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WHY DOES PRIVATE EQUITY KILL OFF RESTAURANTS?
BECAUSE IT CAN, AND STILL MAKE MONEY


By Ronald Holden

The corporate landscape is littered with once-popular brands sucked dry and lifeless by would-be saviors. Greedy bankers in expensive suits make easy villains, even when it's not entirely their fault if markets shift, tastes evolve, production stalls, distribution chains break down, regulations change. Even so, all too soon, all too often, the dispassionate money managers realize that their shiny new bauble has become tarnished. Their response: dump the damaged goods and go off on another shopping expedition.

A couple of recent examples with local connections:

Nalley's, founded in Tacoma in 1918 by a Croatian immigrant named Marcus Nrancic, was once this region's leading purveyor of locally-sourced pickles, salad dressings, and canned chili. At one point, the company plant in "Nalley Valley" off SR 16 was Tacoma's largest employer. Then Nrancic passed away and Nalley's became part of Agrilink, which was acquired by Dean Foods; today the brand languishes in a corner of a conglomerate called Pinnacle Foods alongside another brand from Seattle, Tim Kennedy's Cascade Chips. Pinnacle bills itself as a haven for American "foundation" brands; in turn, they're part of a worldwide portfolio of private equity and real estate investments managed by the sprawling Blackstone Group.

But the biggest story is barely a month old: the bankruptcy of Restaurants Unlimited Inc., a group of 35 stores in 22 states, 2,000 employees, $175 million in sales. The private equity outfit that pulled the plug: Sun Capital in Florida. Here's the backstory.

In 1961, a brash young salesman named Rich Komen, whose uncle had owned a diner in SoDo, talked the University of Washington athletic department into giving him the food concession for Husky Stadium. Komen enlisted his friends to bag up peanuts by hand. A year later he got the concession for the World's Fair. In 1969 he opened the Red Baron, then Horatio's, then Clinkerdagger Bickerstaff & Pett's. In 1971 he teamed up with Ray Lindstrom, and their company, Restaurants Unlimited Inc., eventually operated dozens of locations under different names and concepts, including Palisade and Palomino.

Komen didn't pretend to be a chef; he was an old-fashioned "restaurant operator" who understood early on that to make money in the restaurant business people had to show up at your door. Today's restaurant menus are filled with pages and pages about the provenance of the food, the names of the farmers who raise the corn or breed the lambs; there's a lot of talk about ambiance, about background music, about decor and lighting. Komen defined the concept thus: "Guest first." It was even more revolutionary in its day than "farm-to-table" or "tide-to-table." You went to an RUI restaurant not because you knew whose farm the carrots came from, you might not even recognize it as an RUI restaurant, but you knew you would be welcomed even if you weren't a regular, that your patronage would be appreciated, that you would be looked after. It sounds perfectly normal today, doesn't it? Back then, not so much.

And while we're on the subject of innovations we can attribute to Rich Komen, downtown restaurants used to mean hotel dining rooms or department store lunch counters. Fine dining? Fat chance! Today, Tom Douglas and Ethan Stowell have outposts everywhere, but there was a time, not that long ago, that the "Regrade" (north of the Pike Place Market) was a culinary desert. Cutters Bayhouse (now Cutters Crabhouse) was the first to venture into this no-man's land; Komen and his staff agonized for months before deciding to go ahead with the project.

Cinnabon, created by Komen and Edmonds baker Jerilyn Brusseau, was spun off from Restaurants Unlimited and bounced through the hands of several corporate owners to its current resting place alongside a deli chain (Schlotzky's) as part of Focus Brands, itself tucked into the private equity folds of Atlanta-based Roark Capital's Il Fornaio and Jimmy John's brands.

Jerilyn Brusseau

RUI, for its part, sat unloved and ignored by its new corporate owners in Boca Raton, Fla,

Nalley's, Tim's, Cinnabon and the rest of the flock didn't lose their way because they were trying to survive hard times; rather, they were lured by a dazzling light, the promise of success.

As for RUI. a no-longer local chain mismanaged by out-of-town bankers, finally declared bankruptcy. Jobs lost, restaurants closed, leases abrogated, supplier contracts voided, families wounded. Here's the name of the villain: Sun Capital. Its managing director is Mark Leder, in whose beachfront mansion, six years ago, GOP presidential candidate Mitt Romney argued to potential donors that 47 percent of Americans were "takers." (Ironically, one of his targets was a banquet waiter who recorded his pitch, and the highly publicized aftermath contributed to Barack Obama's re-election.) Leder, who's probably worth half a billion, give or take, runs Sun Capital with a handful of business school buddies.

We checked in with Rich Komen last week; he retired a decade ago to the San Juan islands, where he's now an owner at Roche Harbor Resort.

Komen notes that he's not an "insider" anymore, and laments that people are going to lose their jobs. Still, RUI has retained some of its best professionals in the decade since he sold the company, and "a lot of terrific restaurants." Also a few very bad ones, though he wouldn't name names. Let's concentrate instead on the success stories. Scott's, in Edmonds, is very well run and sales continue to climb. And the flagship, Palisade, adjacent to Seattle's Elliott Bay Marina, is "underperforming" but has found its footing with excellent catering. There are party facilities in an adjacent building and private rooms at both ends of the main structure. "A very special place," Komen says.

Palisade brunch buffet

The purpose of the bankruptcy is to encourage piecemeal buyers. Two or three real dogs, not in Seattle, and half a dozen more that RUI should just drop, and the company would be healthy again.

But what about the $15 minimum wage? That elephant in the room, blamed by Sun Capital for the bankruptcy? Komen doesn't believe it for a minute, but "they had to say something." They couldn't say they'd mismanaged the properties, could they? "Private equity in the restaurant business is problematic," Komen concludes, even though he was all for the deal a decade ago.

More relevant is this observation from a former RUI employee. "Their failure has nothing to do with minimum wage increases, which are less than a 10th of their revenue shortcomings, and everything to do with their stick-in-the-mud '90s concepts, outdated menus, visibly aging restaurants, and diminishing food quality. It's frankly deceptive to report fair wages as an excuse for their avoidable business mistakes. They just didn't keep up."

Even the glitzy Palomino location across from Bellevue Square, couldn't keep up. Within the same block, complex, there's a mid-market Italian chain, Mangiano's; an ambitious modern seafood bistro, Pearl; an outpost of El Gaucho's Fire & Vine called Lakehouse; a Joey's and an Earls (chains out of Canada); a Duke's, a Cactus, and a Black Bottle (all decidedly local); a McCormick & Schmick (started in Portland, no longer quite so local); and a Din Tai Fung branch (Taiwanese dumplings). More no doubt. Across the street, P.F. Chang's (Asian casual). Wild Ginger and Taylor Shellfish (two more local mini-chains). Not at street level, Ascend, an elevator ride into the clouds, high enough in the sky that you see downtown Seattle across Lake Washington. (Just watch your wallet.) So, yes, it's a lot to keep up with.

Palomino side salad and entree

But you have to ask yourself, if Palomino, with its hand-held order devices that keep track of every last sugar cube, if a systems-centric company like RUI can't "keep up," then the problem lies elsewhere. It's not inventory control, rent, revenue per square foot, operational costs per hour, customer counts, or even staffing costs. In the end, it's butts in seats. The average check in Seattle is among the lowest of any major city, but you can train servers to upsell. The problem for RUI is that its restaurants are worn out, old-fashioned, with faded décor and pre-Instagram menus. You don't mind the veneer of fakery at Buca de Beppo or even the Cheesecake Factory because everybody's in on it, but Palomino's braised pork tenderloin and charred kale salad certainly don't sound (or look) appealing. You know a restaurant is in trouble when its happy hour starts right after lunch and runs until close; there's no margin at all in HH food, and precious little in the drinks. So Palomino in Bellevue won't be missed (RUI closed it down).

In fact, Sun Capital wasted no time scrubbing its website of any mention that it had ever owned RUI, G-gone. But back in 2007, Sun had sweet-talked RUI's shareholders into thinking that all it needed to succeed was more capital. Because the grail was growth. At the time of its sale to Sun, revenues were just shy of $150 million, with 29 restaurants in 12 states. A dozen years later, annual sales had inched up to $175 million, even with half a dozen new restaurants. How much revenue, one has to wonder, was Sun Capital siphoning off?

The bad guy here, the really bad guy, is Sun itself. The first job of a business owner, after all, is to plan for catastrophe: what's the worst thing we might have to face in the coming year? And no, it's not that you're going to have to pay your people more money. (In Bellevue, Chef John Howie pays well above minimum wage at both his restaurants and is doing fine.) It's that people might stop coming to your restaurants! But private equity, like the honey badger, don't care. Once private equity has stripped the assets, cut costs to the bone, reduced staff to the absolute minimum, stiffed suppliers as long as possible, then the final step is to make the company more attractive to potential buyers, and you file for bankruptcy "protection."

John Howie's Seastar

Sen. Elizabeth Warren has been railing against private equity for some time now. Writing about Warren's proposals to regulate private equity, the Washington Post says [the private equity owners] "...too often merely plunder a company's assets while neglecting its employees, customers and long-term prospects."

Moreover, the Post continues, one of the curiosities of private equity investment is that a firm can make money even when it drives a company it has purchased into bankruptcy. It's more than a "curiosity." It's a major perk of private equity's takeover. Honey badger don't care. Not their circus, not their monkeys, not even their money.

September 2019


Ronald Holden is a Northwest native who's been writing about local food for over 40 years. His latest book, the second edition of Forking Seattle, is available on Amazon.com ( paperback here , kindle version here ). He blogs at ForkingSeattle.com


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