To be fair, I don’t totally understand what it means when private equity buys a brand, I’ve just noticed this trend. I’m thinking about how shopping at Joann’s started to suck long before the owners decided to close it. And how Panera used to be pretty decent quality and just isn’t anymore.
I see people claim that private equity is to blame but I just don’t see the connection?
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Lots of times Private Equity aquires a company and tries to squeeze as much money as possible from it. Cut staff, buy cheaper ingredients, and overall lower quality is a good way to cut cost and therefore increase profits. Of course this cost cutting then leads to the brand losing reputation and people may not go there anymore leading to a net loss in profits. But at that point you should have made your money back and prviate equilty can repeat the process at another company
It’s a cycle of trying to get the most money out of the business. So, you go for cheaper parts in your product–cheaper ingredients, cheaper fibers, whatever corner you can cut, you cut it. You decide to get rid of the “redundant” staff and decide to do shit like “maximize efficiency” of your staff–suddenly, one person is doing the job of two, three, more people. The short term gains still aren’t enough to justify the purchase, so you cut more and more corners and raise the prices. Prices go up, quality goes down.
The loyal customers who were loyal because the company provided a product they loved and were seen as a given stop being so loyal because why pay premium prices for slop? Short term gains go up like smoke. Businesses close but it’s not all of them. But the few that remain are now understocked or missing main stay products. One person is handling the whole store, customer service sucks. There’s nothing to buy and no one to sell it to.
The store shuts down. And the Private Equity moves on to the next business to squeeze money out of because they never cared to begin with.
The whole point of private equity is that they want to squeeze the brand for as much money as possible. Generally the playbook after buying is to cut costs in as many ways possible which usually means making what was one a nice brand into more low quality bullshit. When they’re done and can’t make any more money they close up shop.
private equity firms want to make a lot of money quickly, so they cut corners. The stores continue to be popular, mainly based on brand recognition. Less expensive ingredients = higher profit margin
Imagine you have a lemonade stand. It’s an awesome lemonade stand that is super popular on your neighborhood because the lemons come from your own tree and you squeeze them yourself. It costs you 50 cents to make it since you put a lot of work into the lemonade and there’s always a huge line to get your lemonade that costs $1.
A private equity company notices your company’s success. They offer to buy it off you for $500. You say yes and now they’re using cheap lemons and making this lemonade as cheaply as possible. Now it’s costs them 25 cents to make it but they also increased the price to $2. Consumer is paying more for a worse product. This can only happen for so long, but by the time the company loses the reputation among its loyal customer base, the private equity company made a killing. Then they look to sell it to another company, rinse and repeat until you end up where chipotle is.
If you open (say) a restaurant, you want to make money by running a restaurant. So you want the restaurant to stay open.
If you are a private equity firm, you want to make money. The end. You don’t really care how you do it. One way you can do that is by buying a business that’s for sale (like a restaurant) then strip it for parts. One way you can do that is by making it use cheaper, nastier food, firing staff, cutting back on maintenance, etc. This makes people not want to shop there and you can declare bankruptcy and close. Then you sell off all the ovens and deep fryers and buildings/real estate the restaurants are in, and you’ve made more money than you paid to acquire the restaurant. Then you use this money to go and ruin another business for profit.
That’s why.
Many businesses make tangible sacrifices on profits in order to provide extra perceived value to their customers. Private equity firms are solely focused on profits, in the short term, so they reverse those decisions.
An example would be Chik Fil A being closed on Sundays. If a private equity firm ever got into Chik Fil A, you can bet they’d be selling chicken sandwiches on Sunday, and that the quality would be noticeably worse.
Equity firms are usually ALL about maximizing profit. That means lower costs and increase revenue. Lower costs means reduce staff, spend less on equipment and tools, and less on ingredients. Less money on ingredients typically means lower quality, thereby by reducing the quality of the end-product.
I don’t know anything about Joann’s or Panera but generally take a company where the owners grew the business and have pride in the product/service they provide.
Then in comes a private equity firm that doesn’t care about the product/service at all and only cares about making money. They will do whatever they can to lower costs and increase profits even if that means lowering the quality and level of service.
The increae in profits make the company seem more succesfull on paper and then they sell it to someone else before their horrible business decisions catch up with them and the company goes bankrupt.
A private equity firm’s only objective is to get as much money out of a thing as humanly possible.
This means cutting everything down to the bare bones minimum, while also usually raising prices to make more money.
So this business used to make sandwiches with high end designer level ham and cheese, fresh baked bread, and really good condiments? It cost them $3 to make the sandwich and charged $9, so they profited $6 per sandwich?
Well, we’re going to go to bottom of the barrel cheap ham that was headed for the trash, bulk processed cheese product. We’ll get the bread shipped in frozen, and get the cheapest condiments we can find.
Now each sandwich costs us $0.50 to make, and we’ll charge $15, so we’re making $14.50 in profit on each sandwich.
Then slash payroll by firing everyone except the bare minimum we need to operate, cutting benefits, cutting training, etc etc
Sure, it’ll drive the business into the ground, but in the mean time, we’ll make a TON of money and then close the business when it goes into the red.
Private equity firms are like vampires. they latch on, suck all the life out, and then when its dead they move on.
when private equity firms buy a company, they shift its gears to maximize short term profits at all costs, cut corners, cheaper materials, layoff staff, the works. they drain as much profit as they physically can until it collapses, then they move on to another business.
Private Equity means that a bunch of banker-types decided to buy the company because they believe they can make changes that will make it a more profitable business. This generally happens when the original owners are experiencing a lot of challenges and the business may go bankrupt soon.
PE companies often try to raise prices and lower quality. Usually this is because the business is in trouble and something drastic needs to be done. This is just another way of companies trying to maximize profits. If the PE group does turn the company around, people blame them for higher prices / lower quality. Although if PE makes big changes that don’t work out and the company goes bankrupt, people blame them for failure too.
The private equity folks are only interested in short-term profit, not long term sustainability. They will buy an established name/brand, and run that into the ground. They will buy a restaurant chain that is known for quality food (looking at Jersey Mike’s recent purchase) and start substituting lower quality ingredients, stop making their bread daily and instead ship it from outside, and decrease the number of staff working so as to maximize profit taken from the enterprise over customer preferences or desires. Think about how good Pizza Hut pizzas used to be, and what trash they are now. Private equity only care about money, and they are a blight on civilization.
Private equity behaves a bit like a mining company. Except instead of extracting metals from the surrounding rock, they’re trying to extract money from companies. And just like mining companies have a history of doing untold environmental damage in their pursuit of metals, private equity has a history of doing untold damage to the companies they buy in their pursuit of money. And then they move on the next mountain/company.
It all comes down to money in the end.
Private equity buys Panara, decent quality food for a mid price point, but the company wants to make money, and not later, they want it NOW!
Best way to do that? Let’s cut a few things. Nothing major though! Those quality ingredients? Well let’s cut back a bit, we can use mid tier quality stuff and no one will notice.
Also those prices are low, let’s bump they up like 20% people love us and our brand is enough that people will keep coming here.
Wait, when we did those things people started coming to us less? Well we still need to make more profits than last year. Use those bottom barrel quality ingredients. Stop baking in house, let’s use a commercial bakery, and cut some employees. We pay them to much.
Hey investors! We made good money this year but for some reason people hate us now. Probably best to start shuttering stores in the low preforming areas. It’s their fault, they did a lot wrong.
4-5 years in: hmmmm this brand isn’t as good as we though, prices are high, quality is low, going in is a nightmare because no one wants to work there because pay is awful. I think we need to start liquidation because this brand won’t work in today’s market.
Private equity: “ooooo Let’s buy TGI Fridays….”
And the cycle continues.
Imagine that you have $5, and you want to buy a glass of cool aid from your neighbors stand. For now they make it full strength and it tastes great, they’re spending about $4 on the drink mix per drink and only make $1.
Well the business (neighbors drink stand) gets so popular throughout the neighborhood that the rich dude at the end of the block offers to buy the stand. Once the sale is done rich guy wants to make his money back, but doesn’t want to raise prices and scare off customers. So instead of raising prices they reduce costs, that same drink is suddenly being made with $3.5 worth of drink mix, and while it still tastes good you feel like you remember it used to be better but still buy it anyway.
Then gradually as the weeks go on the rich guy gradually reduces the drink mix even more, never changing the price to reflect it. Now after lowering it a bunch, it’s barely made with even $1 worth of drink mix, but you’re still paying $5.
Stores and restaurants are the drink stand, rich dude the VC firms.
This has become so commonplace (albeit more in the tech/internet world) we even have a word for it:
Enshittification
(Noun)
The process of a product or service, especially one connected with the internet, social media, or technology, becoming or being made worse, more unpleasant, less useful, etc.
Because when private equity buys them, they buy them to make profits, no other reason. So food quality is reduced, prices increase and staff training seems to get scaled back because it gets worse as well.
It’s usually a death sentence for the business.
There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.
John Ruskin
Private equity firms are companies that put together a group of investors and use their investment money to buy businesses. The investors often want to get their money back with a sizeable profit in just a few years – in most cases they’re not interested in long-term investments. So the private equity firm buys a business like Joann that built up a customer base and lots of stores over decades by being reliably good at what they do, but didn’t make tons of money per year. The private equity owners then look at how they can get the business to create a LOT of profit over a few years, without worrying about the long term (again, because their investors don’t care what happens in 10 years – they want to make as much money as possible over, say, 3-5 years). To do that, they cut costs by firing staff and instead run the stores with very few employees; they automate everything possible; they buy cheaper products and sell them for the same price to make more profit; they cut maintenance costs and let the stores get a bit run down; and so on. For a few years, the stores are wildly profitable because people are still shopping there and haven’t yet realized the quality has slipped, and the investors are happy that they’re getting their investments returned with sizeable profits very quickly. After a few years, customers realize that the quality of the store has nosedived and competitors/online stores are able to steal much of their business so the store starts being less successful, and at that point the private equity owners either sell it off (for much less than they bought it for – which doesn’t matter since they’ve already gotten tons of money out of it) or declare bankruptcy/shut down. Then the private equity firm looks for another store to buy and the cycle continues.
They bought the business so they can make money. They generally look at how the business is operating and try to squeeze as much additional revenue out of it as possible without the consumer choosing not to spend their money there. All this to return more revenue to their shareholders.
This reminds me of the Vail Resorts vs. Alterra Mountain Company who have been buying up all the ski resorts in the USA. They raise prices immediately and lower quality. I can personally attest that the food at Deer Valley has gone massively downhill since it’s acquisition by Alterra.
Private equity firms aren’t interested in running a store, a restaurant or a manufacturing plant. They are interested in posting better numbers next quarter.
To that end an investment needs to pay off quickly.
For a restaurant this means cutting every cost possible, cheapest possible ingredients, skeleton staff, prices as high as feasible. The restaurant doesn’t have to survive. It just has to produce more money than they put in before it dies. Then when it does that’s great actually because now you can sell any remaining assets and move on.
Private equity are investment firms that acquire entire businesses. May be a distressed business they see potential to turn around, may be an owner looking to retire or make their wealth more liquid.
PE firms typically try to improve the operations and improve profitability, and often this means making changes that can affect the quality of product or service compared to the past. Maybe it means decreasing portion sizes or substituting cheaper ingredients; maybe it means finding cheaper suppliers and decreasing quality of products sold; maybe it means reducing staffing in stores, making it harder to find help and longer checkout lines. As PE firms are now getting into consolidating more mom-and-pop industries like dentistry and vets, you see more up-selling of services (oh, we really think you need to have this added deeper cleaning or teeth whitening) vs. just providing medical care. Often the eventual goal is to spin the company back out public or sell it to a competitor, etc.
As an example, here in Chicago there is a chain called Portillo’s that sells Italian beef and hot dogs. They’d grown to about 15-20 locations throughout the city and suburbs, were very popular and busy. But the founder wanted to retire and turn ownership in the business into cash he could spend, so he sold a portion of his business to a PE firm. Eventually, they changed up some of the operations, cut quality and portions, while also growing the chain outside Chicago. Then they went public a couple years ago, and now are looking to grow into something like 600 locations over next few years. And they announced they’re going to be cutting back the variety of items on the menu as part of their streamlining operations. So thanks to a PE firm, the small local chain with good food, large portions, and a wide menu is seeing basically everything get worse in the name of expansion and profits based on the popularity of the name.
Other times, PE firms buy businesses to profit from selling off the parts. A public retailer may trade for less than the value of the real estate they own so a PE firm might come in, transfer the real estate to a new entity, charge rent to the old entity, charge administrative fees for the re-organization of the corporate structure financed with new debt issued by the retail arm, and if the retailer fails so be it — the PE firm made their fees and holds the real estate.
Private equity is the equivalent of a giant corporate mosquito. Predatory capitalism, pure and true.
It is highly variable,
Most chains are franchises, (but not all). In a franchise corporate owns the brand and a local business licences the brand to use on their store. Some franchise licence agreements require the local owner to use corporate suppliers for certain items in the store, ie: McDonald’s requires you use their mcflurry machine.
Depending on the franchise a private equity purchase of a brand might have little to no impact. For example Quiznos – Quiznos corporate has pretty much gone under and corporate provides very little in the way of supplier mandates; so the stores are very independent and basically only license the logos, name, etc. The impact of someone buying Quiznos corporate is very low.
A franchise like McDonald’s, with a ton of mandated supplier contracts would see a much bigger change if purchased by private equity. Changes at corporate will have a much bigger impact on the restaurant.
Now a chain like Hudson Bay company is all owned by corporate, changes to the corporation will have significant effects on each store.
Generally (but not always) private equity firms are looking to make money quickly, and so they’ll sell company assets, trim down for “efficiency”, etc. If corporate has a high degree on influence on a franchise, or actually owns the stores outright this can have a big impact on customer experience. This is what you’re referring to in your opening post. This is what reddit refers to most often, (it’s the cynics expectation).
This isn’t always true though, sometimes private equity firms inject a ton of cash and then do the hands off thing and let the company print them money, like dorilton capital buying Williams F1 team.
So it really depends on the firm buying, the structure of the company, and the individual deal.
It’s called “Let’s put leadership in place that only cares about profitability”. You can see quality getting traded for money, yeah?
Easy example.
I’m a private equity firm. I see a steakhouse chain doing really well. It owns its locations outright (no leases), the debt is minimal, and it’s profitable.
The company profits about $100 million a year and has five billion dollars in assets, mostly the real estate. I offer the company six billion dollars. The board recognizes that’s ten years of profit in one go and votes to allow the sale.
I now own the company and its assets. The first thing I do is “sell” all the buildings and land to another company I own. That company gets all of the five billion dollars of assets for basically free, and I lock the locations in to leases with the new property holding company for, say, a hundred years at three times market rates for rent.
I know they get their steak from a network of beef processors around the country at a really low rate. I make a new company, specifically to shift those contracts to, and then sign the restaurants onto a contract with my “supplier” that requires that they can only get steak from me, for twice as much as I’m paying for it.
I cut staffing at restaurants, reduce starting pay, shrink menus and reduce quality.
And when I’ve milked every asset, I sell the restaurant chain off for maybe only a billion dollars, with the new buyer permanently locked into having no assets but the name and owing me more money than the chain can ever make.
In the meantime, I own all the land, all the locations, and until their impending bankruptcy I still own all their revenue.
They don’t necessarily, it’s just a Reddit meme, gotta blame a bogey man. Most Redditors don’t know anything about finance other than from Reddit. As you pointed out, these businesses are usually going downhill for years BEFORE they are sold to private equity. That’s why they are selling. If they were doing well they would remain public or maybe merge with another public company. Of course sometimes private equity makes things worse, sometimes they improve them, but the stories that become popular are the failures.
Does anyone have a list of restaurants that are now PE owned?
Sawdust is cheaper than Parmesan cheese, but you can keep selling it at the same price. Because of this, you make more money – which is the sole interest of the new owners.
Private Equity looks for short term gains. This often results in long term destruction of the company.
It’s better business for them to dismantle a company and sell it for parts than to continue to operate it.
Private equity firms tend to buy up businesses that are starting to fail. The problem is less to do with private equity firms, and more to do with the business failing. Because the business isn’t making long term profit, it’s cheaper to buy up all the facilities and other assets from the owners. The owners want to get rid of it all as soon as possible and stop the losses, so a private equity firm offering to buy it all together is quite enticing.
Now, the private equity firm is stuck with the same problem the original owners had. The business is starting to fail, even if its profit hasn’t gone negative already. They could completely overhaul the business to make it start turning a long term profit, but the existing systems are already proving unprofitable and it’s a lot of work and risk to try to turn things around.
Then there’s the other option: short term profit, just enough to recoup the cost of buying the business by the time everything is sold or abandoned. Anything extra is “free money”. Aggressively perform every tactic that makes more money now, at the cost of long term sustainability. Neglecting maintenance, charging more money for less service while coasting on the previous reputation, cancel all training, fire all the skilled highly paid experienced workers since you aren’t going to need them soon, don’t replace anything that breaks, start selling off assets and downsizing. This is the tactic that private equity firms tend to specialize in, and be good at doing.
Private Equity firms don’t buy healthy, growing companies. That’s far, far too expensive.
If a PE firm is buying a restaurant chain, it’s because they are in trouble.
Either:
They’re already going downhill by the time PE gets involved. You just don’t realize it because you haven’t been there since the pandemic (or whatever) and that’s why they’re in trouble; or
The company is hemorrhaging money and the only way for them to survive is to cut back on quality and services.
It bears repeating: PE firms only buy struggling companies. If PE firms weren’t buying them, these companies would be going out of business anyway. PE isn’t killing them; they’re already dead.
Now, PE firms will often attempt to turn things around. This is the case with Target. It’s far, far more profitable for them to take a struggling, cheap company, slash costs, turn it around, and then resell it back to the market for a huge sum. That is the end goal.
But, often, that can’t be done. Most companies are too far gone. Once it’s clear that it can’t recover, that’s when they get to the bankruptcy-and-asset-stripping phase.
Are there exceptions? I’m sure there are. But your beloved, nostalgic chain store isn’t getting murdered by evil capitalist carpet-bombers. They’re dying because they’re old brick-and-mortar stores who failed at adapting to the new marketplace.
https://youtu.be/XK8hpxR_r2Y
Here is a YouTube video by a YouTuber I like that made a video kn this exact topic give it a watch to better understand why private equity can suck sometimes