Friday, June 21, 2024

Top 5 This Week

Related Posts

Red Lobster’s Issues Extend Beyond Endless Shrimp (video)

A Red Lobster restaurant in Lakewood, California, on May 15, 2024. Red Lobster is closing more than 50 of its restaurants across the country. (Photo by Eric Thayer/Bloomberg via Getty Images)

It wasn’t just the free shrimp that tanked Red Lobster.

The Orlando-based seafood chain filed for Chapter 11 bankruptcy last week, citing $1 billion in debt according to court filings. The company announced the closure of dozens of stores nationally, with plans to sell company assets, including auctioning interior furniture and kitchenware.

The announcement comes after a disastrous 2023 endless shrimp promotion, where for around $20, patrons could order as much shrimp as they wanted, prompting eating challenges by TikTok users. While it brought customers to stores, it also put the chain $11 million in the red.

Heather Haddon, who covers the restaurant industry for the Wall Street Journal and broke the news about Red Lobster’s pending bankruptcy, explains that other casual restaurants like Olive Garden and Applebee’s are experiencing the same headwinds: customers looking for cheaper eats, plus rising labor and real estate costs.

Haddon says the saga of endless shrimp was just one in a long series of missteps going back a decade. In the early 2010s, the company was sold to private equity firm Golden Gate Capital, which sold Red Lobster-owned real estate, making them beholden to landlords and leases.

In 2016, Thai Union Group, one of the world’s biggest producers of canned tuna, took a minority stake in Red Lobster. This year, they decided to cut bait as the company continued to lose money, citing the pandemic and rising debts.

Haddon spoke with Today, Explained guest host David Pierce about how Red Lobster became a restaurant icon and what contributed to its decline. Listen to the full conversation and follow Today, Explained on Apple podcasts, Spotify, Pandora, or wherever you find podcasts.

Red Lobster’s Bankruptcy: What Happened?

Heather Haddon: Red Lobster declared Chapter 11 bankruptcy and they are planning to restructure as a company. Red Lobster is not closing all of its restaurants but they have closed several dozen, and they have about 600 total. They are seeking bankruptcy protection to deal with nearly $300 billion in debt to their creditors.

By late last year, they only had $30 million left in cash, which is not enough money to run a big, complicated business like this. They were unable to pay a lot of their suppliers. Clearly, this situation has been piling up for some time, but this is where it’s ended up.

The Impact of the Unlimited Shrimp Promotion

David Pierce: I am confident there is more going on here than the unlimited shrimp. What happened there?

Heather Haddon: Red Lobster has run these kinds of bottomless promotions in the past where you could get all the shrimp you want from a certain part of the menu. But they tended to run it as a limited-time offer, one day a week for a limited time or just for a certain period.

The company last June said, “Hey, we’re going to run this all the time so you can come in and pay $20 and get as much shrimp as you want.” So it drove a lot of traffic, but the profits did not go along with those sales.

What Happens Next for Red Lobster?

David Pierce: You mentioned not all the stores are going to close. What happens at this moment for a company like Red Lobster?

Heather Haddon: They’re in the bankruptcy protection process. They have a CEO who is a restructuring specialist brought on to prepare for this bankruptcy process when the company was already on very shaky ground. The goal is to get some new terms with their landlords and try to restructure into a new company and go forward.

The Future of Casual Dining Chains

David Pierce: Does this signal the end of an era for casual dining chains?

Heather Haddon: I don’t think we’re at the end of the era, but it is definitely changing. You see chains like Applebee’s and even Chili’s closing locations. Talking to restaurant analysts, they think it could rightsize the business a bit better, as we just have too many of these restaurants for the amount of consumers there are for their food.

The Decline of Red Lobster

David Pierce: When did things start to flounder for Red Lobster?

Heather Haddon: Darden Restaurants had an activist investor, Starboard, who was agitating for change and wanted the company to be more profitable. Bill Darden, who I believe was still heading the company, dealt with this by spinning off Red Lobster. They sold Red Lobster in 2014 to Golden Gate Capital to deal with this activist.

Golden Gate Capital quickly had the company sell off all its real estate, giving them an infusion of cash but meaning Red Lobster would forever lease back their real estate. In 2016, Thai Union Group took a minority stake and then bought it out wholesale in 2020 after the pandemic hit.

The Broader Restaurant Industry

David Pierce: How common is the story of private equity firms taking over restaurants?

Heather Haddon: Golden Gate has owned quite a number of restaurants. Private equity owning restaurants is pretty common because they generate a lot of cash.

The Future for Red Lobster

David Pierce: Is there any hope for this storied brand?

Heather Haddon: The current CEO believes there’s hope that this restructuring process will work. The firm he works for has done this before, so I wouldn’t lose all hope for Red Lobster.

LEAVE A REPLY

Please enter your comment!
Please enter your name here
Captcha verification failed!
CAPTCHA user score failed. Please contact us!

Popular Articles