding of growth. The former only grows the savings of CEOs and the investor class, while the latter grows the economy for everyone by prioritizing the paychecks of workers.

The Most Popular Tax Policy That Nobody’s Talking About

Speaking of CEOs, Sarah Anderson at The Hill wrote about an amazing new poll result from Data for Progress. She explains the poll asked if Congress should pass “a tax hike on corporations that pay their CEO at least 50 times more than they pay their median employee.”

“This policy would give companies with huge internal disparities two choices: narrow their pay gaps or face a bigger IRS bill,” Anderson writes. “A company where half of employees earn less than $60,000, for instance, would have to limit CEO compensation to no more than $3 million or raise worker pay to avoid higher taxes. In 2022, the average S&P 500 CEO pay hit $16.7 million.”

This survey question proved to be incredibly popular across the board. “Overall, 80 percent of participants support the idea, including large majorities in every political group (89 percent of Democrats, 77 percent of independents and 71 percent of Republicans,)” Anderson writes. “In swing states, 83 percent of likely voters gave it a thumbs up.”

You don’t see this kind of polling result every day. In fact, you’d be hard-pressed to find a food item with that kind of popularity — not even apple pie is as popular as a tax that would ban egregious CEO pay disparities. If I were a candidate running for office this year, I would immediately start looking into this policy.

Navigator released a report this week based on recent polling that finds “Cracking down on price gouging from corporations and reining in the cost of health care and prescription drugs are seen as the best ways for the government to address inflation,” which is the clearest sign that the concept of “greedflation,” which was derided by the economic mainstream as a fringe conspiracy theory, has broken through to the mainstream. An astonishing 58% of respondents cited corporate price-gouging as a top priority in this election, including 53% of Republicans. Only 17% of respondents labeled corporate greed as not a priority or a middle priority.

More respondents believe that President Biden and the Democratic Party are more likely to address corporate price-gouging, but that number still isn’t a majority — 45% of respondents said Democrats were likeliest to combat corporate greed, while 39% said Republicans were likelier to take action. In terms of the November election, it’s that 16% of undecided voters that matter most.

It’s clear from both of these surveys that the American public is fed up with corporate greed in all its forms. The good news is that President Biden and his advocates haven’t been shy about talking about corporate greed as one of the central problems that their administration seeks to address in a second term, nor have they kept quiet about the fact that the Trump Administration was happy to hand corporations the largest tax cut in history under the false premise that those savings would trickle down to working Americans in the form of bigger paychecks.

Any campaign manager can tell you that a huge part of the job over the last six months of a campaign is just repeating and refining your core messages in as many venues as possible in order to reach as many potential voters as possible. These two polls show that the core message of combating corporate greed on behalf of working Americans is a strong one that resonates with a huge majority of voters. The trick is making sure that people connect with that message.

This Week in Middle-Out

• Last week, I wrote about the strategy behind President Biden’s middle-out tariffs on Chinese green-economy exports. This week, the New York Times notes that Treasury Secretary Janet Yellen is working to secure European cooperation on those tariffs. “The Biden administration is now looking to Europe to help the developed world prevent the kind of China shock of the early 2000s, which helped decimate manufacturing in exchange for cheap goods,” reports the Times.
• Pandemic-era federal programs ensuring free school lunches for all students may have expired, but the Times reports that the programs are now being picked up at the state level: “Eight states have passed their own universal free meal legislation since the federal largesse ended in 2022,” and “Dozens more have introduced similar bills or have one in the works.”
• “In one of its biggest steps yet to keep fossil fuels in the ground, the Biden administration announced Thursday that it will end new coal leasing in the Powder River Basin, which produces nearly half the coal in the United States,” writes Maxine Joselow at the Washington Post. This decision, she adds, “could prevent billions of tons of coal from being extracted from more than 13 million acres across Montana and Wyoming, with major implications for U.S. climate goals.”
• The Environmental Protection Agency has announced $300 million in investments to clean up 200 so-called “brownfields,” which are former industrial sites “with documented or suspected environmental contamination that hinders redevelopment,” ranging from “as small as an old abandoned gas station to gigantic shuttered factories.”
• Lawmakers in Minnesota are considering the adoption of some intriguing legislation that would cap out-of-pocket childcare costs for 86% of parents in the state with kids under the age of 5. “The effort aims to ultimately cap family child care payments at 7 percent of a household’s annual income,” reports Vox’s Rachel M. Cohen.
• Robert Kuttner at The American Prospect writes about Senator Elizabeth Warren’s big week: Not only did she defend Secretary of Transportation Pete Buttigieg’s proposed regulation requiring airlines to refund passengers for canceled or badly delayed flights, and not only was the Consumer Financial Protection Bureau saved by a big majority in the Supreme Court, but she also continued to fight the pernicious influence of private equity taking over healthcare organizations and seeking profits at the expense of patient services. It’s just another week in the life of Warren, who Kuttner calls “The Indispensable Senator.”

This Week on the Pitchfork Economics Podcast

We talk a lot in The Pitch about the high cost of housing as one of the biggest pricing pressures on working Americans right now. It’s driving up costs for everyone and expanding inequality even further as younger Americans are frozen out of the housing market by high mortgage rates. Whitney Airgood-Obrycki, a Senior Research Associate at the Joint Center for Housing Studies at Harvard University, joins the podcast this week to discuss the many facets of the housing crisis, from increased homelessness to a record number of working Americans spending anywhere between 30 and 50 percent of their income on housing costs. Airgood-Obrycki also walks Nick and Goldy through the exciting solutions that local governments around the country are enacting to make housing affordable again.

Closing Thoughts

Last week, I wrote about the Supreme Court’s decision to uphold the funding of the Consumer Financial Protection Bureau, which ensures that the CFPB will continue to fight on behalf of the American people against junk fees, rapacious exploitation of consumer debt, and other unethical financial practices. I wanted to call your attention to David Dayen’s excellent piece celebrating this victory.

In particular, this paragraph really spoke to me:

Because the policymakers who created the CFPB decided they would not think several years ahead about the legal implications and talk themselves out of action, millions of consumers have recovered more than $20 billion from financial scams, as the agency has survived one court challenge after another. Tens of billions of dollars more are on the way to the public through agency rulemaking that will limit financial extraction. Consumers won because in 2010, the 111th Congress just went ahead and created an agency that would put the public interest ahead of business interests. The antidote to cynicism, in other words, is governing.

Every public servant should have “the antidote to cynicism is governing” engraved into a plaque and posted somewhere in their offices where they will see it every day. At its heart, that’s what governing in the time of middle-out economics is all about: The job is to overcome the cynicism and world-weariness that has dominated politics in the trickle-down era, and instead fight for policies that help the vast majority of working Americans.

Cynicism doesn’t place you outside of politics, or make you better than anyone. It just transforms you into yet another faceless soldier marching in defense of the status quo. Actually governing — by which I mean passing laws that invest in the American people — is how we shake off the cynicism that took root in the 1990s and flourished in the digital age that followed.

This is not just an empty slogan: It’s also valuable campaign advice for elected leaders running for office this year. Voters remember and reward the leaders who are willing to shake off cynicism and fight on their behalf. People are tired of being told what government can’t do for them. It’s time for leaders to get out there and prove what can be done.

And that’s just what the CFPB is doing. As the Washington Post’s Tony Romm notes, “The Consumer Financial Protection Bureau plans to restart its aggressive crackdown against payday lenders and other companies that offer high-cost, short-term loans to poor borrowers, after a Supreme Court ruling this week resolved a challenge to the federal agency’s authority to act.”

You have to admire the CFPB’s can-do spirit: They’re celebrating a win by immediately going after an even bigger win. That’s how you defeat cynicism: By doing the work every day.

Be kind. Be brave. Take good care of yourself and your loved ones.

Zach